Addressing the Growing Gap in Retiree Health Coverage Paul W. Dennett American Benefits Council July 26, 2005 Citizens’ Health Care Working Group Houston, Texas

The Problem  Declining numbers of Americans with retiree health coverage  Increasing share of health coverage being paid by retirees  Inadequate savings by active workers for retirement needs, including health needs  Inadequate vehicles to encourage savings for future health care needs

Declining Coverage  Persistent decline in the number of firms offering retiree health coverage  66 percent of large firms (200+ employees) offered retiree health in 1988  36 percent offered retiree health in 2004  And the number is all but certain to decline even further....

Numerous Causes for Decline  Increasing costs: 12.7% increase for 2004  Unfavorable accounting rules (FAS – 106)  Caps on employer contributions to premiums  Changing ratio of retirees to actives  Global competitiveness pressures  Lack of affordable coverage in individual market

Employer Cost Concerns  Nearly 90 percent of employers that offer coverage say CEO is very concerned or somewhat concerned with increasing costs for retiree health coverage  Retiree health expenses account for more than a quarter (29%) of firms’ total health costs

Retiree Cost Concerns  Average monthly premium is $490 for pre- 65 retirees and $260 for over-65 retirees  Nearly half of retirees with coverage pay 40% or more of their premium expense  Approximately 1 out of every 5 retirees pays 100% of their premium expense  New or recent hires far less likely to have retiree health as a benefit

Need for Stronger Savings Incentives and Vehicles  Few Americans save adequately for retirement, or at all for future health needs  Retiree coverage needs beyond Medicare could exceed $200,000  401(k) and IRA funds are subject to tax on distributions, including for health expenses  Health Savings Accounts (HSAs) have strict limits on contribution amounts

Improvements in Medicare  Prescription drug coverage available under Medicare starting in 2006  New health plan options under Medicare Advantage program  Financial incentives for employers to maintain comparable drug coverage  Additional options available to employers to encourage continued retiree coverage

Further Reforms  Encourage joint efforts by private and public purchasers to improve health care quality and efficiency  Allow tax-free use of funds from pension plans, 401(k)s or IRAs for retiree health  Establish new tax-advantaged savings vehicles for retiree health  Modify HSAs rules to permit increased contributions for future health care needs

Summing Up  Retiree health coverage gap is growing wider  Increasing cost pressures fall on both employers and retirees  Recent changes in Medicare will help, but more is needed  Top priority is to lower health costs and improve quality  Employers and individuals need better savings incentives and vehicles