Retirees, Your Health Plans Look A Bit Peaked

Along with a gold watch, many companies traditionally bid adieu to retiring employees with a promise to pay their health insurance costs, at least until age 65 when medicare kicks in. But these days, more and more retirees are experiencing the realities of the workplace. And a new accounting rule, effective in January, may cause you to dig deeper into your pocket to provide sound medical coverage for yourself and family. By recognizing the inevitable early, though, you have an opportunity to plan ways to juggle your medical budget to assure solid protection.

The new rule requires companies to show the liability for retirees' health benefits on their regular financial statements. The drag on earnings, which could weaken share prices, should put greater pressure on employers to trim medical costs. An easy way is to require retirees to pay a heftier hunk of the insurance premium--or even all of it. And if you don't think that's a fair way for your company to reward loyal longtime workers, consider this: Some companies have eliminated health benefits for retirees altogether, and others, including Unisys and McDonnell Douglas, have cuts on their drawing boards.

READ THE RULES. Before you get word that your ex-employer is pulling the rug out from under you, a first step is to become familiar with your plan's cobra provisions. The term stands for the government's Consolidated Omnibus Budget Reconciliation Act of 1986, but it might well be called Continuation of Benefits for Retiring Actives. Its rules govern how long an employee who retires (or whose job is terminated) can continue coverage under the company's group health plan.

The period may be specific--18 months, typically--or however long it takes until you are eligible for medicare. Varying by company, there are different arrangements on how much of the health premium gets paid by the employer, how much by you.

Once you are armed with the data, you're prepared to decide whether you need to buy additional health coverage for yourself and your family. The size of your company can affect the decision. If you work where there are 20 or more employees, and keep working past 65, your employer must let you stay in the regular health plan. Then medicare supplements the company benefits.

KEEP WORKING. If you are still at work, but are close to retirement age and feel fairly certain you'll face sizable medical bills once you say goodbye, you might want to consider delaying the retirement date. If the company plan calls for active employees to pay only a small portion of the health premium, while retirees must pay the full amount and perhaps get fewer benefits besides, it could make economic sense to stay on the job a while longer.

Don't bank on medicare to relieve all of your health worries once you hit 65. Its coverage often leaves much to be desired. For instance, a longtime stay in a hospital can be financially disastrous: You pay $163 daily after the first 60 days, $326 daily after 150 days, and all costs beyond that. And medicare pays nothing after the first 100 days when a patient is in a skilled-care nursing home. There's no benefit, either, for custodial care--the kind needed by many nursing home residents--or prescription drugs once you are out of the hospital. So if your ex-employer's own group plan is costly or excludes retired workers, you will need to investigate the cost of medicare supplement policies, sometimes called medigap or medsupp coverage. There are 10 different health plans. Each offers a basic package of benefits, but individual policies include coverage for such things as skilled-nursing, outpatient drugs, and preventive medical care. A free booklet, Consumer's Guide to Medicare Supplement Insurance, has helpful information. It's available from the Health Insurance Association of America, Box 41455, Washington, D.C. 20018.

Ron Berman, a partner in the tax department of Grant Thornton's office in Madison, Wis., says some companies have reduced their costs by setting up separate insurance pools for retired employees. Older than the general work force, retirees have more health claims and consequently are usually insured at higher rates. Rather than cut them off completely, the companies agree to subsidize the health premiums for a specific length of time--5 or 10 years, say. After that, notes Berman, the retirees must pay the full premium.

In such instances, it's a good idea to check whether you can join with others in a group that can ask an insurer to provide coverage at lower-than-individual rates. Churches, fraternal organizations, and professional associations often make such deals. "You pay 100% of the premium, but it's less than you'd pay by yourself," Berman says.

WARNING SIGNALS. Another idea some companies are using to lower their own costs while helping loyal workers and retirees stay insured: a veba. That's a voluntary employee benefits association. It's similar to a 401(k) plan that lets you sock away pretax dollars in an investment account, with the money specifically earmarked for health costs or medical insurance premiums. Because vebas have strict limits on the amount of assets that can be put aside, they're not widely available. But more companies, particularly ones where employees are unionized, are considering setting them up.

If there is an upside to the new accounting rule, it's that it forces companies to get the numbers out into the open, so analysts and workers will have a chance to spot early-warning signals of an employer's inability to fund health-care liabilities. "Previously, employers promised benefits to retirees without calculating what they might cost," says Melissa Krause, an audit partner at Deloitte & Touche. "Everything was pay-as-you-go. So you could work 25 years and then discover your company didn't have enough money to keep its promises."

In the mid-1980s, that happened at such companies as Colt Industries, Bethlehem Steel, and Bessemer Cement. Now, with the average retired worker's annual health costs running about $2,500 vs. $2,275 in 1990, more companies are planning to take steps to trim expenses in the near future. The propensity to minimize costs or slash benefits shows up clearly in a Foster Higgins survey of 1,380 employers (table).

Despite President-elect Clinton's optimism that government action can bring about improved health care for everyone, Grant Thornton's Berman says the individual shouldn't depend on Washington. And you certainly shouldn't rely on any verbal pledges that are made by your employer.

"Right now, you need to understand exactly what your company has promised you--in writing," says Berman. "And no matter how good it sounds, double-check whether there's a line that says the company has the right to amend or terminate the plan." If the words are there, the courts have upheld the companies' rights to make any changes they want--even if the result is that you're left with expensive medical costs, or no insurance at all. It's a case, perhaps, where reading the fine print can make you feel in desperate need of a doctor.

      Employer action*   Percent that did  Percent that plan
                           it since 1990         it by 1994
      Raised premiums              30%               17%
      Increased cost-sharing
      by raising deductible or
      out-of-pocket maximum        26                14
      Tightened eligibility        11                10
      Increased benefits           12                 5
      Terminated plan               3                 4
      *Based on survey of 1,380 companies