U.S. to Pay Big Employers
Billions Not to End Their Retiree Health Plans
Mary Williams Walsh New York Times
Friday, February 24, 2006
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
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
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
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
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
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
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,
"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.