Death, Taxes--and Health-Care Costs

With retiree benefits at risk, you may have to scramble for coverage

Think health insurance won't be a problem after you retire? After all, your company offers a plush retiree policy, for free. Think again.

Companies are hacking away at this once-common benefit. A return to surging health-care inflation, coupled with an early '90s accounting rule that forces them to write off future insurance obligations against today's profits, has many execs rethinking how generous they should be to people who no longer contribute to the bottom line. While two-thirds of all companies with 200 or more employees provided retiree health benefits in 1988, only 37% did last year, according to Larry Levitt of the Henry J. Kaiser Family Foundation, a health policy think tank. Even companies keeping the insurance are nipping coverage, or making retirees pick up more of the premium.

This sea change is surging straight toward baby boomers. Medicare kicks in at 65. Before then, a retiree without company coverage is at the mercy of private insurers. Rates for older applicants can be three to six times what a 24-year-old would pay, more if there are health problems.

Later on, Medicare covers only about half of seniors' health-care bills. Many larger companies used to provide supplemental coverage--so-called wraparound policies--to pick up where Medicare left off. But employers have been even quicker to drop those, according to the human-resource consulting firm William M. Mercer. If you're forced to turn to Medigap for supplemental coverage, that's costly. Standardized rates for Medigap policies range from less than $50 a month to almost $300, according to Mercer. And benefits are generally less rich than what employers provide. Also, Medigap insurers have the right to reject retirees who don't sign up within 63 days of losing a company wraparound.

As for long-term care insurance, only about 9% of companies with more than 100 employees provide that, says Robert Davis, president of Long-Term Care Quote, an independent agency for such policies. Here, at least, the trend is up--but that's because companies almost always make employees pay the full premium.

What can you do? Clare Hushbeck, a labor economist at AARP, counsels anyone thinking of retiring early to ask some questions: Will you be on the company's group plan until you're old enough for Medicare? What about your spouse? Will you have to pay anything toward the coverage? And will a Medicare wraparound be offered after age 65? What will it cover, and how much will it cost? Ask for a written promise that these benefits will not be subject to future change.

GO FIGURE. Otherwise, you may not have much recourse if your benefits are cut later. The courts have generally sided with companies in suits brought by angry retirees. In a 1998 ruling, the Sixth Circuit Court of Appeals in Cincinnati decided General Motors had the right to change health benefits for 50,000 salaried workers even though they had taken early retirement based on company promises of free lifetime health insurance. While many of the documents given workers promised the benefit, the court said, some also mentioned GM's right to change benefits in the future.

Medicare-eligible retirees should at least get a sense of whether the company is considering cutbacks. One increasingly common tactic is to put a cap on company expenditures for retiree coverage, leaving beneficiaries to pick up any future price increases. Right now, at companies that require retirees to share the costs, the seniors pay about one-third. (At 34% of large firms, they pay the full amount.) Full premiums run about $160 for a retiree, $330 for a retiree plus spouse.

When planning your retirement, factor in the possibility of health insurance costs. Check with insurers to see how much they would be.

Premiums vary widely depending on age, health, and residence. A 55-year-old woman in good health might pay $250 a month for a standard preferred provider organization (PPO), in which beneficiaries generally see specified doctors but can go out of the network at higher cost. A 63-year-old male smoker could face premiums of $600. A retiree with diabetes, arthritis, or heart disease might find it difficult to get coverage at all. For worst-case scenarios, federal law requires that full insurance be made available to those applying within 63 days of a leaving a group plan. In some states, health maintenance organizations (HMOs)--which pay more of the bills but require patients to see in-network doctors--have open-enrollment periods during which they take any applicant, although not necessarily at an affordable price.

EXPERIENCE COUNTS. Shopping for the best rates can be problematic. Many insurers demand a month's premium in advance before they will give a firm price and commitment to cover. Also, if you have health problems, ask an agent to suggest insurers likely to accept you. One rejection increases the likelihood others will do the same, since companies share such information.

Trimming coverage is one way to lower premiums. An indemnity plan that lets you choose your own doctor will cost 10% to 25% more than a PPO. Increasing the deductible from $500 to $1,000 can shave 10%.

You probably don't need long-term care insurance if you have less than $250,000 or more than $1.5 million in assets, says Charles Hais of Brecek & Young Advisors, a Cincinnati financial planning firm. Those with less than $250,000 would probably find it difficult to make the payments--and would soon qualify for Medicaid if confined to a nursing home. Those with more than $1.5 million can bear the cost themselves.

A year in a skilled nursing home costs about $50,000 on average nationally, though it can be more than double that in high-cost areas. The typical stay is less than 2 1/2 years. About 40% of those 65 and older will need long-term care at some point. In-home or adult day care, or assisted living facilities, cost 50% to 80% as much.

One way to save is to buy while you're young. A healthy 45-year-old might pay $690 a year for the same policy that costs a 65-year-old $1,600. If you decide to buy, be sure to pick a top-rated company, one that will be around when you need it. Davis recommends insurers rated A or better by such firms as A.M. Best or Standard & Poor's (which, like BusinessWeek, is owned by The McGraw-Hill Companies), with at least $500 million in assets, 50 years in business, and 5 years in long-term care.

Legislative help may be on the way. Congress is considering more generous tax deductions for long-term care policies. And Representative John Tierney (D-Mass.) has introduced a bill to guarantee that retirement health benefits won't be reduced after a worker retires.

In the absence of such laws, anyone contemplating retirement needs to face up to the possibility of hefty insurance costs. Perhaps sailing around the world will have to wait.

By Carol Marie Cropper

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