It's been a difficult year for Estella Hyde.
In January, the degenerative muscle disease that's plagued the former nurse for more than a decade flared up and has left her unable to walk the length of a block. In March, her doctors broke the news that she had advanced breast cancer and would require chemotherapy and a mastectomy.
For Estella, the last nine months have been a medical merry-go-round of operations, doctors visits, group therapy meetings and twice-weekly treatments where she is hooked up to a machine that cleans her blood and slows the progress of her reinvigorated muscle disease, myasthenia gravis. Late this spring, she lost the last of her once-long auburn hair.
This summer, things took another unexpected turn for the worse when Estella's husband, James, received a letter from his former employer. It said the couple would soon have to pay for up to 40% of their medications, which now run $1,250 a month. The company, Michigan-based Arvin Meritor Inc., went on to say that it will continue phasing out coverage for retirees over the next several years, leaving potentially huge bills on the Linesville, Pa., couple's shoulders.
"We're totally caught now," says Estella, 58, whose cancer prognosis remains unclear.
The Hydes are among the growing ranks of retirees -- and future retirees -- being forced to confront a harsh new reality of rapidly rising health costs. Retiree medical coverage, which many people assumed was guaranteed for life, is dramatically shrinking.
Saying they can no longer sustain the huge bills, employers are swiftly raising retirees' insurance premiums and co-payments for services such as doctor visits and prescription drugs. They're axing benefits such as dental coverage and life insurance. A small number of companies are walking away from paying for their healthcare altogether.
According to a report released earlier this year, nearly three-fourths of the companies surveyed by the nonprofit healthcare policy group Kaiser Family Foundation and human resource consultant Hewitt Associates said they have made retired workers shoulder a higher share of insurance premiums in the last year. In the survey, 86% of companies said they planned to increase what retirees pay for health insurance in the next three years.
Those most affected are the 3 million retirees, such as the Hydes, who now find themselves in a precarious position. Because they've yet to turn 65 and are therefore ineligible for Medicare coverage, they must either pay the higher costs, find cheaper insurance or go without medical benefits.
Future retirees won't fare much better. According to benefits consultant Watson Wyatt & Co., only 10% of companies are expected to offer any retirement health coverage by 2031. That means all but the tiniest percentage of workers younger than a typical baby boomer will be responsible for the lion's share of their own retirement medical costs.
"Employers are running away from writing the check for retirees' healthcare as fast as they can, and they're showing no sign of slowing down," says Paul Fronstin, director of the health research program at the Employee Benefits Research Institute in Washington, D.C. So many cuts are happening that Fronstin estimates a 55-year-old today who lives to 85 will need about $300,000 in savings to pay for supplemental health insurance and out-of-pocket expenses in retirement. Younger workers could need twice that much.
Raising their own cries about rising health costs, the companies reducing retirement benefits say they can't stay profitable if they don't radically realign what they spend on retirees' medical care. Health costs have risen dramatically over the last decade -- doubling in the last five years -- and that's left a house of cards atop many employers' balance sheets.
In a bet that now looks either foolish or smart, most put off paying higher salaries decades ago by offering generous pensions and health coverage down the road. That's an offer most now can't afford to fulfill. According to the Kaiser-Hewitt survey, the cost of giving retired workers health benefits rose by nearly 14% to $20.6 billion in 2003 for the companies in their survey.
For example, Lucent Technologies Inc., which cut retiree health benefits this year and recently announced plans to do it again in 2005, has 32,000 current employees who must support the costs for 225,000 retirees and dependents. Arvin Meritor, the auto parts manufacturer that's cutting the Hydes' benefits, says it has little choice but to scale back. "We must take aggressive steps to remain competitive in an increasingly challenging manufacturing environment," said Krista McClure, a company spokeswoman.