Commentary: Medicare's $86 Billion Band-Aid

The subsidy won't stop many companies from scaling back retiree drug benefits

The massive Medicare bill that President Bush is set to sign on Dec. 8 will create a new drug benefit for seniors who currently don't have prescription coverage. But it also threatens the nearly 12 million retirees who now get drug insurance from their former employers. The reason: With a government-financed option now available, many companies will consider dumping coverage and letting Medicare provide drugs for their retirees instead.

To prevent such a shift, Congress bought a little insurance of its own: It set aside $86 billion to induce employers to keep providing prescription drug benefits over the next decade. Problem is, much of that funding will be wasted. That's because it will provide a windfall for some employers unlikely ever to drop coverage. And it isn't enough to forestall others from joining the trend toward slashing retiree benefits. In fact, the new legislation will allow some companies to blame Washington for dropped coverage. "Retirees will get a letter from their former employer that begins, 'Due to recent legislative changes in Congress..."' says Heritage Foundation health policy analyst Edmund F. Haislmaier.

WHY DIDN'T CONGRESS design a better solution? Mostly, because nobody can think of one -- short of redesigning the entire Medicare program, a step Congress rejected. The subsidy may have its flaws, but without it, most retirees would wind up with Medicare coverage, which is less comprehensive than private plans. Today, the average senior has annual drug costs of about $2,500. Those with employer insurance pay about $500 out of pocket. Under the Medicare plan, their costs would double, to $1,000. So shifting millions of seniors to Medicare would not only have cost taxpayers hundreds of billions, it risked sparking a revolt among retirees.

Still, a close look at how the subsidy will work shows why its efficacy will be limited. For many employers, the aid was the price of their support for the Medicare bill. But, for others, the subsidy will be a pure windfall. Some 90% of cities and states say they would never drop drug benefits for their two million retirees, with or without a subsidy. And companies that are locked into tough collective-bargaining agreements with unions such as the United Auto Workers can't dump benefits.

INDEED, General Motors Corp. (GM ), which is expected to spend an estimated $3.6 billion this year on retiree health, including $900 million for prescription drugs, just signed a four-year contract with the UAW that barely touches the insurance. The new law will have "no impact" on GM's coverage, a company spokesman says. But GM can still expect more than $200 million a year -- or in excess of $2 billion over the next decade -- in subsidies.

Much of the rest of Corporate America, however, will face tough choices about continuing drug coverage after the Medicare plan starts in 2006. The likely trend is clear: Since 1993, the share of large employers offering retiree insurance has dropped from 40% to just 23%, according to Mercer Human Resource Consulting LLC. Still, Credit Suisse First Boston estimates that companies in the Standard & Poor's 500-stock index will spend $27 billion in 2004 for retiree health benefits.

Now corporations will have to weigh whether to take the subsidy and swallow their remaining retiree costs or simply dismantle their coverage. "Companies are faced with a lot of decisions," says Joe Martingale, a health-care expert at consulting firm Watson Wyatt & Co.

Since the government will subsidize only 25% to 50% of the cost of private drug insurance, employers that stop providing drug coverage will still save quite a bundle. The Congressional Budget Office figures that about 2.7 million retirees will lose employer benefits as a result of the new law.

With a better overall bill, this mess might well have been avoided. But a deeply divided Congress created a patchwork plan that mixes public and private insurance. So $86 billion is the price of the bailing wire and bubble gum lawmakers needed to hold together the shaky health-care system for seniors.

By Howard Gleckman

With David Welch in Detroit

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