Thousands of U.S. Retirees Struggle with Big Health Insurance Rate Hikes

Bruce Japsen
CHICAGO TRIBUNE

Nov. 23, 2003

Tens of thousands of retired workers, long accustomed to generous health benefits, are being hit with huge increases in premiums as rising medical care costs strain tight corporate budgets in a lackluster economy.

The costs for providing benefits to retirees are rising even faster than premiums for active workers, pushing more companies to eliminate retirement health benefits in the future. Currently, more than 12 million retirees have some kind of medical coverage, provided by roughly half of U.S. companies with 1,000 or more employees.

Retiree premiums are doubling for some, or at least jumping much faster than the 13-25 percent rate increase for active workers, because companies are exhausting caps set years ago to protect themselves from rising health care costs, analysts say.

Harmon Davis knows all about it.

Davis, 60, repaired cash registers and business machines for NCR Corp. for 40 years before retiring three years ago under a deal that put his monthly premiums for him and his wife at $100 this year. But by next year, his premiums will more than double to $231, according to a letter Davis received from NCR in October.

And by 2005, Davis' costs are projected to triple to $620 a month, which is an amount that will eat more than a third of his annual $21,540 pension. Davis expects he will be forced to look for a part-time job to pay the bills.

''A number of us had based our early retirement decision somewhat on the fact that we would have medical coverage at a reasonable rate,'' Davis said. ''Had I known this is coming, there are more chances that I would have stayed than would have left.''

Similarly, 95,000 Bethlehem Steel retirees and their dependents lost their health care insurance when the company went bankrupt this year. International Steel Group of Cleveland, which bought Maryland and Indiana operations of the company, did not take over liability for the retirees, and the Pension Benefit Guaranty Corp. covers only pensions, and that at a reduced level for many.

The trend of cutting benefits for retirees comes just as Congress has passed a drug benefit for seniors under Medicare, which is one of the most important benefits for retirees with employer-based medical coverage, seniors say.

Yet the Medicare drug plan does little for retirees under 65. Even for those over 65, Medicare's drug benefit was enacted too late to help them with their premium hikes because Medicare's proposed prescription coverage will largely take effect in 2006, with the exception of drug discount cards available next year.

The spike in costs for employers comes as companies wrestle with myriad economic conditions and demands by Wall Street to improve bottom lines. Some companies are also exhausting budgets for retiree medical benefits.

NCR, of Dayton, Ohio, wrote letters to its more than 14,000 retirees last month letting them know the company needs to eliminate $250 million in expenses by the end of 2005 and needs to cut medical benefits to meet the company's overall budgeting targets.

NCR said it is passing along more medical costs to retirees over two years to try blunt the impact. It isn't the first time NCR has cut retiree benefits.

In 1999, NCR eliminated supplemental medical coverage to Medicare for those who were not 64 as of Dec. 31, 1998.

In 1999, NCR also stopped offering active employees retiree benefits. For those retirees who had not reached 65, 1999 was also the first time they began contributing to their premiums, according to NCR spokesman John Hourigan.

''The objective is to better align our capital, both human and financial, in order to ensure NCR is a successful and sustainable company for decades to come,'' NCR Chief Executive Officer Mark Hurd wrote to retirees.

''Many of the decisions we are making are not easy, because often people are affected in some way.''

Health care coverage for retirees tends to be more expensive because retirees are older and tend to use more medical services, particularly prescription drugs, analysts say.

Most stay on employer-sponsored retiree plans until they are 65 when Medicare coverage kicks in, and they will then only need an employer-sponsored supplemental policy, which typically includes drug coverage.

But such supplemental policies are going up, too, often double and triple what retirees have been used to for much of the decade.

Ralph Kolderup, a retired regional sales manager for the former Ameritech, now SBC Communications Inc., said supplemental coverage cost just $2 a month three years ago. This year, he paid $133 a month, and his premium will rise to $224 a month next year.

''To go from zero to more than $2,500 a year is fine if you are working and get annual raises and maybe a performance bonus. But when you are retired, what the hell are you going to do?'' said Kolderup, who is 65. ''Your income levels are stable unless you want to go back to work when you are 65. Most of us know health-care costs are spiraling out of control in this country, but this raises a question: What is going on?''

SBC is like an increasing number of companies being forced to raise premiums on retirees because of corporate budgeting maneuvers implemented several years ago that set a cap on future retiree obligations. In SBC's case, the company created such a cap in the early 1990s and told workers they some day faced the possibility of paying a portion of their medical premiums if they rose above the cap. The cap kicked in last year, triggering large increases in retiree contributions.

Because of the dramatic increase in health care costs over the years, the caps are starting to kick in at companies across the country. About half of all employers offering retiree medical benefits report having such caps, according to a study by the Henry J. Kaiser Family Foundation and benefits firm Hewitt Associates.

''Ten years ago, a lot of companies reduced their liability by putting in caps, and that future deferral is now hitting retirees,'' said Todd Swim, benefits consultant with the Chicago office of Mercer Human Resources Consulting. ''The only way companies can manage that liability without drowning is to institute these caps.''

In the future, retiree medical benefits may not even be around for current employees given the current trend, analysts say. Already, one in five large employers says it is going to eliminate retiree coverage for ''future retirees,'' typically new or recent hires, within the next three years, the Kaiser-Hewitt analysis indicates.

''SBC is among the declining number of companies that are offering health-care benefits for retirees,'' said SBC spokesman Walt Sharp. ''Because of that double-digit increase in the cost of care, it has increased since.''

Today, SBC said, retirees are contributing 30 percent of their total costs, which is still below the national average of about 40 percent depending on the size of the company, benefits analysts say.

''Retirees who have medical coverage have been so well treated with low cost coverage that any change looks awful, but it is going to get worse,'' Swim said.

Bruce Japsen is a reporter for the Chicago Tribune, a Tribune Publishing newspaper.

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