Hundreds of thousands of retired workers who used to have generous health benefits from large companies are digging deeper into their own pockets this year. Surging medical inflation is draining hundreds of millions of dollars from corporate profits, and many large employers are responding by cutting back on health care benefits for retirees or requiring them to pay more for coverage.
The reductions in health benefits stem mainly from sudden sharp increases in employer spending on prescription drugs last year. Drugs account for 40 to 60 percent of employers' overall spending on Medicare-age retirees' health care. At the same time, far-reaching cutbacks by Medicare HMOs, which used to provide generous drug coverage and other benefits for their elderly and disabled members, are forcing employers to pay for retirees' drug coverage themselves, since Medicare does not cover the cost of most drugs.
As a result, current health care costs for retirees are soaring 18 percent a year, on average, according to the U.S. Chamber of Commerce. And large companies' liabilities for future health care costs for retirees are rising as much as 34 percent.
Margaret Cleary, 80, who retired from the Morgan Guaranty Trust Co. unit of J.P. Morgan & Co. in 1986, is well aware of the effect of rising drug costs on retiree benefits. The monthly deduction for her Medicare HMO from her $550 pension check jumped to $128.74 from $50 this year, she said, more than she could afford. She dropped the HMO and chose a less expensive plan with no coverage for the prescription drugs she said she needs to control diabetes and problems with her blood pressure and cholesterol levels.
A spokesman for JP Morgan Chase said a retiree in her position could have selected a new company-subsidized policy that would only cover drugs, instead of the more comprehensive coverage she had. But Cleary said that when she renewed her health plan last December, she did not understand that her HMO would raise its rates. "I was paying $50 a month," she said. "I didn't think they were going to make it $129."
The soaring costs for employers are reflected in enormous charges recorded recently by large companies in the annual spring crop of reports to shareholders. The Ford Motor Co., for example, said in its latest annual report that it subtracted $1.92 billion from last year's pretax income to reflect anticipated payments for 150,000 retirees in the United States, mostly for medical costs. That was an increase of 24 percent, or $370 million, from $1.55 billion the year before.
General Electric, General Motors, Verizon, Boeing and other companies that long have provided extremely generous health plans for tens of thousands of retirees are also especially vulnerable, as their recent annual reports make clear.
Several health care experts say costs for retirees will keep rising, unless the government provides tax relief for the employers or a taxpayer-financed drug benefit.
But many companies, instead of waiting for legislative changes, are requiring retirees to pay a larger share of their costs through higher monthly premiums, deductibles and copayments, especially for drugs.
Lorraine Sablan, 70, a retired aerospace worker at Allegheny Teledyne in San Diego, said the premiums subtracted from her $669 a month pension rose 80 percent on Jan. 1 to $90.16. The company shut the plant where she worked in 1994.
"If it keeps going up, we won't have a pension," she said.
Dan Greenfield, a spokesman for Allegheny Technologies, the parent company, which has 20,000 retirees but only 10,700 active workers, said even though his company is relatively small, "health costs are a big number, and even in a low inflationary environment, it continues to rise."