By Kelly Greene 

  Major employers are divided over whether to continue providing

prescription-drug coverage to retirees when Medicare starts offering such

benefits in 2006, a new study finds, despite a federal subsidy designed to

entice them to keep doing so.  

  Even the retirees who will get to keep their private coverage face increasing

out-of-pocket costs, both in drug payments and overall medical-insurance

premiums, according to the third annual survey of retiree health benefits by

Hewitt Associates, a Lincolnshire, Ill., benefits-consulting firm, and nonprofit

Kaiser Family Foundation of Menlo Park, Calif. The two organizations interviewed

333 private-sector companies from May through September that have at least 1,000

employees and offer retiree health benefits.  

  The majority of employers, 58%, said that they plan to preserve their current

drug coverage for retirees when the Medicare Modernization Act takes effect in

2006. In return for providing drug coverage that's at least equivalent to the

Medicare drug plan, those companies could collect a subsidy from Medicare: a

tax-free payment equal to 28% of drug costs from $250 to $5,000 for each

retiree, estimated at $611 on average.  

  An additional 17% of employers plan to offer coverage as a supplement to the

new Medicare drug plan rather than continuing their current plans. The new

government benefit is expected to reduce out-of-pocket drug costs by 37% on

average for retirees who don't have coverage through their former employers,

according to the Congressional Budget Office.  

  The employers expect those decisions to cut costs: Among the 34% of companies

that have analyzed the financial impact of the new Medicare law, two-thirds

expect to reap savings. In fact, 15% expect to cut their pretax costs by 20% or

more. (Eight percent expect no reduction, and 26% don't know or responded

"other.")  

  But 8% of the employers surveyed plan to drop their drug coverage altogether,

contributing to the overall erosion of retiree health benefits. From 1988 to

2004, the share of employers with at least 200 workers offering such coverage

fell to 36% from 66%, according to a separate Kaiser study earlier this year.  

  Some 13% of major employers said they don't know what they'll do, and 4% are

developing other plans, the study said.  

  "It's sort of like waiting for the other shoe to drop," said Edward Beltram, a

retired human-resources manager and spokesman for the Lucent Retirees

Organization. When Lucent Technologies Inc. dropped Mr. Beltram's wife's health

coverage this year, the couple's monthly premiums jumped to $516 from $143.

"We're concerned that something might happen to the prescription-drug plan," Mr.

Beltram added, because the company has informed retirees that it's examining the

issue.  

  A Lucent spokeswoman said the company sent a letter to retirees in September

saying that it hasn't decided yet how or if to alter retiree health benefits.  

  Already, 53% of large employers have increased retirees' drug co-payments or

co-insurance in the past year, and 51% said they are very or somewhat likely to

increase retirees' share of such payments next year, the study found.  

  It's a trend that is likely to continue because 54% of large employers said

they have established caps, or "ceilings," on what they will spend for the

benefits. This limits their liabilities, because once the caps are reached, all

of the increases in costs are passed along to retirees. Among companies with

caps, 56% already have hit their limits on the cap for their largest plan for

retirees who are 65 and older, and an additional 27% expect to do so in the next

one to three years.  

  "What often happens is that employers end up making changes that wind up

shifting costs to retirees to stay within their caps," said Tricia Neuman,

director of Kaiser's Medicare Policy Project.  

  ---

                                      Dropping Drugs?  

  Large employers' plans for their retiree drug coverage when the new

Medicare law goes into effect in 2006:  

  Continue to offer drug coverage and take federal subsidy       58%  

  Offer drug coverage as a supplement to Medicare drug plan      17%  

  Don't know                                                     13%  

  Drop drug coverage                                              8%  

  Other                                                           4%  

  Source: Kaiser Family Foundation/Hewitt Associates  

  (END)