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Kaiser: Most Employers Will Take Subsidy, Provide Retiree Drug Benefits

DECEMBER 7, 2005 -- Four in five businesses now providing drug coverage for retirees will continue to provide the coverage next year and accept government subsidies aimed at encouraging employers not to drop retirees once the new Medicare drug benefit goes into effect on Jan. 1. But only half of those employers expect to still be offering the benefit to retirees in 2010.

The report, compiled by the Kaiser Family Foundation and Hewitt Associates, also found that another 10 percent of private-sector employers said they will provide some drug coverage to supplement the new Medicare drug benefit while 9 percent say they plan to stop offering drug coverage to Medicare-eligible retirees.

The report gave proponents of the new drug law (PL 108-173) some comfort amid fears that employers would drop retiree drug coverage once the law began Jan. 1.

"The widespread dropping of drug benefits that some had feared has been averted so far as businesses figure out what their longer-term response will be," said Kaiser Family Foundation President and Chief Executive Officer Drew E. Altman.

The federal government is offering to subsidize 28 percent of employers' drug benefit costs.

Among firms that will accept the federal subsidy in 2006, about four in five say they are "very" or "somewhat" likely to accept the subsidy again in 2007. But in 2010, only half of those employers say they are likely to maintain coverage and accept the subsidy while 22 percent say they are unlikely to do so and 28 percent said they do not know.

Employees must also consider how enrolling in the Medicare drug program will affect their coverage. Nearly three in 10 employers who are offering a subsidy said retirees who sign up for a Medicare plan would lose both employer-sponsored medical and drug coverage if they enroll in a Medicare prescription drug plan and a similar share of employers said retirees would lose prescription drug coverage but retain other benefits. The remaining firms—41 percent—say retirees would maintain all employer-sponsored coverage.

"Most retiree plans offer more comprehensive benefits than Medicare and retirees who drop employer-sponsored coverage may not be able to pick it up again later," said study co-author Tricia Neuman, a Kaiser Foundation vice president.

Rising costs for retirees will also play a major role in employers' decisions on providing retiree health care benefits. When asked about retiree health benefits overall, the 300 large firms (1,000 or more employees) surveyed reported an average increase of 10 percent in total retiree health costs between 2004 and 2005, including both Medicare-eligible retirees and early retirees, those under age 65 who do not quality for Medicare benefits.

About one in eight surveyed firms said they had stopped offering subsidized retiree health benefits in 2005 for future retirees, mainly newly hired workers. "Unfortunately, retiree health cost pressures remain intense," said Frank McArdle, manager of Hewitt's Washington, D.C., office.

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