Flexible plans help employers cut retirees' health costs

After offering flexible benefits to active employees, employers are now encouraging their retirees to participate.

To control retiree health care costs, employers are turning to flexible benefits plans and encouraging retirees to share the costs of their plans. In the process, retirees are rethinking the choices they make, and many are purchasing only the benefits they need.

Using on a system of credits, typically valued at $1 each and based on the number of years of service, the flexible plans allow employers to offer a basic benefits package at a fixed cost and to share those costs with retirees.

Elaine Johnston, senior analyst at Baltimore Gas & Electric which has 9,200 active employees and 2,600 retirees, says that unlike traditional benefits plans, the new flexible plans give employers a chance to walk away from ever increasing health care costs.

Johnston says the flexible plans "give us control because for the first time we, as employers, can decide each year about just how much we spend. If you use the traditional method and say, 'Here is your plan,' you as an employer are locked in and as costs escalate you find you are riding with them."

Indeed the "cap your health care costs" theory behind flexible plans is encouraging large employers, such truck and automobile manufacturer Chrysler Corp., Highland Park, Mich., and food manufacturer Pillsbury Co., Minneapolis, to tailor their own flexible plans.

A credit system

Chrysler Corp., launched its flexible benefits plan for retirees last year after its flexible plan for active employees began paying dividends. Richard F. Brown, manager of international benefits and special benefits projects, says 15,000 of Chrysler's 18,500 retirees were given the option to convert to flexible benefits, 8,000 of them decided to join the plan. Salaried employees, who retired on or after June 1, 1991 were automatically enrolled in the flexible program bringing the total number enrolled in flexible benefits to 11,500.

Some 7,000 employees chose not to take the flexible option. "We felt encouraged that over 50% of our retirees who had the choice to join the flexible plan did so," says Brown.

He says the 7,000 who did not join will continue to receive benefits under Chrysler's traditional non bargained plan, which has no built-in flexibility. Under the old plan, retirees have a choice of an HMO and a PPO with set copayments and deductibles totaling $200 for single employees and $250 for married employees with dependents.

The maximum out-of-pocket spending under the old plan is $500. For example, Brown says an employee who is hospitalized and is billed $2,000 would pay the first $200. The retiree normally would pay 20% ($360) on the next $1,800, but since the employee's out of pocket expense is capped at $500, he would pay only $300 more in copayments, and the company would pay the remaining $1,500.

Brown says Chrysler's retirees currently file claims totaling between $50,000 and $60,000 per month. Under the auto manufacturer's old benefits plan, expenditure on retiree health benefits totaled $298 million in 1990, and $351 million in 1991. Brown says retirees who were formerly salaried employees account for 20% of these costs--roughly $60 million in 1990 for salaried retirees, and $70 million in 1991 based on the total number of 18,500 retirees. Figures detailing how much Chrysler is saving under flexible plans are not yet available.

Under Chrysler's flexible plan, retirees are given credits depending on whether the retiree is single, married with dependents, or eligible for Medicare. Brown says single retirees received 2,000 credits in the first year of the plan, and 2,200 this year. Medicare singles receive roughly half that number of credits because costs are lower, Brown says. Married retirees with dependents were given 22,000 credits in the first year.

Brown says a non-Medicare retiree might get credits worth $5,000. The credits cover medical and dental coverage. Brown says last year the retiree would have used 5,000 credits to buy back PPO coverage priced at $5,000. This year, Chrysler gave the retiree credits worth $5,500 but the cost of buying back the PPO was $5,600 and the retirees had to pay that $100 shortfall. "We gave our retirees advanced warning that a shortfall would arise," says Brown, noting that the flexible plan has built-in mechanisms to help retirees meet the shortfall.

For example, Brown says Chrysler provides life insurance under its flexible plan and retirees have an option to sell all or part of that life insurance coverage in exchange for credits. "The advantage to retirees is that instead of getting a death benefit tomorrow they get credits today and that can help them meet the $100 shortfall necessary to buy back the PPO," Brown says. "It's a living benefit."

An employee with a $50,000 life insurance policy, for example, could get credits totaling that amount for as long as he or she lives. If the retiree dies, he or she would lose the life insurance. Six percent of Chrysler's retirees, and 15% of its active employees have sold their life insurance and "for them it was a good benefit," Brown says.

Another feature of the Chrysler flexible plan for retirees is that every retiree receives a Chrysler Retiree Choice Award in place of a pension increase. The award amount varies depending on the number of years of service. Brown says that in 1991 the maximum Chrysler Award for a retiree with 30 years of pension service was $1,000, rising to $1,500 this year.

Using an example of how the award system works, Brown says a $1,000 award is typically divided in half, so that each year the retiree would receive 50%, or $500 in this example, in cash. The balance ($500 in 1991, and $550 this year), is given to the retiree in credits.

Brown says that once a retiree has made his plan decisions, any remaining credits are placed in a retiree choice account, in effect a trust under Internal Revenue Code section 501 (c) (9). Currently, 9,000 of the 11,000 flexible retiree plan holders have leftover credits in a choice account. Active employees enrolled in the flexible plan receive the cash value of their remaining credits in their pay checks, Brown says. Tax laws prevent retirees from getting similar cash benefits.

"We give the retirees more than enough to cover the $100 shortfall that arises in buying back the PPO, and we give them credits towards an HMO and a Blue Cross and Blue Shield indemnity plan, which both cost more," Brown says.

Brown says the purpose of the trust is to allow retirees to use the non tax credits from the fund to pay for any potential gaps between credits and the cost of benefits.

Additionally, if retirees use health care services, they can put in a claim for reimbursement and meet the shortfall. As an example, Brown says, a retiree who incurs a $40 vision expense can submit a claim for reimbursement. If the retiree does not use money from the trust account, the total sum is carried over to the next year. "They don't have to file claims this year. They can decide to invest it, so the plus side is that this account continues for future use," Brown says, noting that retirees cannot get the money back in cash because the trust is a voluntary employees' beneficiary association (VEBA), and can be used only for payment of medical and death benefits. In cases in which the retiree has a spouse, the fund would continue as a health care fund for the surviving spouse in the event of the retiree's death.

The BG&E system

Baltimore Gas & Electric's Johnston says adopting flexible benefits plans for active employees was an important first step toward extending the plan to retirees. It allowed the utility to gain experience with flexible benefits and to evaluate its computer system needs. "We didn't implement flexible benefits for retirees before now because we just did not have the capability to bill and collect different amounts of money," Johnston says. She says the utility is now fully prepared for an aggressive move into flexible benefits. It recently installed an integrated human resource information system that links payroll, personnel records, and benefits on the same database.

Johnston says BG&E's flexible benefits program for retirees will take effect July 1, for the 3,000 active employees who are due to retire on, or after, this date. The soon-to-retire actives will come under the flexible benefits plan later this fall, but the plan will not be effective until January 1, 1993, Johnston says.

The plan launch follows a drive to inform soon-to-retire active employees about flexible benefits. BG&E has trained 130 employees this year alone, so they can train as many as 9,000 other employees about the benefits of flexible plans. Employees due to retire in July also will learn the mechanics of how the system works from a company video, newsletter, and workbook.

Although BG&E is cost conscious, it has not calculated how much money it will save by introducing the flexible plan, Johnston says. She hopes flexible benefits will help contain the utility's health care expenditures, which currently average $4,000 per employee. "We know we can't reduce our health care expenditure but, like other companies using flexible benefits, we are hoping to reduce the rate of increase," says Johnston.

Johnston says the $4,000 the utility currently spends per employee includes costs for retirees and the amount the retirees pay (which varies depending on which plan is chosen). If a retiree chooses a comprehensive indemnity plan or HMO, the utility will generally pay for their health care costs in addition to 60% to 70% of their dependents costs, Johnston says.

In looking at the cost of providing flexible benefits for active employees, Johnston says costs vary according to which plan the employee selects. Typically an active employee with a comprehensive plan and a $250 deductible who uses credits to purchase health care coverage would retain $10 in credits. An active employee with a comprehensive plan and a $500 deductible would retain $46 in credits. Highlighting the benefits to both employer and employee of the comprehensive indemnity plans, Johnston says that an active employee who selects the more expensive first dollar plan would be required to use all his credits in addition to paying $73.

Under the flexible plan, retirees will receive credits based on length of service and age at retirement. They can then use the credits to purchase health care from one of the three BG&E indemnity plans or five HMOs. Retiree benefits include life insurance and dental care; vision is not covered. Johnston says BG&E's active employees do not receive a vision plan either, although active employees do benefit from a health expense account that allows them to pay for uncovered services with pretax dollars. The health expense account option is not available under the Internal Revenue Code.

As in the case of active employees, retirees under flexible benefits can choose between three self-insured plans and Base Plus Major Medical, a costly plan that offers 365-day hospital stay at 100% coverage. Johnson says the Base Plus plan incorporates a $200 deductible for non hospital expenses. Citing one example, she says the deductible would have to be satisfied for visits to the doctor or for prescriptions not filled by the hospital.

The three remaining retiree choices are self-insured comprehensive plans. The first has a $200 deductible; the second a $250 deductible, and the third, a $500 deductible. Johnston says the difference between plans is that if the employee is hospitalized, he or she would have to meet the deductible before the plan would begin to pay under the comprehensive plans.

As for retiree contributions, Johnston cites a 64-year-old retiree with 35 years of service who elects first dollar coverage, the most expensive plan, for himself and his spouse. The plan would cost the retiree $81 of his own money a month. But if the retiree selects a less expensive, but comprehensive plan with a $250 deductible, he would retain $2 worth of credits with no additional out-of-pocket spending.

Similarly, if the retiree chose a comprehensive plan with a $500 deductible, he would save $38 in credits and could get that back in cash. Johnston says retirees are already responding positively to the credit system. "It's money in their pockets, and it provides an incentive for them to choose a comprehensive plan," she says. Under the comprehensive plans, the retiree shares the risk and gets the financial reward. That, Johnston says "makes good financial sense for the retiree and for us as employers."

The Pillsbury plan

The Pillsbury Co., Minneapolis, has operated a flexible benefits plan for salaried retirees for the past five years. To qualify for entry to the plan, retirees must have at least 10 years of service and must be age 55 years or older. The company currently has about 3,000 salaried retirees under the plan. Some 20,000 other retirees are covered by collectively bargained union plans. Dorene Eklund, retiree health specialist, says that under the Pillsbury flexible plan retirees receive credits worth $1,400 per year of service. This sum is pro-rated so that, for example, an employee with 30 years of service who has $42,000 in credits could elect to start receiving her credits when she reaches age 55. Eklund says the credits would be pro-rated over the retiree's lifetime so she might receive $4,000 in credits annually until she is 65, and half that amount of credits afterward.

Pillsbury currently offers retirees who are married and under age 65 four plan options. Retirees who are married and over 65 are offered two plans. Single retirees receive a single option. In one example of how the flexible plan works, Eklund says that a retiree who is 55, and covered by the single life option, could start receiving credits at age 55. "If the retiree starts to receive credits at age 55, he would receive all 42,000 credits over 10 years," Eklund says.

The retiree can then purchase additional medical and dental coverage, and life insurance. "A retiree who is under age 65 could purchase the Option 150 Plus plan, which is the most expensive plan option, at $2,500 per year," Eklund says. The Option 150 Plus plan provides 80% coverage and is a basic indemnity policy covering hospital care, visits to physicians, and prescription drugs. The expensive plan also provides well-baby care, and cancer screening, and covers the cost of physical examinations--services currently not covered by the less expensive plan options.

Eklund says Pillsbury's least expensive plan costs $1,900 per year and has a $500 deductible. The plan covers hospital care, visits to physicians, and prescription drugs.

Before operating flexible benefits plans, Pillsbury offered retirees a basic medical plan with 80% coverage. The plan included some life insurance coverage, and employees paid 20% of their medical claims after satisfying a deductible, Eklund says. The basic major medical plan included visits to physicians, hospital care, and prescription drugs.

Eklund says retirees who have many credits, which are based on years of service, can buy whatever health care they need. Retirees with a restricted number of credits are less happy with the system because it means they "have to spend something out of their own pockets," Eklund says.

COPYRIGHT 1992 A Thomson Healthcare Company
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