Solutions to managing retiree health care.

In the past, health care benefits for the retiree population were a natural extension of coverage for active employees. At a minimal cost, employers could simply integrate retiree's coverage with Medicare, and retirees could continue to receive basically the same coverage as before.

Lately, however, with employers facing such issues as skyrocketing health care costs, a rapidly growing pool of retirees, and an increasing number of workers taking early retirement, retiree health care has become more complicated. Plus, new regulations affecting retiree health care have added to the complexity and threaten the future of all retiree benefits.

HIGH COSTS OF RETIREE BENEFITS

According to a recent study by A. Foster Higgins & Company, a benefits consulting firm, health care benefits consumed approximately 45 percent of a company's 1991 net earnings. Of this, 14.1 percent was earmarked for retirees only.

This percentage will continue to grow since retirees 65 and over now comprise the fastest-growing segment of the U.S. population. In 1970, according to Foster Higgins, about 9.8 percent of the population was over the age 65. By 1984, that figure grew to 12 percent, and it is forecast to reach 21.1 percent by the year 2030.

The high costs, however, are not attributable only to the high numbers. As a group, retirees are generally more expensive simply because they are older and require more health services and more prescription drugs.

Additionally adding to employee's current retiree concerns is the fact that health care benefits, unlike pension funds (which the government requires companies to at least partially fund in advance), are not usually set aside or pre-funded. Rather, companies have historically paid as they go, using revenues generated from the labors of active workers to fund retiree programs.

But that supply of active workers is rapidly shrinking. In 1960, according to the Social Security Administration, the ratio of workers to retirees was 5:1. By 2020, with the baby boom generation in retirement, the forecast is 2:1.

NEW FASB REGULATIONS

The Financial Accounting Standards Board (FASB) recently issued a new ruling, #106, requiring all publicly held U.S. companies to account for the cost of retirement health care for all current and future retirees as well as their covered dependents. These financial obligations, which at best may only partially be deducted from a company's taxable income statement and, in most instances, be recognized as a liability on its balance sheet.

The future financial picture for employers gives cause for concern. An estimate reported by the Employee Benefit Research Institute -- a non-partisan, non-profit organization based in Washington D.C. -- has put the employers' costs of providing health care for just current retirees at $241 billion. The U.S. General Accounting Office has gauged the total liability for both current and future retirees at over $400 billion.

CORPORATE DILEMMA

Everyone favors health care benefits for retirees, but no one wants to pay for them - not the employer, not the retiree, and not the government.

Companies want to provide coverage, but they also want to remain profitable. And the FASB ruling has meant a reduction in annual profits for some large companies of 20 to 80 percent.

SOLUTIONS

Some companies are simply eliminating retiree benefits. Foster Higgins reported that in 1989, 3 percent of companies surveyed had ended or planned to end medical benefits to retirees. That number rose to 7 percent in 1991. And most courts are upholding employers' rights to terminate or change benefits, especially if an escape clause is written into the company's health policy.

Other companies are turning to such solutions as reducing benefits or increasing the cost-sharing of medical expenses. Most employers already require retirees to contribute something for their own as well as their dependents' coverage. Other viable cost-cutting measures include:

* Requiring an even greater contribution toward the health care premium.

* Offering retirees a monthly fixed-dollar amount, often tied to their years of service or business achievement.

* Charging higher deductibles and/or coinsurance payments.

* Offering only core benefits (and eliminating such items as dental and vision coverage).

In fact, companies are increasingly reducing the level of benefits. In 1989, according to the same Foster Higgins survey, 43 percent of companies questioned had reduced or planned to reduce medical retiree benefits. In 1991, that number rose to 65 percent.

HMO RETIREMENT PROGRAMS

Many companies are looking to health maintenance organizations (HMOs) to provide for their retiree health care needs -- for retirees both over and under 65. They are finding that HMOs can offer more benefits at a lower cost without the burden of annual deductibles and time-consuming paperwork. And because HMOs afford fixed rates for a contractual period of time, companies can more easily and accurately project future liabilities to comply with the FASB regulations.

Under a Medicare risk program, an HMO contracts with the federal Health Care Financing Administration to treat Medicare patients for a present fee -- approximately 95 percent of what the government would pay in a fee-for-service setting. The HMO provides total health care. In return, the retiree essentially assigns his or her Medicare benefits to the HMO.

An HMO risk plan can cost as low as $30 to $45 per month per retiree. (This is an average for PacifiCare of California's Secure Horizons' program.) The plan includes total preventive care and hospitalization coverage. It also includes doctors' visits and prescription drugs, which often require a nominal copayment. A risk plan can also offer extra features such as hearing aids, vision and dental coverage and chiropractic care, and it eliminates charges such as deductibles and copayments.

While there is no charge for Medicare Part A coverage, Part B currently costs $36.60 a month. Plus, there is a $652 deductible fee for the first 60 days of hospitalization, a $100 annual deductible fee for medical care and a 20 percent coinsurance charge on all covered costs. In addition, to fill in the gaps of Medicare coverage, a retiree often purchases a supplemental policy, which can cost between $50 and $200 a month.

OTHER RETIREES

For non-Medicare eligible retirees over 65 and for younger retirees, standard HMO coverage can offer the same benefits as a Medicare risk program and can also be cost-effective. An HMO costs approximately $110 to $140 a month per employee or retiree who is under 65 or not eligible for Medicare.

For retirees under 65, a traditional indemnity policy runs $175 to $220 per month, and even as high as $300. For private insurance for retirees over 65, a monthly indemnity supplemental premium can run $100 or more per month.

Thus, HMOs can offer more coverage for less money. And the amount of money employers need to set aside to comply with the FASB regulations can be lowered to well over 50 percent, depending on the coverage selected and the employee contribution that is required.

GROWING INTEREST

Employer interest in health maintenance organizations is steadily growing as a health care option for retirees. PacifiCare of California, for example, though its Secure Horizons' health plan, offers a program designed specifically for retirees 65 and over. The program was first made available to employer groups in late 1989 as part of a pilot project. Two groups participated. Today, more than 70 employer groups offer Secure Horizons' plan to their retirees.

These companies are discovering, as are employers nationwide, that Medicare risk HMOs effectively meet their budgetary requirements and, at the same time, provide their retired employees with comprehensive, high-quality, and accessible health care.

Jeff Folick is President, PacifiCare Health Systems.