Like others at NLT Corp. of Nashville, Tenn., L. G. Laurence expected the firm's "security program" to cover most of his health-care expenses when his working days were over.
For years, the insurance company had touted its retiree benefits, using them to attract and retain valued employees. But late in 1982, American General Corp. of Houston took over NLT, a smaller firm. And, in an effort to curb soaring medical costs, the new management began requiring retirees to pay a larger share of their own health-care bills.
"People worked for years and paid their dues and expected these benefits because they were promised," said Laurence, 61, who is among a group of retirees challenging the cuts with a $250-million lawsuit. "And now they (American General) came along and changed things."
The furor in Nashville has attracted powerful forces seeking a showdown on an issue that is of growing urgency within corporate America: Under what circumstances--if any--can a company cut back the health benefits of retired workers?
Such benefits, relatively rare before the 1960s, have risen astronomically as a corporate expense. The Labor Department estimates that the long-term liability of U.S. corporations for such care is about $100 billion--and growing rapidly.
The costs are rising for several reasons. The number of retirees is growing at many companies and people are living longer to collect benefits. Medicare has been shifting costs to the company plans by imposing higher premiums and deductibles, thereby reducing the share it pays. Inflation has lingered in health care. And future costs are difficult to project because of changing technology.
"We're dealing with an issue that has social, economic and fiscal implications," David M. Walker, a deputy assistant secretary of labor, declared. "It's likely to be the single largest employee-benefit issue of the late 1980s."
Both Sides Get Support
Because of the high stakes involved, national advocates of employers and retirees have taken sides in the American General lawsuit. The 20-million-member American Assn. of Retired Persons (AARP) and the United Auto Workers recently filed statements in support of the NLT retirees. The Washington Business Group, which represents more than 150 major corporations on health-policy matters, is supporting American General.
"This case stands for the proposition that you can't make promises you don't keep," declared Chris Mackaronis, an attorney with AARP's worker equity department.
Retorted Cathy Amkraut, public policy manager for the Washington Business Group: "The inability to amend benefits is unrealistic. You cannot provide a benefit package in 1986 and be sure it will be appropriate any time in the future."
Surveys show that many employers offer retirement health coverage, although such benefits are less common in smaller businesses and vary considerably. Last year, for example, the Hewitt Associates consulting firm found that 86% of 762 "medium-to-large" employers offered such coverage.
But unlike pensions, which are protected by federal law, health programs for retirees are not federally regulated. Also, most companies do not set aside large funds for the health benefits, choosing rather to finance them on a pay-as-you-go basis. Indeed, the tax code offers employers little incentive to establish such medical funds.
This has raised fears that beneficiaries could lose out in a major bankruptcy, one that might even be triggered by out-of-control health expenses.
Issue of Disclosure
Until now, companies have not had to reveal the price tag of their long-range promises in health care. But the Financial Accounting Standards Board, a private, standard-setting body, plans to tackle the controversial issue later this year.
The question is extremely sensitive because disclosing the cost could affect how investors view a company's long-range stability. Analysts say that the real price tag for some employers is 50 times as high as their yearly spending on health benefits.
In an October report, the Employee Benefit Research Institute in Washington warned that the growing problems threatened to "discourage establishment of new plans or restrict the benefits of existing plans." Deborah J. Chollet, an economist at the research group, said: "When you're looking at a liability that is 50 times your current spending for health care, you're looking at a very big liability."
When American General took over NLT in 1982, the new managers were looking at a benefit package for retirees that had cost more in the past four years than in the previous 31, said James R. Tuerff, an American General executive in Nashville.
Over the next couple of years, the new management introduced changes so that NLT's program would match American General's. Although some coverage actually increased, NLT retirees faced added expenses of hundreds of dollars a year or more through newly required contributions of $16 to $32 a month and other changes.