Author: Dawn Gunsch

Last year, after posting losses totaling $2.4 billion for 1989, 1990 and 1991, Blue Bell, Pennsylvania-based Unisys Corp. announced that it could no longer afford to pay for medical benefits for its nearly 25,000 retirees and their dependents. Peter Hynes, a spokesperson for Unisys, says that continuing the retiree coverage would cost the company an estimated $100 million a year or more. The choice, he says, was to either cut the benefits or jeopardize the company’s economic survival.

This is a dilemma with which an increasing number of companies are struggling. They no longer can bear the full expense of medical coverage for current and future retirees. According to Retiree Health Benefits: An Era of Uncertainty, a study released in March 1993 by New York City-based KPMG Peat Marwick, the percentage of midsize firms (having 200 to 999 employees) that offer retiree benefits dropped from 44% in 1991 to 37% in 1992. The percentage of large firms (having 1,000 to 4,000 employees) that offer retiree benefits dropped from 56% to 52% between 1991 and 1992. The declines started in the mid-1980s. Before that time, more than 60% of firms having 500 to 999 workers provided retiree benefits.

Certainly, with retiree populations increasing and health-care costs continuously rising, the expense of covering employees’ medical costs after they retire is hard to justify, especially within companies that have struggled through these recessionary times. An August 31, 1993, report by the Employee Benefit Research Institute, located in Washington, D.C., indicates that the elderly population currently numbers 32 million, or 13% of the total population. This number will continue to grow as baby boomers age and as the average life span continues to increase. (An August 1993 issue of Employee Benefit Plan Review indicates that a 65-year-old white male will live an average of 14.9 years, as opposed to 13 years in 1969.)

This growth affects postretirement health-care systems significantly, especially considering that the elderly use more health-care services than other groups in the population. According to the Employee Benefit Research Institute, the elderly, although only totaling 13% of the population, account for one-third of all health-care expenditures. Not only do they use more medical services, but their services tend to be more costly as well.

Early retirees who are younger than age 65 are particularly problematic for employers trying to control costs. This group constitutes about one-third of the retiree health enrollment, or 3 million people, estimates the KPMG Peat Marwick study. Not yet eligible for Medicare, these individuals nonetheless have a high medical-benefit utilization rate, making this group more expensive for employers to cover than the 65-and-older group who are covered by Medicare. In addition, the pre-65 population is more likely to have dependents other than spouses, such as children in college, and to want coverage for those people. The study reports that an employer pays approximately 70% more for a 64-year-old retiree than a 65-year-old retiree.

For retirees who are 65 or older, Medicare pays 70% of physician and hospitalization costs. Employer-sponsored supplemental plans must pay only an estimated 30% of total charges for these retirees. However, Medicare doesn’t control the cost of prescription drugs, which represents the greatest health-care cost to employers for this retiree group.

The KPMG Peat Marwick study reported that retiree health-care coverage has been increasing at an average annual rate of 17%. In 1992, for example, the average total monthly cost for retiree medical coverage for a single person over age 65 was $124, compared to $40 in 1985. Multiplying this cost by the retiree population equals a substantial liability for the companies that offer retiree health-care benefits.

This became evident this past year as a result of a ruling that went into effect December 15, 1992, by the Financial Accounting Standards Board (FASB), a nonprofit organization that sets accounting standards in the U.S. The Statement of Financial Accounting rule number 106 requires that companies record unfunded postretirement benefits (except pension plans) on their financial statements, rather than reporting expenses as they’re paid, which was the case in the past. In addition, it requires that employers recognize the unfunded obligations already accumulated for current actives and retirees. This transition obligation can be amoritized over a 20-year period or can be recorded all at once.

To comply with the FASB rule, Detroit-based General Motors Co. chose to take a one-time charge against its 1992 earnings. The automaker, which currently has nearly 400,000 retirees and almost 350,000 active employees, calculated its liability to be nearly $21 million—the bulk of which pertains to medical coverage. Detroit-based Ford Motor Co. and New York City-based AT&T both also posted one-time liabilities of $7 million.

Although such charges don’t affect a company’s cash flow, they do certainly skew their debt-vs.-equity ratios. They also serve as a wake-up call. G. Richard Wagoner Jr., executive vice president and chief financial officer of GM, remarked at the time of the charge that it was “significant in highlighting the seriousness of GM’s retiree-health-care-cost problem.”

Since that time, GM has begun to pass off some of the financial burden to its retirees. The company announced in September that, beginning January 1994, salaried retirees would be responsible for making monthly contributions toward their medical benefits. (One year earlier, GM had made a similar announcement to its active salaried work force.) The retirees’ monthly payments will range from $20 to $107, depending on coverage. For example, a single, Medicare-eligible retiree who enrolls in an HMO plan will pay a maximum premium of $20 a month. An employee who isn’t yet Medicare eligible and has dependents will pay up to $107 a month for the HMO program. Payments for GM’s regular insurance package are less, but this program requires higher out-of-pocket expenses.

GM hopes to initiate cost-sharing of retiree health coverage with its hourly employees as well. It’s a topic that will be addressed during contract negotiations with the United Auto Workers this fall. “Given the urgency of the situation, we continue to aggressively pursue steps to further reduce the escalation of GM’s health-care costs,” says Wagoner.

Employers pass costs to retirees.
Sharing the costs of benefits with retirees, as GM has done, is a popular alternative to eliminating the benefits, as many companies have chosen. According to a 1993 analysis by New York City-based William M. Mercer Inc., fully half of the U.S. companies that recently revised their health-care plans increased retiree contributions. “What we’re seeing is that the retiree simply is paying a greater per-month premium than he or she paid in previous years,” says George Wagoner, a principal in the Richmond, Virginia, office of William M. Mercer.

The KPMG publication found similar results. According to the study, the percentage of the premium paid by retirees for single coverage jumped from 15% in 1988 to 31% in 1992. For family coverage, the figure increased from 23% to 41%. Only 20% of retirees who have single coverage, and 10% of retirees who have family coverage, receive their retiree health benefits free, compared with 40% of retirees who received their coverage free in 1988.

To keep up with rising costs, Pittsburgh-based Westinghouse Electric Corp. has amended its benefits plans for both active employees and retirees several times within the last six years, each time resulting in the employees paying a larger share of the cost through increased copayments and deductibles. The company offers several plans for the employees and retirees who are younger than 65 and not yet eligible for Medicare. (The retirees who are younger than 65 simply can continue the coverage that they had while on the job.) These employees and retirees can enroll in either an indemnity plan or an HMO.

One of the changes that the company has made to receive greater contributions from the employees and retirees is to charge them based on their salaries. “At one time, everybody paid the same amount,” says Len Weaver, assistant director for retiree planning at Westinghouse. “Now, if you make more money, you contribute more to the plan.”

Westinghouse charges interested retirees who are Medicare eligible $4.25 a month per person for a supplemental hospitalization plan. The retirees also have an option of purchasing a Blue Cross Medicare-supplement plan through the company.

Another method that companies are using to decrease their costs and increase retiree contributions is to tighten eligibility requirements and base contributions on age and years of service. According to the William M. Mercer survey, slightly more than one-third of the benefits plans that have been revised in the past year have tightened eligibility standards.

Boston-based John Hancock Mutual Life Insurance Co. took this route. Before 1992, a 65-or-older retiree only had to have five years of service with the company and be eligible for a pension to also be eligible for the company’s retiree medical benefits. The company covered 100% of the medical coverage for the retiree over age 65. “We felt that we could no longer afford to pay for someone’s retirement coverage for 25 to 30 years when that person had been with the company for only five or six years,” says Barbara Whitcher, director of benefits.

The company decided to tighten the eligibility for future retirees and to have them share in the cost. “We wanted to base our contributions on the retirees’ contributions to the company,” says Whitcher. “We decided to go by years of service.”

Now, a retiree must have been with John Hancock for at least 15 years to be eligible for coverage, and also must pay a portion of coverage costs. A John Hancock retiree who’s 65 years or older and has 15 years of service pays 55% of the cost for his or her medical coverage, and 60% for dependent coverage. That amount decreases by 3% for each additional year of service, up to 30 years. A retiree who has 30 years of service pays 10% of his or her coverage, and 15% of dependent costs. Retirees who are younger than 65 contribute the same amount as active employees, which currently is 15% for an individual and 20% for dependent coverage.

Other companies are forcing retirees to pay a larger portion of their medical benefits by changing their plan design from a defined-benefit plan to a defined-dollar plan, or by placing caps on the amount of money that they will spend for benefits. “Companies are moving from benefits promises to dollar promises,” says Werner Gliebe, vice president and group benefits consultant for New York City-based The Segal Co. “In the past, companies promised a particular set of benefits to retirees. Now, instead of the plan driving the cost, the employer is saying, ‘I will give you X dollars toward whatever plan is in place.’ “

This type of system helps employers better control their expenses, says Gliebe. If a company promises a particular benefit, its costs are dictated by that benefit. If the benefit’s rates increase substantially each year, so too does the cost for the employer. If the employer only promises to pay a certain amount of money toward that benefit, however, it can decide by how much it will increase its costs each year, or if it will increase them at all.

One way of switching to a defined-dollar plan is to place caps on company contributions. The William M. Mercer survey reports that more than a quarter of companies that have made changes in their plans have done this. Richmond, Virginia-based Media General has capped its contribution for future retiree medical benefits at $4,500 per year, per employee. Rochester Gas & Electric in New York currently has a $150 monthly cap in place for its retiree benefits. AT&T pays fixed-dollar amounts that vary by formula for employees, based on age and service.

Active employees contribute for future needs.
Rather than asking employees for contributions toward their health coverage after they’ve retired, some companies are beginning to ask them to help foot the bill while they’re still active. “Companies are beginning to look at [retiree medical benefits] the same way that they look at pensions,” says Fred Morris, senior vice president in the Post-retirement Health Care Services Group at State Street Bank and Trust Co. in Boston. “Just like a pension liability, companies can put money into a trust fund so that when somebody retires, there’s money put aside to pay for that.”

Setting up a prefunding account for benefits allows employees to contribute to the cost of the post-retirement medical benefits when they have the money to do so—while they’re still working. Employees can contribute via a Voluntary Employee Beneficiary Association (VEBA). A VEBA is similar to a 401(k) plan in principal. An employer sponsors the trust, in which workers may make regular contributions that the employer may match wholly or in part. In contrast to a 401(k), however, in which employees’ contributions are made before paying taxes on the money and taxed when withdrawn, employee contributions go into the 501(c)(9) VEBA trust after taxes are paid on the money. The trust earnings and payout for health premiums then are tax-free.

One company that has adopted this prefunding method for its retiree medical benefits is Fort Worth, Texas-based American Airlines. Back in 1990, American informed its employees that they would be eligible for retiree medical benefits only if they contributed to them for at least 10 years prior to retiring. To be eligible to contribute, employees must be at least 30 years old, have one year of service with the company, be on U.S. payroll and be a regular full- or part-time employee.

For employees who joined the trust plan at the onset, the required contribution was a flat rate of $10 a month, payroll-deducted on an after-tax basis. The company determined this rate as an appropriate amount for employees to help share in the costs. The rate can change, based on medical-cost inflation. New hires and employees who signed up after the initiation date pay substantially higher rates based on age. The company matches the contributions dollar for dollar.

At retirement, the company draws from the fund of the employee’s contributions and the company’s matching contributions in 10 equal installments to pay for that employee’s coverage in the Retiree Group Medical Plan. When the employee’s share of money in the fund has been spent, the company pays for the remainder of the employee’s retiree medical coverage. “We established the trust for employees to prefund their retiree benefits, in response to a nationwide problem of increasing medical costs, and the FASB 106 rule,” says Linda Carlson, specialist in benefits compliance for American. “Their contributions help to ensure that the company will be able to provide a high-quality medical plan to our retirees and their families, despite the significant increases in medical costs.”

According to Jim Murphy, managing director of compensation and benefits, the company makes no promises as to the future level of medical benefits. “[Our promise is that] to the extent that the company provides health care to retirees, they will be covered based on their prefunding,” says Murphy. “What we’ve done is somewhat innovative. To contrast it with other companies, most companies have done one of two things: either asked their employees to contribute to health coverage in large amounts during retirement years, at a point in their life when they don’t have a lot of free cash, or eliminated coverage.” Once American Airlines’ employees retire, on the other hand, they no longer have to contribute to receive coverage, provided they prefunded their benefits while still active.

State Street’s Morris agrees that Americans’ method is a creative approach to managing its liability. It enables the company to reduce its share of the retiree medical costs and allows employees to contribute their share while they still have the money. “[The contribution] is a small dollar amount currently, but it ends up over a long period of time meeting an obligation for the future,” says Morris.

American currently has a favorable employee-to-retiree ratio because of recent growth. However, it anticipates large liabilities as this ratio shifts.

International Paper Co. has developed a similar system for employees to save for their postretirement benefits. The Purchase, New York-based company offers a variety of retiree medical benefits for both salaried and union employees who were hired before 1987. Retirees younger than 65 have the same options as actives, while those aged 65 and older have the choice of enrolling in a Medicare supplement plan. The company has placed caps on the amount that it will pay for these benefits, however, based on age and service. So to help employees save money for their postretirement medical coverage while they’re active, International Paper has set up a VEBA account.

Salaried employees age 50 and older may contribute up to $20 a month into the fund, payroll-deducted after taxes. The company matches the employees’ contributions, but on paper only. “[The company contribution] is just a book match, it isn’t funded,” says Pat Freda, manager of trust operations. This book amount is credited with the same rate of return as the employee piece.

When a contributing employee retires, the funds that have built up in both accounts are used prorata to pay for his or her share of coverage. When the money from both accounts is gone, it becomes the employee’s responsibility to pay for his or her premiums.

Although the company won’t pay for medical benefits for employees who were hired after 1987, it may make the saving option available to them. Final decisions on the subject haven’t been made yet.

There currently exists several vehicles for prefunding retiree benefits as American Airlines and International Paper Co. do. Each provides opportunity to both lower a company’s reported liability and to create a system for employees to contribute to their postretirement benefits while they’re still working. However, each also has tax and legal limitations (see “Pros and Cons of Prefunding Vehicles”).

What Houston-based Cooper Industries has done is different still. In 1989, Cooper announced that it would no longer provide medical coverage to employees who retire after September 30, 1989. “We had run some analysis of the liabilities associated with the retiree medical program, and the costs were huge,” says Stephen O’Neill, director of employee benefits. Cooper’s bill for retiree health care was $16 million in 1988.

On top of that, Cooper’s analysis revealed that only two-thirds of the company’s employees were eligible for coverage. “We’re a company that has grown by acquisitions throughout the years,” says O’Neill. “Some companies that we acquired offered retiree medical programs, and others didn’t. We decided that if we were going to make changes, it didn’t seem logical to continue to exclude one-third of our employees. But the cost of extending coverage to an additional one-third of the organization was prohibitive. We looked at a lot of alternatives in terms of a redesign to reduce costs and liabilities, and we concluded that none of them was going to produce a significant result.”

Although it chose to eliminate all medical coverage for future retirees, Cooper made some provisions for its current work force. For employees younger than age 50 who had been eligible for retiree coverage previously, the company increased its monthly contributions to their pension plans. The contributions range from $10 to $90, based on age. For employees who were at least 50 years old on September 30, 1989, Cooper offered a choice. They could either take increased contributions to their pension fund or a combination of a small pension-fund increase plus transitional retiree medical coverage for up to five years. “Those people [aged 50 and older] were having to make plans for retirement,” says O’Neill. “We didn’t want to just cut them off; they really didn’t have the time to make other arrangements.”

For the younger employees, the increased pension-plan contributions are a way for the company to help employees pay their future medical bills or buy insurance between retirement and Medicare eligibility. “We didn’t try to pass this off as a one-for-one buyout or anything like that,” says O’Neill. “We were taking away something that had value, so we wanted to try to do what we could to provide additional retirement income in lieu of that.”

The employees who are hired after September 30, 1989, receive neither the increased pension contributions nor retiree medical coverage. As O’Neill puts it, the company isn’t taking anything away from these individuals.

Mary Case and her associates at Fort Lee, New Jersey-based Kwasha Lipton, a benefits consulting firm, propose another prefunding vehicle that also uses a pension plan. The company’s theory is to use untaxed pension contributions to pay for cafeteria benefits plans. Here’s the reasoning behind it. An employer can receive a tax deduction for the money it spends on retiree benefits. Retirees don’t pay taxes on the benefits that they receive. An employer also receives a tax deduction for a pension benefit’s cost, but the benefit itself is taxable. By paying for the medical benefits with pension-plan funds, the delivery of the medical benefits remains tax-free.

According to Case, several companies are considering adopting this plan. None have done so yet, however, because the IRS still is contemplating the legality of the plan.

Managed care helps control retiree costs.
Another avenue that employers are commandeering to lessen their retiree medical-benefit liabilities is managed care. “Phasing retirees out of indemnity plans and into managed-care programs designed for seniors can be cost-effective and can produce positive outcomes,” says Jim Wade, vice president of human resources for Fountain Valley, California-based FHP Inc.

Wagoner says that William M. Mercer has seen a rise in companies offering managed-care options to their retirees, primarily for the retirees who aren’t yet Medicare eligible. Most companies that offer these types of options to their active employee base simply extend them to their pre-65 retirees.

According to Kwasha Lipton’s January 1993 edition of Kaleidoscope, managed-care techniques that work for an active-employee population should work equally well, if not better, for a high-cost early-retiree group. Utilization review, case-management programs and the use of primary-care physicians for outpatient care are all effective tools for keeping down the costs for this high-risk group.

KPMG Peat Marwick reports that 27% of retirees were enrolled in a managed-care plan in 1992. However, the study indicated that within the companies that offer these plans to both their active and retiree populations, as much as 55% of their active work forces were enrolled in a managed-care plan. The lower enrollment rates for retirees seems to be more a result of retirees’ unwillingness to select these options than employers’ unwillingness to offer them. The study cites that about 60% of retirees have the option of selecting an HMO plan, 20% can choose a PPO plan and 20% can pick a POS plan.

According to the firm, there are several factors that contribute to retirees’ reluctance:

• An established relationship with a physician
• Weak financial incentives (Medicare-eligible retirees face fewer out-of-pocket costs than active workers)
• A myopic loss of security by giving up a traditional Medicare-supplemental plan.

Because of the desire to stay with their traditional providers, the report says that retirees are more inclined to enroll in PPO or POS plans rather than an HMO. Historically, however, HMOs have the best record for controlling the rising cost of health care. Therefore, employers may not realize potential savings by enlisting managed care for over-65 retirees.

According to Kwasha Lipton, there are certain situations in which managed care can be cost-effective for employers who offer it to the Medicare-eligible retiree group. For example, managed-care companies that integrate their HMOs with Medicare can enable employers to offer their retirees a more generous Medicare-supplemental package than they could otherwise offer, and for nominal fees.

FHP’s Wade concurs. “Managed-care companies that offer senior plans will accept the Medicare payment as premium payment and provide seniors with a higher level of medical benefits than what they might ordinarily get from a straight Medicare plan,” he says.

The aspect that managed-care can impact most is prescription-drug costs. Kwasha Lipton reports that prescription drugs represent 30% to 40% of total retiree health-care liabilities, compared with 5% to 10% for active employees. This is partly because prescription-drug use increases with age. Also, because Medicare covers most other expenses for retirees over age 65, prescriptions become the greatest expense for employers to cover.

Employers can control these costs by using several managed-care methods. One is the use of mail-order programs for maintenance drugs, which Kwasha Lipton says accounts for approximately 70% of total drug expenditures. Ohio Retirement Systems, the title given to the five retirement systems of Ohio’s state employees, has employed this method for several years. All five systems—highway-patrol retirement system, police and firemen’s disability and pension fund, public-employees retirement system, school-employees retirement system and state-teachers retirement system—participate together under a joint contract for mail-order pharmacy. “We just recontracted the mail order and did so very aggressively,” says Jim Braun, manager of the health-care team for Washington, D.C.-based The Wyatt Company, which consults the Ohio Retirement System. “The rates have seen a significant improvement this year.”

Another managed-care method that companies are using to control retiree prescription expenses is the formation of local pharmacy networks. These are most effective when integrated with mail-order programs. This is something else that the Ohio Retirement Systems have aggressively pursued. “Pharmacy costs are a very significant part of the total cost of Ohio’s retiree-benefits expenses,” says Braun.

Offering incentives for employees to use generic drugs and using formularies are other techniques that companies are using for managing their costs. “Formularies define a set of drugs that can be used under a particular program,” says Segal’s Gliebe. “What that does is let the plan sponsor negotiate more aggressive rates for those drugs with vendors for volume discounts. Because they’re limiting the supply of their competitors, they can participate in that particular program.”

Companies must define their roles.
There are countless methods that companies can engage, and are using, alone or in combination with others, to limit their liabilities for retiree medical benefits. With medical costs continuously rising, and the retiree population growing, it’s near impossible for employers to continue funding completely their employees’ postretirement health-care coverage. But just how much should an employer contribute toward its workers’ future health care? That depends on several factors.

Discontinuing coverage completely may be the most cost-effective method. However, a company must weigh the financial benefits against the negative attitude that such an action may create. The decision to discontinue benefits must not be made lightly. Retirees of several companies have sued their employers for discontinuing their coverage, claiming that their employers had promised them lifetime benefits. At Orland, Indiana-based Universal Components, for example, 27 salaried retirees brought suit against the company when it stopped paying for their medical coverage. The retirees won their case in trial court. However, in February, the U.S. Court of Appeals reversed the lower courts decision and ruled in favor of the company.

More than 8,000 McDonnell Douglas retirees sued the Saint Louis-based company for eliminating their benefits. The case still is pending in court.

Asking employees to prefund their own benefits requires a careful look at tax laws and legal requirements.

If a company chooses to limit what it will offer, Kwasha Lipton’s Case says that it must first answer several questions. “Should we offer a certain amount of benefits or a certain amount of money? How should the money be allocated among the participants? Should we give more to married people than single people? Should we give more to people who go out before they’re Medicare eligible than to people who are Medicare-eligible?”

The questions aren’t easy. When the numbers total millions of dollars, however, and affect a company’s bottom line, the answers must be contemplated.

Numerous studies have indicated that most large companies already had family and medical leave acts in place before they were required by law. A survey of 1,000 employers conducted by Lincolnshire, Illinois-based Hewitt Associates, which was released in March 1993, found that as many as 63% of the surveyed companies already had family-leave policies and 56% had medical-leave policies. However, very few had policies that contained all of the same provisions as the federal Family and Medical Leave Act (FMLA). According to Carol Sladek, a work-and-family specialist with Hewitt Associates, most companies had to “make at least some adjustments to their leave programs to comply with the new law.” For example, a majority of companies had to alter their policies to include the provision that requires them to continue payments of medical benefits for employees on leave.

In the time between June 4, when the Department of Labor released the act’s regulations, and the act’s effective date, human resources managers across the nation scrambled to whip their current policies into shape. Compliance wasn’t the only goal of many of the managers, however. Having to look into compliance with the law afforded human resources professionals the opportunity to review their family-friendly policies as a whole. “People aren’t just interested in the regulations,” says Paul Cholak, a consultant for Alexander & Alexander and a board member of the Boston HR group. “They are looking at [the FMLA] in a much broader sense. It’s raising the consciousness of people about work-and-family issues.”

Gerald Uslander, an attorney in the Washington, D.C., office of William M. Mercer, has made the same observations. Many employers, forced to comply with the law, are making it work for them. “Let’s make the employees feel that they’re getting something from us,” says Uslander regarding employers’ attitudes.

In fact, studies have shown that having family and medical leave policies is advantageous for businesses. In its survey of companies that had leave before the enactment of the FMLA, Hewitt found that the majority of companies experienced a boost in morale and goodwill among employees, and decreases in turnover. Approximately 40% of the companies also experienced decreases in recruiting and retraining costs.

Ted Pippin, director of HR for Providence Hospital in Washington, D.C., has seen these benefits firsthand. His company has had family and medical leave policies “on the books” for two years as a result of a Washington, D.C., statute. (Because the hospital is a Catholic institution, however, Pippin says that it has always provided people with needed leave.) “People get time to spend with their families when they are in need,” says Pippin. As a result, Pippin says that the employees see that the company cares for them because it holds their job open and helps them financially by paying for their benefits while they are out. The goodwill created from the gesture has helped the hospital retain good employees.

When The Jesup Group Inc. bought Uniroyal Plastics Company Inc. in October 1986 for $110 million, it was counting on the newly acquired firm to bring in $13.5 million a year, based on information supplied by the seller.

The buyer and seller based the purchase price and funding on this amount—an amount necessary to help The Jesup Group cover not only the interest payments from the acquisition but also the acquisition’s retiree benefits, pension obligations and environmental liabilities. As The Jesup Group began to total the year-end figures, however, it discovered a terrifying truth: Uniroyal Plastics had brought in less than $5 million.

For the next four years, The Jesup Group, then based in Stamford, Connecticut, sold off its operations to make ends meet, but it wasn’t enough. Although the company’s total annual sales in 1990 were $200 million, it was paying out $17 million a year in health-care costs alone, $14 million of which was for benefits for retirees of Uniroyal Plastics. (Employees of Uniroyal Plastics belonged to the United Rubber Workers (URW) union, which had negotiated a lifetime, fully paid medical-insurance plan for its members and their dependents.)

The high benefits costs, combined with a greatly underfunded pension plan, large environmental liabilities and an income that was much lower than had been predicted, meant financial doom for The Jesup Group. Efforts to restructure the company proved unsuccessful. In November 1991, the operations of The Jesup Group filed Chapter 11 in South Bend, Indiana.

When the case reached the courts, the interests of retirees became a major topic. While it was in financial trouble, The Jesup Group had failed to pay for many of the medical claims that retirees of Uniroyal Plastics had filed. (The plastics company had been self-insured.) Some former employees had bills that were outstanding from medical practitioners that totalled between $20,000 and $50,000, which the practitioners were unable to collect from either Uniroyal Plastics or The Jesup Group. One retiree owed nearly $150,000 in medical bills.

The court and the company’s trustees appointed 25 retirees to serve on an official retirees’ committee and represent the retirees’ interests. The court also authorized the committee to hire legal counsel and consultants. Committee members hired Randall Light, a senior manager in the Human Resources Management Consulting Group of Crowe Chizek, based in South Bend. Light attended committee meetings and asked the retirees what they wanted.

“Those meetings were pretty emotional,” Light says. “The retirees didn’t trust the company.” The retirees indicated to Light that they felt that the firm had lied to them and cheated them out of money, and that they weren’t happy at all about the way in which things were handled.

The bankruptcy code required that if the operating organizations of The Jesup Group were providing benefits to retirees at the time during which their parent company filed the bankruptcy petition, then part of their reorganization plan must include benefits for retirees. The code didn’t specify the amount of funds that The Jesup Group had to allocate to the retirees or how much time was allowed for it to continue payments.

By December 19, the company, the URW and the retiree committee agreed on a new, scaled-down benefits plan. The organization would pay only for prescription coverage for retirees older than 65 who were eligible for Medicare, and only for catastrophic medical coverage for those retirees who were younger than age 65.

Although the retirees agreed to this plan, they didn’t like it. They wanted more-extensive benefits than what the company could give them.

They also had strong opinions about what they wanted for their future benefits. They didn’t want the same situation to occur again. They no longer wanted their former employer to self-insure their benefits but instead wanted a plan that was fully insured by an insurance company. That way, even if The Jesup Group ceased making payments, it would have already paid for the premiums until that point, avoiding unexpected debts for the retirees. Also, because of their distrust of the company, the retirees wanted the company to have as little involvement with their insurance plan as possible.

Retirees take control of their benefits.
The retiree bankruptcy committee negotiated a plan with The Jesup Group. The committee members persuaded it to pay them, as an entity, the amount that it would spend on their benefits. The retirees would then buy and administer their own benefits. The company agreed.

“Given the cost of bankruptcy, the only way that the operations could have survived was to have a rapid bankruptcy proceeding,” explains Oliver Janney, vice president, general counsel and secretary of Uniroyal Technology Corp., which is the name that The Jesup Group took after the bankruptcy process. “To do it quickly, we had to work out an arrangement that got everybody at least something.”

Besides wanting to appease the retirees, the organization also saw the benefit of giving control of administration to the retirees. Uniroyal Technology emerged from bankruptcy as a much smaller company than The Jesup Group had been. It didn’t have the people to administer the retiree benefits effectively. The group of 3,000 retirees is nearly three times larger than the company’s group of 1,200 active employees. Martin Gutfreund, vice president of human resources and administration for Uniroyal Technology, says that the retirees, most of whom still reside in the local area, can plan and manage their program much more effectively. “You have a group that’s capable—like a cooperative—of determining what’s in their collective best interest—and they have a very democratic process for deciding that,” he says.

Janney agrees. “We have retirees who have time on their hands,” he says. “They probably can do a more thorough job of managing their benefits than a company can that has to serve its active employees. Retirees have different needs for medical support from those of active employees,” Janney adds.

Having gotten the organization’s agreement, the committee members filed an application with the Secretary of State’s office to establish a nonprofit organization, and wrote bylaws with help from their hired counsel. On October 1, 1992, the same date on which Uniroyal Technology emerged from bankruptcy, Uniroyal Retiree Benefits Inc. was established. Its purpose would be to administer all the medical and life-insurance benefits for the retirees of Uniroyal Plastics.

The committee of retirees that had negotiated the retiree corporation in bankruptcy court selected seven of its members to serve as the board of directors for Uniroyal Retiree Benefits Inc. The board members have sole authority in Uniroyal Retiree Benefits. The board members volunteer their time every Monday afternoon for board meetings, and, as needed, they work in the office. In the first months, however, they met frequently.

“It has been difficult to assume our roles and to know what to do,” says Earl Burkhart, president of Uniroyal Retiree Benefits’ board of directors. “We didn’t have any experience with this sort of thing. It’s also difficult getting some of the retirees to understand what we’re doing.”

The board members hired two administrative workers to help take care of the bookkeeping and to track coverage. During the first three months of operation, the scaled-down benefits plan negotiated during the early stages of bankruptcy court was in effect while board members searched for an insurance company to handle their benefits. It proved difficult because the group that the retiree corporation was trying to cover is high-risk. The group of retirees includes many people who are younger than 65 and therefore not yet eligible for Medicare.

Any insurance company with which the retirees contracted probably would be this group’s primary source of coverage. “The insurance companies realize that [the retirees] aren’t the healthiest population in the world,” Light points out.

American Medical Security, located in Green Bay, Wisconsin, agreed to insure the retirees beginning in January 1993. A key factor for the insurance company in agreeing to a fully insured plan for the group was an agreement that the retiree corporation has worked out with the local medical community.

In the South Bend area, where approximately 65% to 70% of the retirees still live, three out of four hospitals have agreed to accept what Medicare pays as full payment. This lowers the risk for the insurance company. Eighty percent of the doctors in this area also have agreed to these payments.

“The community has really gotten into this,” Light explains. “A lot of the people either are related to or know someone who’s involved in this, so there’s a lot of compassion going out to these retirees.”

In addition to getting practitioners in the South Bend area to participate, the board of directors has persuaded some hospitals and a large physician group to participate in Madison, Wisconsin, where many retirees have relocated. Regions in which the company is working on similar agreements are Florida, Pennsylvania and Ohio. “Many doctors who understand the plan agree on an individual basis not to bill the patient the balance,” Light says.

HR helps implement the benefits plan.
Once the retiree corporation had secured an insurance carrier, Gutfreund and his HR staff at Uniroyal Technology helped the retiree board of directors put the new benefits plan together. They helped the retiree corporation’s board members transfer the medical benefits from one company to the other, and provided them with general assistance until they were able to take full control. After that, Uniroyal Technology broke all ties with the retiree corporation except for its role as funding agent.

The responsibility of Uniroyal Technology is to contribute a fixed amount to Uniroyal Retiree Benefit Inc.’s benefit fund. It bases the amount that it contributes on an estimate of what the scaled-down benefits plan that was negotiated during court would have cost per year, per retiree.

For example, the estimated amount that benefits would have cost Uniroyal Technology in 1993 for each retiree younger than 65 is close to $1,050. For retirees older than 65, the individual amount would be approximately $560. Multiplying each of these amounts by the number of eligible retirees in each age category determines the amount that Uniroyal Technology must contribute to the fund each year, which it pays in monthly installments. The company’s contribution for 1993 is $2.4 million ($2.2 million for medical insurance and $.2 million for life insurance).

Uniroyal Technology’s contribution covers approximately two-thirds of the benefits cost. Retirees must contribute the other one-third themselves. Retirees who are younger than 65 pay between $40 and $120 a month, depending on coverage, and retirees who are older than 65 pay between $68 and $136 a month. The cost to the younger retirees is lower because they don’t yet qualify for Medicare and therefore incur greater out-of-pocket expenses than the older group.

When setting up the plan, retirees negotiated for a two-month premium reserve. During the next two years, Uniroyal Technology’s contributions will include payments in addition to the monthly installments that the retiree corporation sets aside in reserves. At the end of the two years, the reserve should have enough money to cover two months’ worth of the company’s contribution. The retirees hope that this reserve will serve as a cushion, should Uniroyal Technology fall into financial difficulties—as The Jesup Group did—and stop paying into the benefit fund.

The plan works in a fashion similar to an HMO. It doesn’t require traditional deductibles but instead requires that retirees make copayments for service. For example, retirees pay $15 for a doctor visit, $150 for a hospital stay, $5 for lab tests and $15 for prescriptions. The insurance company pays the balance and issues prescription cards to beneficiaries. Many of the retirees who are older than 65 have discovered that this plan costs them less than private Medicare supplemental insurance that covers drug costs.

To control utilization and keep premium rates down, the insurance plan pays treatment costs based on Medicare fee schedules (determined by DRGs, or diagnostic-related groups). If a hospital charges $5,000 for a particular treatment, and the Medicare fee schedule indicates that the treatment is worth $4,000, the insurance company will pay only $4,000. The insured is responsible for paying the balance. Because of the corporation’s agreement with practitioners to bill only the approved Medicare amount, however, often there’s no balance to pay.

Benefits plan proves beneficial to both sides.
The plan is working out well. The board members of Uniroyal Retiree Benefits are proud of what they’ve done. Having control of their own benefits comforts the retirees. “Because they’re on their own now and the contract is issued to them,” says Light, “if their former employer again discontinues its payments, they could deal with it. They would have the opportunity either to contribute more to the plan themselves or to trim the benefits. They’re totally in control.”

Gutfreund adds that Uniroyal Technology also is pleased with the way in which the retirees are managing their benefits. Having the retirees control their own benefits offers several advantages to the company. Not only does the program spare Uniroyal Technology the responsibility and the time-consuming chore of administering the retirees’ benefits, but it also saves the company a substantial amount of money in administrative costs. Gutfreund estimates that the administration of these benefits could require as many as two people working full-time.

Because the organization’s contribution to the benefit fund is equal to what it would have been spending on retiree benefits anyway, the absence of administrative costs means that the organization comes out ahead financially. “The retirees are able to get the benefits they want and we pay the money we would have paid anyway, except that we don’t have the administrative costs,” Janney says.

The fact that the retiree corporation fixes the costs of funding for Uniroyal Technology offers another advantage. The annual increases that the retiree corporation has built into the plan to cover rising costs are much lower than the trend in the insurance industry. Light says that of the 15% to 25% increase in cost that insurance companies charge each year, only 5% to 10% of the increase relates directly to goods and services. Having more people using more services causes the additional increases.

“The company’s obligation in this case is to fund only the increased cost of goods and services,” Light says. “It’s up to the retirees to control those utilization rates so that if they use the plan less, they’ll come out ahead.”

Light says that this element of fixed costs and increases has prompted people from other companies to take an interest in what Uniroyal has done. “Companies are interested in limiting and defining costs,” he explains. “It takes the guesswork out of their post-retirement liability calculations.”

Light believes that the plan offers a viable solution for a company in a situation similar to The Jesup Group’s. In bankruptcy situations in which retirees’ interests are jeopardized, retirees already have organized for negotiation purposes. (Although it would require more work to organize retirees who haven’t organized already for bankruptcy negotiations, it isn’t impossible.)

Setting up an organization from which the retirees can administer their own benefits means going just one step further. For organizations that aren’t facing bankruptcy but are having financial difficulties, Light explains that this approach offers a preferred solution to terminating benefits outright, as some organizations do.

Janney explains that a plan like that of Uniroyal Retiree Benefits most likely would work better in certain industries than it would work in others. “In companies within industries that have generous retiree benefits, such as the rubber industry, I think that it offers a lot,” Janney says. “It may be a way of meeting expectations for more-expensive retiree benefits than most companies are able to make available to retirees. It’s the same concept that most companies have today with their active employees—the concept of sharing the costs of insurance,” Janney adds.

Gutfreund believes that Uniroyal Retiree Benefits Inc.’s solution for meeting retirees’ needs could be the wave of the future. “Uniroyal Technology now is financially sound, we’re providing superior employment opportunities for more than 1,200 employees throughout the country, and we have met the medical-insurance needs of our retired employees,” he says. “All of that came about because of some very creative and effective work.”

It’s 6:25 in the morning. The sun’s rays, just awakening, haven’t yet chased the chill from the air. Inside the Subaru-Isuzu Automotive (SIA) plant in Lafayette, Indiana, however, the air is hot from the panting breath of workers. As the triumphant sound of the theme from Rocky blasts from speakers, the automotive workers touch their toes and twist their torsos, and swing their arms like windmills in the wind.

Twice a day for five minutes, associates (employees) are encouraged to perform stretching to music before their shifts. The stretching exercises are designed to harden workers for physical labor to keep work-related injuries—specifically strained muscles and repetitive-motion injuries—at a minimum.

The stretching program has been a part of the operations at the plant since production began in September 1989. A year earlier, SIA managers had visited the plant’s parent companies in Japan. They discovered that a morning stretch to music was standard practice at all the car companies in that country. They brought the music back with them on tape.

SIA’s management realized that the Japanese companies were onto something. Other car companies in the U.S., both domestic and Japanese-based, had confided in SIA that their workers were experiencing a large number of strained muscles and repetitive-motion injuries. The Bureau of Labor Statistics confirms this. According to the agency, workers in the automotive industry experience 9.6 lost workdays per 100 full-time workers. The national average for all industries is only 8.4.

Management at these other car companies had blamed the high accident rate on the need for loosening up or conditioning in preparation for the physical work. “They all wished that they had had something in place from the start” to control the situation, says Lee Ashton, personnel and training manager at SIA. So SIA put a conditioning program in place.

Employees work out before they work.
SIA’s program ensures that production workers are prepared for physical labor before they hit the production line. It also prepares administrative and managerial personnel for repetitive-motion work, such as typing on computers. As part of all employees’ orientations, the company teaches workers about work hardening, a name borrowed from gardening terminology. Just as gardeners gradually expose tender seedlings to the cold before leaving them out unprotected in the spring, so should employees prepare their bodies for work. By stretching and strengthening their muscles, workers run less risk of straining them on the job. “Our goal is to prevent injuries,” says Mark Siwiec, manager of safety and environmental compliance at SIA. “If injuries do occur, however, they should be less severe.”

The company’s orientation for new hires lasts two weeks, or 80 hours. Of those 80 hours, 45 hours are devoted to physical training. During the employees’ first week, physical training is minimal. The workers perform simple exercises (such as squeezing balls of putty to strengthen their arms and their grips), while sitting in a classroom, receiving instruction.

The second week of orientation is devoted completely to physical training, and workers receive a more comprehensive workout. An exercise physiologist leads them through low-impact aerobic exercises to improve their cardiovascular fitness. She teaches them how to stretch properly and how to use the workout machines that the company bought specifically for work hardening. The equipment is designed to strengthen specific parts of the body. For example, one machine contains a weighted device, which a worker must roll left and right to strengthen his or her forearms.

Although all employees go through the same orientation, they don’t receive the same physical conditioning. It’s much more intense for the production workers than for the administrative and managerial staffs. Production workers perform such additional exercises as:

• Threading a clothesline through a chain to improve dexterity and hand-and-eye coordination
• Twisting around a broom handle a rope that has a brick attached to it to strengthen the forearm and grip
• Screwing nuts onto bolts buried in kitty litter to toughen fingertips.

In addition, the production workers receive physical training specific to their jobs. For example, one responsibility for a worker in SIA’s trim and final area is putting wheels on vehicles. During the orientation period, the therapists take this employee to the trim and final area for several hours each day to work off-line performing this and other tasks. Here the therapists coach the employee on proper lifting, equipment moving and so on.

The company also requires this type of training for any employees who have been off work for eight weeks or longer, or who transfer into line positions that have physical requirements that are different from the requirements of their previous positions. These employees don’t work in their positions for a full eight hours until two weeks after the transfer. The first day, they may work only two hours performing their jobs, and the rest of the time, they do other things to help the department. The amount of time they spend performing their jobs increases each day. An exercise physiologist and a physical therapist check with them consistently during this time to see if they’re experiencing any soreness.

Workers stay in shape.
Once on the job, the employees are responsible for maintaining their own physical conditioning. The company doesn’t abandon them in their efforts to remain fit, however. The morning stretching is available every day in each department for anyone who wants to participate. Although not mandatory, the company recommends it. The company consistently reminds the employees, through videos and newsletters, about the importance of physical conditioning.

In addition, the company maintains an on-site workout facility within its training center. The facility is available to all employees—administrative and managerial as well as production—from before the start of the first shift at 6:30 a.m. until after the second shift finishes work at 1:00 a.m. each day. The facility contains exercise machines, weightlifting machines and different kinds of strengthening devices. During new-employee orientation, the exercise physiologist teaches the new workers how to use this equipment.

Also, two physical therapists are readily available during working hours to help employees use the equipment or to help them tailor a program to fit their needs. For example, if an employee complains to a physical therapist of a sore back, the therapist teaches the employee stretching and strengthening exercises that are specific to the muscles that are creating problems for the employee. In addition, the therapist evaluates how the employee performs particular job functions to determine what’s causing the problem and suggests less-straining methods.

The organization contracts for the therapists with an outside source to work on site full-time. Before it made this decision one year ago, it was paying for physical therapy at hospitals every time an employee became injured. “It was expensive—very expensive,” Ashton says. “We talked with our insurance company, and it indicated that we probably could do this better, and maybe even save some money, if we just brought it in-house.”

Ashton says that since the company has brought the therapists in-house, it absorbs the costs that ordinarily would be charged to workers’ compensation insurance, saving itself 30% to 40% in administrative costs. Siwiec says that this decision has saved the company some intangible costs as well. Having the physical therapists and the equipment facility on-site, therapists can conduct rehabilitation therapy right at the plant. Injured employees spend less time away from their jobs, and the organization has more control over their treatment. Because the therapists know the jobs and the work processes, they can help the employees better than could an off-site therapist who isn’t familiar with the specifics of the employees’ jobs.

SIA also employs a full-time physician at the plant. “We made this decision for several reasons. When people get to know someone as an associate or co-worker, they trust him and are more willing to go to him with problems. Also, from a case-management standpoint, we wanted someone who could watch after the employees regularly to make sure that they get the best treatment. We wanted someone who knows our jobs and our people,” Ashton says.

Results outweigh the costs.
Both Ashton and Siwiec say that they believe the work-hardening program is making a difference. “The people who end up getting injured many times aren’t the ones doing the stretching exercises,” says Ashton. He says that although it would be nice to be able to require everyone to exercise on a regular basis to eliminate this problem, the company has reservations about forcing regular exercise on employees, because exercising isn’t a direct job-related duty. “We try to show people the benefits of exercising, but don’t feel that we can mandate it.”

It’s tough to qualify the program empirically, however. Because the Indiana facility is only a little more than three years old, it hasn’t established standards in every position yet and still is experiencing growth and change. “It has been difficult for us to have any type of stable period during which we could say concretely that it’s making a difference,” Ashton says. The work-hardening program has gone through changes during the four years of its existence.

In addition, because the program began when the plant did, there’s no previous experience with which to compare it. Ashton also says that it’s difficult to compare SIA’s injury rates and severities with data from other plants because there are too many variables. For example, he says that at some companies, employees must work fast on short tasks for long periods of time. At SIA, employees experience a lot of job rotation and work on a variety of tasks.

Ashton, however, does estimate that having the work-hardening program on-site saves the firm approximately 30% to 40% on rehabilitation. In the long run, these savings outweigh the costs of the work-hardening program, which include only the salaries of the exercise physiologist and therapists, and the purchase price of the exercise equipment (between $20,000 and $30,000). The company houses the equipment in the same room as other training material, so there’s no additional cost for space. There also are no costs involved with the morning stretching (except for the tape players).

In addition to the cost benefit, Ashton says that he’s sure that the program affects employee morale. “We’ve received a lot of positive feedback from the associates who use the equipment or get advice from the doctor or the therapists. They’re pretty positive about having the opportunity to do that.”