The Medicare Modernization Act and the final Medicare Part D regulations released in January 2005 offered a major opportunity for employers to reduce their cash costs and their reported financial liabilities for retiree prescription drug coverage.

Despite widespread use of the Medicare federal subsidy, a vast majority of employers are planning to curtail their retiree medical plans for current and future retirees in the next five years, according to a new study by Watson Wyatt Worldwide.

The survey of 163 companies found that only five percent of employers do not expect to place any additional restrictions on their medical benefits for future retirees over the next five years and seven percent do not expect to implement further restrictions for current retirees. Fourteen percent of employers plan to eliminate the benefit entirely for future post-65 retirees and six percent plan to eliminate it for their current post-65 retirees.

Nearly two-thirds of employers (65 percent) anticipate increasing the financial contributions for future retirees and half (50 percent) expect to change their plan design. Twenty-four percent intend to tighten eligibility for future retirees and ten percent expect to place a new or lower cap on their employer contributions. As more companies adopt account-based programs for current employees, 26 percent anticipate offering this option to their future retirees

Many employers are collecting federal subsidies from the new Medicare Part D prescription drug program. Out of the 77 percent of employers that took the federal subsidy in 2006, 64 percent plan to take the federal subsidy in the future.

About 40 percent of employers in the survey said they believe the best way to solve their retiree health cost problem is terminate the benefits altogether, although most continue to offer benefits because of practical considerations, primarily union contracts.

Employers have wide latitude in how they use the federal subsidy for retiree plans. A new survey from Towers Perrin shows that 82 percent of the companies receiving a subsidy have used it to reduce the company’s cost. Only six percent have used it to reduce retirees’ costs and only eight percent have shared the cost savings with retirees.

About a third of U.S. employers offered current workers retiree coverage in 2005, down from about two-thirds in 1988, according to the Kaiser Family Foundation.

The ongoing employer assault on retiree medical benefits is occurring in the context of aggressive cost shifting for active employee health benefits. For the fourth consecutive year, the increase in the cost of providing health care benefits to U.S. workers slowed as companies stepped up their efforts to reduce coverage and push more costs onto workers, according to a separate Watson Wyatt survey covering 585 large employers with more than 13 million workers

According to the survey, employers expect health care benefit costs to increase a median eight percent in 2006, down from the ten percent increase in 2005. The vast majority of employers surveyed — 86 percent — also said their health care benefit costs came in at or below budget in 2005. Employers expect costs to increase about eight percent again in 2007.

The survey also found that nearly one-third of employers (32 percent) said that in the next one to two years they will start encouraging workers to use health care services “wisely” while slightly less (30 percent) said they plan to increase accountability of employees to manage their own health. Both steps are commonly used to pave the wave for “consumer-directed” health plans.

The new “consumer-driven” health care plans are code for terminating traditional employer-provided health plans and shifting most costs and risks to employees.

According to a new survey of nearly 3,000 companies by Mercer HR Consulting, 22 percent of the largest companies — those with 20,000 or more employees — have already installed consumer-driven health plans. These plans are usually introduced as one health plan option, often with the goal of phasing out other options and shifting entirely to the consumer-driven plan.

The Watson Wyatt survey also found that nearly half of employers (47 percent) are currently auditing or reviewing who is eligible and who enrolls in their health care plans, or plan to begin doing so this year. These reviews commonly signal a reduction in coverage.