Generations of current and future employees may never have the security of employer-sponsored retirement health benefits enjoyed by a number of current retirees, according to a recently released report.
The findings in “Retiree Health Benefits: Trends and Outlook” by Paul Fronstin for Employee Benefit Research Institute, suggest that the combined effect of a number of political and economic circumstances dating from the early 1990s will likely be to discourage employers from offering their future retirees health benefits.
If this in fact happens, brokers can expect to be looked to for the health insurance education retirees would otherwise have gotten from their employers, says Ray Werntz, president of the Consumer Health Education Council, a program of EBRI, a nonprofit Washington organization.
“Employer coverage is usually designed to fill the gaps in Medicare coverage,” says Werntz.
In the past, it was not uncommon for retirees to buy three and four policies to fill those gaps, he says. “This was unnecessary and redundant. Its very easy to make a mistake. Trying to fill in the gaps with an individual policy is not for the faint of heart.
“A broker who helps retirees buy what they need and not more is going to be worth his weight in gold,” he says.
The circumstances cited in the report as putting employer-sponsored retiree health benefits in a precarious position are business accounting changes, age discrimination rulings by federal courts, medical inflation and potential federal legislation.
In 1990, the Financial Standards Accounting Board, a private organization in Norwalk, Conn., that sets standards for financial accounting and reporting, issued Financial Accounting Statement No. 106, which required significant alteration of the methods used by most private companies when accounting for their retiree health benefits, according to the report.
“The rule required companies to record unfunded retiree health benefit liabilities on their financial statements in accordance with generally accepted accounting principles,” the report says. “Because FAS 106 requires employers to accrue and expense certain future claims payments as well as actual paid claims, it dramatically impacted companies calculation of their profits and losses, and thereby created a strong incentive for financial managers to limit expenses.”
The report finds that as a consequence of FAS 106, as well as the increasing cost of retiree health coverage in general, employers have begun to place caps on the amount they are willing to spend on health coverage for their retirees.
Other consequences include age and service requirements, and dropping the benefit for future and even current retirees, according to the report.
Some companies have switched or are considering switching to a “defined contribution health benefit” in which active employees “would typically accumulate funds in an account to pre-fund retiree health benefits during their working life,” the report says. “After workers retire, the funds in the account could be used to purchase health insurance from their former employer or union, or directly from an insurer.”
The age discrimination ruling discussed in the report is from a 1998 lawsuit heard in federal district court brought against Erie County, Pa.
Counsel for the Erie County Retirees Association, which brought the suit, argued that the countys retiree health benefits program was in violation of the federal Age Discrimination in Employment Act because (older) Medicare-eligible employees were required to pay a higher portion of the total cost of their health insurance fees than (younger) early retirees, according to the report.