The decline in retiree health benefits is likely to have significant consequences for workers and society. Unlike pensions, which are protected by legal provisions that limit states’ ability to change them, retiree health benefits can be on the state budget chopping block at any time. For current and former employees, the loss of their employer-sponsored coverage may force them to turn to costly medigap plans or go without health insurance at all Khandker and McCormack, 1999. For the Medicare program, the loss of retiree health benefits reduces federal outlays by 23 percent compared to those of beneficiaries in comparable health and socioeconomic status who have supplemental private coverage.
The current status of retiree health Discover benefits is not just a question of whether or when reforms will occur; it also reflects how well states and localities are preparing for the eventual financial challenge. Until recently, few states set aside money to pay for their retiree health-care promises and now only 15 have funded ratios above 7 percent. Many large states, such as Florida, New York, and New Jersey, have zero dollars set aside to cover future health-care costs for retirees (see Figure 1).
As the number of firms eliminating retiree health coverage has declined, other employers have increased the generosity of their plans. Four percent of firms reported that they had changed their retiree health plans in the past two years, and 5 percent are planning to do so in the next two years. The most common changes are to increase retirees’ cost-sharing requirements or to introduce a three-tier cost-sharing formula for prescription drugs. Virtually no firms have reduced the maximum lifetime benefit or capped or limited the monthly income replacement benefits for retirees.
These trends are expected to continue because of recent court rulings, economic pressures, and concerns about rising health-care costs. The Supreme Court’s decision in M&G Polymers, for example, has shifted the way retiree health benefits are assessed by courts. The Court has clarified that retirees must affirmatively prove they have a vested right to the particular level of contribution-free health benefits described in their CBAs rather than relying on an arbitrary presumption of vesting. In addition, the enactment of the Patients’ Bill of Rights and the potential for lawsuits against employers that provide retiree health benefits could lead some to drop or drastically limit their benefit offerings.
Although the number of retirees who rely on employer-sponsored health coverage will remain stable, some firms are making plans to change their offerings. For example, one large firm is considering offering retirees a defined-contribution account that they can use to purchase their own supplemental Medicare coverage (Medicare Advantage). If such an option were available for all retired workers, it would allow them to bypass traditional Medicare and its costly deductible and coinsurance and instead directly contract with a Medicare Advantage plan that offers lower premiums and out-of-pocket costs. Such an approach would be similar to the COBRA program for former government employees.