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Employers Cut Subsidies for Retirees, Leaving Them With Full Cost Burden

By Milt Freudenheim

The New York Times -- Employers have unleashed a new wave of cutbacks in company-paid health benefits for retirees, with a growing number of companies saying that retirees can retain coverage only if they are willing to bear the full cost themselves.

Scores of companies in the past two years, including telecommunications giants Lucent Technologies and Alcatel and a big electric utility, TXU, have ended medical benefits for some or all of their retirees and instead offered to let them buy coverage through a group plan. This coverage is often more expensive than many retirees can afford.

Experts expect that the trend, driven by the fast-rising cost of health care, will continue, despite the billions of dollars that the government will distribute to companies that maintain retiree health coverage when the new Medicare drug benefit begins in two years. In contrast with pensions, companies are not obligated to set aside funds to pay for retirees’ health benefits, and the health plans can usually be changed or terminated at the company’s choosing, with no appeal available to the retirees.

The costs can be a shock. According to surveys by benefits consultants, companies that offer health benefits to retirees typically have subsidized about 60 percent of the premium. Losing that support all at once can mean hundreds of dollars a month in unexpected costs.

Moreover, in dropping their subsidies, many companies push retirees into insurance pools that are separate from those of younger, healthier workers, executives said. That lowers the company’s costs for insuring its current staff, while raising the premiums charged to retirees even further.

James Norby, president of the National Retiree Legislative Network, an advocacy group that is urging Congress to strengthen legal protections for retired workers, said companies that charged for formerly covered benefits had found “a clever way of getting out of the contract they made to people who had been retired for 15 or 20 years.”

Employers that are shifting costs to their retirees often present the change as a benefit: Although the company is no longer subsidizing coverage, premiums are usually lower than for individual policies, and the retirees do not have to worry about being rejected by insurers because of their age or prior health problems.

The emergence of these plans “is a very significant trend,” said Frank McArdle, a health policy expert with the Hewitt Associates benefits consulting firm in Washington. “Even though it’s not subsidized health coverage, retirees, particularly early retirees under age 65, still have access to a group product that they could not readily duplicate on their own.” Those with medical problems are often rejected by commercial insurers, he noted.