In a pinch: Health costs siphon workers’ retirement savings

March 2008
Employee Benefit News

Faced with rising costs for health care and other necessities, some workers are cutting back on retirement savings. The trend may spur employers to redouble their efforts to provide effective retirement education and financial planning benefits.

“People are really feeling the pain of rising health care costs in a short period of time,” says Paul Fronstin, senior research associate for the Employee Benefit Research Institute in Washington.

Many Americans – fully 63% – had to pay more for health benefits last year, according to EBRI’s 2007 Health Confidence Survey. Among them, 30% decreased their retirement plan contributions. What’s more, 52% slashed other savings. Some had trouble paying for basics like food, heat and housing (29%) and other bills (36%). Compared to just a few years ago, more people say health costs are negatively impacting their ability to save for retirement. However, says Fronstin, “They may be cutting back for a lot of reasons. Gas prices going up, the housing crisis, the economy in general.”

A hurting’ economy
A separate study by Watson Wyatt Worldwide in 2007 confirms that rising health care expenses are hindering the ability of some workers, particularly those with chronic conditions and low incomes, to save for retirement. Researchers surveyed full-time employees of companies with at least 1,000 workers. Overall, about 12% of respondents said they had decreased their retirement plan contributions as a result of increased health care spending over the past two years. Those whose families included a member with a chronic condition were more likely to say so (17%) than those without one (7%). Workers with lower incomes were more likely than other respondents to report increased stress levels, difficulty paying for basic needs and using savings to pay for rising health costs.

Higher premiums and out-of-pocket costs for health benefits, combined with a slowing economy, appear to be taking a toll on workers’ ability to bank any money for the future. “What seems to be a very slow economy is hurting even more than just a few months ago,” says Helen Darling, president of the National Business Group on Health. “You don’t have to look hard to know that if wages haven’t gone up, but benefit costs and fuel costs have, people have less money to spend – and that means less money to save.”

People do what they can to keep their lives “patched together,” says Darling. That often means paying for the house, the car, the babysitting, the dry cleaning or even a haircut before investing for retirement.

Households at risk
The story gets worse. Rising health care costs are likely to impact more than the ability of workers to save for retirement. They may also affect people’s ability to maintain their standard of living in retirement.

Forty-four percent of U.S. households are considered “at risk” of being unable to afford their standard of living in retirement, according to data released in February from the National Retirement Risk Index, developed by the Center for Retirement Research at Boston College. That’s even if they work to age 65, buy annuities with their financial assets and take out reverse mortgages on their homes.

The above scenario figures people would dip into “pizza and wine” money to pay for retirement health care expenses if they had to, explains Alicia Munnell, director of the center. But she and the center’s researchers also wondered what would happen if people didn’t give up spending on everyday pleasures during the golden years. “You want to keep your pizza-and-wine spending constant over your life,” she says.

When the impact of rising health care costs is factored in explicitly, and pizza-and-wine expenses held level, the proportion of households at risk jumps to 61%.

People with lower incomes and in younger generations are generally at greater risk as health care costs rise and employer contributions to retiree medical benefits dwindle.

Educational tools lacking
“Health care costs are the huge wild card for all of us in planning for our retirement,” says Sally Hass, benefits education manager for Weyerhaeuser Corporation, the forest products company based in Federal Way, Wash.

“One of the messages employers can provide is to keep yourself healthy, well and safe, and to take full advantage of the preventive features in your health plan,” Hass continues. “Maybe you won’t hemorrhage money on health care expenses.”

Hass advises employers to include long-term care insurance and health savings accounts in their retirement education programs. Darling adds that workers need to understand that Medicare won’t entirely cover their
medical expenses.

John E. Nelson, author of “What Color Is Your Parachute? For Retirement,” urges employers to promote health risk assessments that tell workers what their health care needs may be in the future.

Tools for estimating short-term health expenses for flexible spending accounts are common, and those for projecting long-term health have emerged.

“There are no tools yet for estimating long-term health expenses,” says Nelson. “That will be the next wrinkle.” Such tools are needed in the marketplace. As of last year, a retiring 65-year-old couple needed about $215,000 to cover medical costs for the rest of their lives, according to Fidelity Investments. That figure increases annually by an average of 6.1%.

Employers are beginning to tie the concepts of financial well-being and health into retirement planning education, notes Cathy Tripp, national leader of consumerism for Watson Wyatt . “Financial health, emotional health and physical health is where some companies are starting to go,” she says.

Fighting ERISA erosion

July 2007
Employee Benefit News

The state health reform movement is speeding along Eisenhower highways to Washington, where some legislators want to roll back federal protections that allow employers to run health benefit plans outside of state law.

Maryland gave up on its “Fair Share”" law in April, after a federal appeals court concluded the Employee Retirement Income Security Act of 1974 prevents the state from requiring Wal-Mart to spend at least 8% of payroll on employee health benefits or pay the difference into a state Medicaid fund. But more broadly based pay-or-play proposals remain on the table in other states, including California, Pennsylvania and Illinois.

At least 32 states considered some kind of employer-financed health care legislation this year, according to the Tax on Jobs Coalition, a group of employers assembled by the Washington, D.C.-based National Retail Federation to fight state mandates. And while the pace of legislative proposals slowed this year, momentum remains considerable.

“States are pushing the employers, both large and small, saying, ‘You’ve got to be a player,’” said Joy Johnson Wilson, health policy director for the Denver-based National Conference of State Legislatures, at a recent briefing in Washington, D.C.

Even the widely publicized Massachusetts universal health law — considered an “individual mandate” because it requires residents to obtain health insurance — contains a questionable provision forcing firms with 11 employees or more to pay $295 per employee if they fail to offer a certain floor of health benefit coverage. At press time, the law was set to go into effect July 1 without a challenge from employers.

Meanwhile on Capitol Hill, two bipartisan bills — the Health Partnership through Creative Federalism Act and the Health Partnership Act — have been introduced to give states access to federal grants for health reform initiatives such as tax credits, risk-pooling arrangements or single-payer systems.

Some of these state plans, lawmakers say, would require Congress to take the unprecedented action of granting an ERISA waiver.

Employers express alarm at the prospect of ERISA erosion. The federal law, they argue, spares employers from a crazy quilt of state mandates and encourages them to provide health insurance to some 160 million workers.

The health care system is in danger of “creeping or galloping balkanization,” says Neil Trautwein, vice president and employee benefits policy counsel for NRF. At a congressional hearing on state and federal health care reform in May, he told lawmakers: “ERISA pre-emption is a crucial linchpin to employer-sponsored coverage. State experimentation should be limited to state plans.”

Kevin Covert, vice president and deputy general counsel for human resources at Honeywell, testified on behalf of the Washington, D.C.-based American Benefits Council that his company’s ability to avoid state health mandates helps provide an affordable and competitive health benefit plan that includes a disease management program.

“It is critical that Congress not do anything with respect to ERISA pre-emption that would stifle our health care innovation,” said Covert.

States, however, tell a different story. John Morrison, insurance commissioner for the state of Montana, where an estimated 20% of the population is uninsured, explained at the hearing that ERISA unfairly prevents his state from requiring local employers to pay into a risk-pool program for uninsured residents.

“Because of ERISA pre-emptions, self-funded employer plans do not contribute to the funding for this program, even though their employees are able to take advantage of the portability pool when they lose their employer coverage,” said Morrison.

Morrison and other backers of state-sponsored initiatives to cover the uninsured are pushing for ERISA waivers that would allow states to require employers to contribute to state health programs. They also want the ability to collect data on benefits, enrollment and claims from self-insured plans, which could be used to evaluate whether an employer’s plan meets state requirements.

Donna Cooper, policy secretary for Gov. Ed Rendell of Pennsylvania, says ERISA looms as an obstacle to the governor’s state-subsidized health insurance plan that was unveiled in January. The “Cover All Pennsylvanians” program would levy a 3% payroll tax on businesses that do not provide qualified health benefits to workers.

“Let’s say [employers] offer a product that has a $10,000 deductible and can only be used if you fall off a ski slope,” Cooper said at a May forum in Washington, D.C., sponsored by the Alliance for Health Reform and the Robert Wood Johnson Foundation. “That wouldn’t count to get out of our free-rider assessment.”

But ERISA may halt Pennsylvania’s efforts to sort out which self-insured health plans are eligible for an exemption from the so-called “free rider” tax, said Cooper, since the federal law prevents states from regulating large group health plans.

Creeping threat to ERISA

The Arlington, Va.-based Retail Industry Leaders Association, which successfully sued Maryland in the Wal-Mart case, objected to Pennsylvania’s proposed 3% payroll tax at a hearing before state lawmakers in April.

“We’re not objecting to the theories of universal access and expanding insurance to individuals,” says John Rinzel, vice president for state government affairs at RILA. “Hopefully, these things will drive down costs. But when you introduce a payroll tax, you’re threatening the provisions of ERISA.”

RILA has no quarrel with the Massachusetts health plan, however, because it hinges on requiring people to secure health insurance on their own. “These laws don’t, in theory, affect the practices of a business in terms of offering health care,” Rinzel says.

Neither is Rinzel particularly concerned with aspects of the Massachusetts law that require employers to set up a Section 125 plan or pay a fee if their health benefits are deemed insufficient. RILA’s members, mostly large employers, are expected to meet those requirements easily.

Local retailers also support the law, says John Hurst, president of the Retailers Association of Massachusetts.

“Keep in mind how far we came,” he notes. “The early versions of this included a pay-or-play 7% payroll tax, which we vehemently opposed. This is uncharted territory, and the employer community in Massachusetts is dedicated to giving it shot.”

Ed Kaplan, senior vice president and national health practice leader for the Segal Co., says the Massachusetts mandate may lower costs for large employers by reducing surcharges levied by the state for uncompensated health care.

In addition, he says, some employers will use the law to remove employees from the health benefit plan while still meeting minimum coverage requirements set by the state.

In the short term, the Massachusetts health care reform plan appears to have little impact on self-insured employers, which is likely why the law’s employer mandate hasn’t been challenged in court.

“No one has come out and said, ‘Hey, ERISA is pre-empting this,’” says Kaplan. “It may have a good chance of silently going forward without an ERISA challenge. If that happens, then the other states will follow. Then gradually, without any federal change, ERISA becomes less powerful.”

Some policy experts, however, say the Massachusetts law would be able to withstand a challenge from employers.

Amy Monahan, an associate law professor at the University of Missouri at Columbia, writes, “Unlike Maryland’s act, which has a very strong ‘pay’ provision, Massachusetts’ fair share contribution law has a weak ‘pay’ provision, arguably allowing it to survive an ERISA pre-emption challenge and be the first such law to do so.”

Phyllis Borzi, a health policy research professor at George Washington University, believes state health care reform laws that are structured like Maryland’s, but more broadly based, imposing a refundable tax on all employers, also would evade ERISA preemption.

“By ‘broadly based’ I mean something like Massachusetts or like what Governor Schwarzenegger has proposed in California,” Borzi says. “Something that reasonable people can look at and say the state has tried to make everybody bear the cost and didn’t single out one employer or group of employers.”

Self-insurance remains popular

Despite continuing threats to ERISA pre-emption, self-insurance remains a popular strategy among employers.

“Self-funding is alive and well,” says James Kinder, CEO of the Self-Insurance Institute of America. “Reports indicate more companies, municipalities and other governmental agencies are turning to self-insurance not only to save dollars but also to develop benefit programs to meet the specific needs of their workforces.”

In 2006, 55% of workers with health insurance belonged to a plan that was either completely or partially self-funded, up from 49% in 2000, according to the Kaiser Family Foundation and the Health Research & Educational Trust.

One of the latest employers to switch to self-insurance is the City of Melrose, Mass. Between 2001 and 2005, the city’s health insurance premiums shot up by a total of 75%. CFO Patrick Dello Russo figured the city would be better off self-funding its plan, which covers about 800 employees. The new plan was implemented in 2006.

“We pay the claims that are submitted. The rate increase in the budget is less than it normally would be,” Dello Russo says. “This year it’s 7%.” That kind of self-insurance success story may be repeated for lawmakers if threats to ERISA pre-emption continue.

Meanwhile, two presidential candidates appear to have taken a cue from state health reform initiatives. Former North Carolina Sen. John Edwards and Illinois Sen. Barack Obama have announced health plans with pay-or-play as a major feature. As details about these and other candidates’ plans emerge, employers are sure to look closely at the impact.

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Rite Aid Health Solutions breaks new ground in old territory

December 2006
Employee Benefit News

Any start-up company would be jealous of these numbers. In just over one year of being in business, pharmacy benefit manager Rite Aid Health Solutions has attracted enough clients to serve 100,000 lives and has received kudos for customer satisfaction.

But the Camp Hill, Pa.-based PBM is no ordinary start-up. Rite Aid Corp. once owned PCS Health Systems, which used to be the nation’s largest PBM, serving millions of health care consumers. Rite Aid sold off PCS in 2000 during a period of financial troubles, but kept its eye on the market for a chance to re-emerge. That opportunity came in 2005, when the company established Rite Aid Health Solutions, aiming mainly at the small to mid-sized employer market.

“So now we’re back,” says Greg Drew, vice president and general manager of Rite Aid Health Solutions. “We didn’t want to be out of the business, but it was necessary at the time. Rite Aid Corp. is very committed to the new PBM.”

Drew says Rite Aid Health Solutions holds itself to a high standard of transparency, both in terms of rebate revenue and network pricing.

“We disclose everything that the manufacturer gives us. [We do] all the stuff you would expect to see from any PBM,” says Drew. “What’s more, all our rebates are 100% pass-through, so we don’t have a motivating force to drive higher-cost drugs. Everything we do is incorporated into our administrative fees.”

In other words, Rite Aid Health Solutions makes its money from client administrative fees alone.

“That’s the model we’ve chosen to operate on, and it’s the one we can feel best about,” says Drew. “It doesn’t make sense to drive a higher-cost drug for a client, and we would not want to engage a client where we’d be doing that kind of thing because it would be contrary to our corporate culture almost a bit hypocritical.”

Some PBMs share rebate revenues with clients, but Drew frowns on that practice too: “The motivation needs to be to develop an effective solution for the plan without driving higher costs. It doesn’t do any good to get a couple of extra dollars per claim on a rebate if you’re driving the average cost per claim by $10.”

Rite Aid Health Solutions prides itself on being consultative to customers. Its clinical services include prior authorization, utilization review, and disease management. Many firms, particularly small businesses, have switched to Rite Aid Health Solutions as their PBM to gain access to these services, says Drew. Most small business clients have between 300 and 1,000 employees, while larger clients have up to 25,000.

Another way Rite Aid Health Solutions stands apart from the competition is in its pharmacy network pricing.

“Like everybody else, we guarantee average claim pricing,” says Drew. “[But] we actually pass through the actual claim costs. So the plan benefits if what is actually paid to the pharmacies is lower than the guaranteed cost. We don’t retain it. Most PBMs retain any savings that comes through beyond the network guarantee.”

Rite Aid Health Solutions is also pioneering a 90-day retail program for maintenance medications at select pharmacies. The PBM contracted with Rite Aid and other pharmacies to offer a “very aggressive” cost structure that rivals mail-order rates for a 90-day supply of prescription drugs, says Drew.

Whereas mail-order programs typically attract 20% of plan members, a 90-day retail program can draw a 45% participation rate, says Drew, because customer satisfaction is so much higher. Consumers want to keep a relationship with their local pharmacist, and they like being able to purchase their medications on the spot rather than waiting for a package to arrive in the mail.

Customer satisfaction is a high priority in the competitive PBM industry, where wooing clients away from other PBMs is a common growth strategy. In this arena, Rite Aid Health Solutions has an edge: Wilson Health Information, a healthcare consumer research company, found Rite Aid Health Solutions to be the top-rated PBM in customer satisfaction in its 2006 WilsonRx Pharmacy Benefit Satisfaction Report.

Rite Aid Health Solutions has a full national network of 55,000 pharmacies, enabling the PBM to serve large clients with a far-flung work force. Rite Aid Corp.’s own network will mushroom to more than 5,000 stores in the first quarter of 2007, when the company’s acquisition of the Eckerd and Brooks pharmacy chains is expected to close.