Costs on the rise for retiree health plans

updated 11:23 a.m. ET June 29, 2006

NEW YORK - Retirees with company-sponsored medical benefits face higher costs, more restrictions and different plan options as their former employers move to curb their spending on such perks, a new study said.

The good news is the majority of companies currently offering retiree medical benefits have no plans to eliminate them in the next five years, according to a survey of 164 company released Wednesday by Watson Wyatt Worldwide, a consulting firm. Only 6 percent of employers plan to end the benefit for current retirees that are 65 years old or older and 14 percent said they’ll stop it for future retirees in that age bracket.

Still, the benefit will be more expensive. Sixty-four percent of employers said they plan to increase contributions for their current retirees while 65 percent reported future retirees will pay more.

Meanwhile, 8 percent of companies indicated current retirees will face either new or lowered spending caps while 10 percent said that fate awaits future retirees. It will also be harder to qualify for such benefits as 8 percent of companies reported they will tighten eligibility requirements for current retirees and 24 percent of future retirees will face a more strident environment.

As a way to lower costs, employers are increasingly considering some relatively new plan options such as Health Savings Accounts or Health Reimbursement Accounts, said Cara Jareb, director of retiree medical consulting at Watson Wyatt. She said some employers favor such accounts because they can put a defined amount of money into them, allowing them to have better control over health spending.

But there are potential downsides for retirees. For example, if an employer starts funding an HRA for an employee while he or she is still working and the person leaves the company before retirement, they can’t take the fund with them. An HSA, which can be funded by a combination of employer and employee contributions, belongs to the worker and goes with them should they leave the company. However, a very serious illness can easily wipe out such a fund, Jareb said.

Ten percent of companies said they plan to offer an account-based option for current retirees while 26 percent maintained they will introduce it for future retirees.

Jareb said that in an earlier study, only 2 percent of employers planned to offer such an option to current employees while 7 percent said future retirees would have such a program.

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