30 December 2004

Employer Actions Drive Health Costs For Retirees Higher

Last fall, Michael Foster, a retired vice president for Rohm & Hass Co., got a letter telling him that the monthly premium for his health coverage in 2005 was rising to $1,069 a month from $823. "Retiree health-care costs continue to rise," the company explained.

But not all Rohm retirees are feeling the same pinch: those from a different unit of the Philadephia-based specialty-chemicals company will pay just $77 a month for the same coverage. And some pay nothing.

While employers routinely blame rising health-care costs when they increase the amount retirees pay for coverage, retirees may face the price hikes simply because employers change the structure of the plans. Companies may separate retirees into their own pool, charge one group of retirees higher premiums or charge one group higher premiums to, in effect, subsidize another.

NO COMPARISON

Retirees in two divisions of Rohm & Haas pay different monthly HMO premiums for the same coverage.

ROHM RHEM

2003 $49 $288

2004 64 823

2005 77 1,069
Sources: Company handouts; Mr. Foster's letter to the chemical company's board of directors

Mr. Foster, who retired from Rohm's electronics materials group in 2002, initially paid $140 a month for coverage, and grew suspicious when his premiums kept rising so steeply. Coverage in an HMO for himself and his wife rose to $288 a month in 2003, and $823 in 2004. He called other retirees and discovered that those in other divisions were paying far less for their coverage.

The reason: the company had established ceilings, or maximum amounts, it would pay for each retiree's health coverage; the retiree pays everything above the companies' capped amount. Rohm capped coverage for some groups of retirees at $16,666 a year for a couple under age 65, while the cap for the electronics division retirees is $2,700 a year per couple. (Retirees in both groups have coverage of $4,000 per couple once the retiree reaches age 65).

More than half of large companies that offer retiree health care, including Aon Corp., General Electric Co., Halliburton Inc. and International Business Machines Corp., have capped what they will spend on their retirees' health benefits.

Nor is it unusual for employers to provide different levels of benefits for different groups. A company may charge salaried retirees more for their benefits, to offset its costs of providing coverage for union retirees, whose benefit it can't unilaterally reduce.

Similarly, if a company used pension assets to pay for the health coverage of one group of retirees, the law prevents it from cutting that group's benefits significantly for five years. But a company may charge other retirees more. Rohms's filings show it transferred excess pension assets to fund retiree medical expenses in 2001, but don't say for which retiree group the money was used.

Mr. Foster says he feels like he is subsidizing other retirees. "This existence of benefits discrimination among retirees in different business units is upsetting," he wrote in a Nov. 12 letter to the board of directors. He says he'll drop his Rohm benefits, because he can find less expensive coverage where he lives, in Wellesley, Mass.

Leslie Johnson, a Rohm spokeswoman, says in an e-mail that the company is addressing rising health-care costs. "We proactively and aggressively negotiate the most comprehensive coverage at the lowest costs, offer multiple options, including less costly programs."

She adds that "the variety of plans offered to retirees is complex, partially as a result of the acquisition of numerous companies over the years." While some pre-1993 retirees are not subject to caps, she says that "company costs for providing benefits to retirees are not subsidized by the premiums paid by retirees."

In general, retiree health-care costs can rise when employers segregate them into their own group, apart from active employees. In the past, employers included all health-plan participants -- active employees and retirees -- in the same "risk pool." This practice spread health-care costs among a wide pool of people.

When retirees are segregated into their own pool, the per-capita costs rise, because an older, sicker population may need more medical care. Employers protect themselves from spiraling costs by adopting ceilings on what they will pay for the retirees.

Xerox Corp., which in 1994 established a ceiling on what it would pay for retirees in the future, split the rating pool of its active and retired employees in 2003, a move that has caused the retirees' costs to nearly double.

Eugene Nathenson, 62, a retired controller of Xerox Financial Services, saw his premiums rise to $3,196 a year in 2004, from $1,645 in 2003. "I said, my God, how could the premiums have gone up that much?" he recalls. Not only that, but the deductibles he and his wife pay will rise in 2005 to $2,400, making his total out-of-pocket costs increase to more than $6,000 a year.

In an e-mail, Xerox spokesman Bill McKee noted that costs for pre-65 retirees are 50% to 60% greater than for active employees. But he added that the company in 2003 began phasing in caps over several years "to partially offset the significant cost increases" for retirees. "Giving Xerox employees and retirees access to affordable and quality health care remains a priority."

Some Xerox retirees have asked the company to merge the risk pools for active and retired participants. There is little reason for a company to do so, however. When a company segregates retirees into their own risk pool, or establishes a limit on what it will pay for their benefits, it can actually profit when medical costs rise.

Rising costs often prompts retirees to drop coverage, starting with the healthiest, who can obtain less expensive coverage elsewhere. In fact, the enrollment booklet distributed to Rohm & Hass retirees encourages them to explore this possibility: "...you may find it advantageous to explore health care options that are available on the open market," and it goes on to provide links to government programs, AARP, and a Web-based insurance broker.

Meanwhile, retirees who can't drop the coverage (perhaps because they have pre-existing conditions that make them uninsurable) remain in the health plan, driving up costs.

When retirees drop out, employers save money, and also book a gain, because they can reduce the liability recorded for retirees, having assumed they would continue to receive coverage until they die.

"When 100% of the increases is flowing through to the retiree, there's no incentive to get the costs down," complains Mr. Foster.

By ELLEN E. SCHULTZ
Staff Reporter of THE WALL STREET JOURNAL

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