Retiree Health Benefits: What the Changes May Mean for Future Benefits

Abstract

This Issue Brief addresses a wide range of retiree health issues. It reviews the provisions and impact of FAS 106 and includes a discussion of how companies have changed their overall retiree health liabilities. It describes Medicare, the primary source of publicly financed retiree health benefits, and its changing relationship with employer plans. In addition, it analyzes other financing arrangements. The Issue Brief concludes with a discussion of policy issues that will potentially affect workers, future retirees, and employers.

Changing demographics are likely to have serious implications for the financing and delivery of health care services as the baby boom generation reaches retirement age.

FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106) — approved in December 1990 — has dramatically changed the way most private companies account for their retiree health benefits and other postretirement nonpension benefit obligations. FAS 106 requires liabilities for retiree health benefits to be recognized explicitly on balance sheets. It applies many of the same principles that were used in accounting for pensions (FAS 87 and FAS 88) to other postretirement benefits (e.g., health coverage, life insurance, long-term care insurance, and housing).

In response to FAS 106 and increases in health care costs, some firms have dropped retiree health benefits, while others still have no plans to change their existing benefit provisions. However, the vast majority of companies have made numerous changes in their retiree health benefit programs. Of those companies indicating a modification or considering one, the most common was a change in cost sharing provisions, followed by caps on company contributions, and annual adjustments in retiree contribution amounts.

The Medicare managed care program was created by Congress in 1982 under the Tax Equity and Fiscal Responsibility Act and became operational during 1985. This program allows Medicare beneficiaries to enroll in one of three types of managed care contracts: risk HMOs, cost HMOs, and health care prepayment plans. Employers have discovered that Medicare HMOs, especially risk HMOs, offer employers and retirees a "win-win" alternative to the traditional fee-for-service Medicare program and traditional retiree health benefits.