Friday, February 24, 2006

U.S. to Pay Big Employers Billions Not to End Their Retiree Health Plans

The New York Times
U.S. to Pay Big Employers Billions Not to End Their Retiree Health Plans

America's largest companies expect the federal government to pay them about $4 billion over the next four years to help keep their retiree health plans alive at a time when such benefits are increasingly on the chopping block, according to a new study by Credit Suisse First Boston.

The money is due to start flowing to employers this month as part of Medicare's new prescription drug benefit. When Congress authorized the Medicare drug benefit, it also agreed to start subsidizing the drug component of employers' retiree health plans, to keep them from shifting their retirees into the government program.

The goal is to save the government money, even after the subsidies, while giving the retirees a better deal than they might get if they were pushed into Medicare.

Among the nation's 500 largest companies, 331 offer retiree health plans.

With the program just starting its first year, it is not yet clear whether the subsidy will achieve its goals. For one thing, there are about 36 million people 65 and older in this country who are eligible for Medicare, but only about 7 million retirees currently covered by employer-sponsored health plans. Still, the Credit Suisse study, published on Wednesday, shows that the subsidy is popular with big employers — even those that do not fit the stereotype of companies in waning industries unable to cope with health care inflation and armies of baby-boomer retirees.

The money, to be sure, will flow to some financially weaker companies staggering under the weight of their health plans, like General Motors, which is expected to receive $1.1 billion over the next four years in drug subsidies for their retired workers.

But there are also thriving businesses like the utility company Exelon, which seem able to afford their plans on their own but will nonetheless receive the federal payouts.

There are companies, too, like BellSouth, that have been setting aside money for retiree health care for years and have billions on hand.

And some that have no reserves for those outlays, like Delta Air Lines, will also receive subsidies.

The government is not drawing distinctions because the subsidy is meant only to help employers stay in the retiree health care business, not to direct public funds to the neediest employers.

Mark Hamelburg, director of employer policy and operations at the Centers for Medicare and Medicaid Services, the agency that runs Medicare, said, "The whole purpose was to incentivize employers to keep providing the good level of coverage that they have had." So far, employers covering 6.4 million retirees have enrolled for the subsidy, he said.

To get the new subsidy, a company must offer retirees a prescription drug benefit that is at least as valuable as the minimum benefits now available under Medicare. Even though General Motors, 3M, Unocal, International Flavors and Fragrances and Avaya are among businesses that have limited or cut back their retiree health plans in recent years, the study showed, all still offer benefits generous enough to qualify for the subsidy.

At the same time, the study found a few large companies that were expanding their retiree health plans, not cutting them. General Electric, for example, in 2003 increased its total obligations of this sort by about $2.5 billion, as part of a new labor agreement. The Medicare subsidy will offset some $583 million of that increase.

And BellSouth's commitments to retiree health care increased $3.3 billion in 2004, after auditors for the company required changes in the way it was accounting for the benefits. The Medicare subsidy will offset $1.1 billion of that.

The Credit Suisse analysts who conducted the study, David Zion and Bill Carcache, prepared it to show investors how successful, or not, companies had been in shifting the cost of their retiree health plans onto other payers.

Companies that fear they have promised more benefits than they can deliver "are actively trying to pass the buck," the analysts wrote. This means trying to shift costs "to anyone who will bear them: their retirees, active workers, the U.S. taxpayer, etc.."

"If they succeed," the analysts added, "it's a giant transfer of risk from corporate America to the work force, and retirees."

Instead of increasing corporate profits in a given year, the subsidies are supposed to free up cash that the company would otherwise have to spend on health care. Mr. Zion and Mr. Carcache said this effect would show up on corporate cash-flow statements. In the future, though, after the Financial Accounting Standards Board completes its current project on pension accounting, retiree medical plan activity might make its way onto corporate balance sheets.

The company with by far the biggest retiree health plan is G.M. — a plan so large that the $77 billion obligation constitutes 18 percent of the combined retiree health obligations of the nation's 500 largest companies. G.M. projects that it will make cash outlays of about $18 billion for retiree health care over the next four years.

Those projections were made before it negotiated a package of concessions with the United Auto Workers union in October, but a G.M. spokesman, Jerry Dubrowski, said newer projections were not available. He said the cutbacks were still being challenged in court by retirees, who argue that the union has no legal authority to negotiate for them, only for active workers. If the concessions are upheld, Mr. Dubrowski said, the retirees will still get a better deal under G.M.'s health plan than if they were pushed into Medicare.

"This is an important first step in reforming the whole health care system," he added.

But the company that will get the biggest boost from Medicare on a percentage basis is not G.M., but Genuine Parts, a distributor of auto replacement parts and office products that has rising sales and profits, and a much smaller health plan. The subsidy, estimated at $6 million over the next four years, will reduce its overall health care obligations to retirees by 62 percent, the study found.

The Credit Suisse analysts found that the big companies, over the life of their retiree health plans, expected to receive about $25 billion from the federal subsidy arrangement.

But Mr. Hamelburg of the federal Centers for Medicare and Medicaid Services said that companies' estimates did not capture the entire outlay expected because they did not include the substantial subsidies that would go to state and local governments that run retiree health plans. The government expects to pay all employers, private and public, about $14 billion over the next four years.