A health plan for retirees in a time of uncertainty.

• Author: Sydlaske, Michael D.
• Position: Includes related case study - Benefits

As a result of steadily increasing medical costs and the changes to accounting rules that measure the cost of retiree health plans under the Financial Accounting Standards Board statement on post-employment benefits other than pensions, many employers are taking a close look at the philosophy and financial impact of their retiree medical plans. Some have reexamined their current level of benefits; others have questioned whether they should provide a medical retiree plan at all. But employers making these decisions are likely to damage the employer/ employee relationship as well as the well-being of their employees.

What employers need, therefore, is a medical plan that provides full benefits to long-term employees at a reasonable cost and that gives them the flexibility to adjust the plan to allow for changes in the future environment.

The medical pension plan is such a plan. It incorporates into the retiree medical plan such pension plan design concepts as service-related benefits and benefits that reflect age at retirement. This modification to the typical retiree health plan enables an employer to provide a full, valuable benefit to long-term employees while eliminating the windfall benefit frequently provided to short-service employees or employees who retire early. It also provides the employer the freedom to adjust to changes in the medical care delivery system while still providing quality coverage.

By combining elements of both of these modifications to the traditional plan structure, an employer can provide quality medical coverage to long-service employees at a cost the company can afford.

Dealing with change

Employee medical plans are written to mesh with the medical care delivery system of the United States. Thus, as the delivery system evolves, medical plans evolve as well.

This constant change makes the concept of an accrued benefit difficult to apply to health plans. While it is easy to state that a retiree's medical benefit is vested at retirement, it is more difficult to define what, precisely, is vested. How can the employer reserve the right to make sensible changes that reflect changing conditions?

The answer in general is for the employer to fix the level of benefits but to reserve the right to change the means by which it provides those benefits. A plan with these features can survive radical changes in the financing and delivery of health care and can work well in today's environment as well as in the future.

How can...