Detroit's Woes Point to Growing Retiree Health Insurance Gap

06/12/2009 05:12 am ET | Updated May 25, 2011

The bankruptcy of Chrysler LLC is requiring painful sacrifice all around, but an especially big cut is being taken by the health care plan that covers the company's retirees.

A health care trust fund established earlier by the big three automakers will become the new majority owner of Chrysler, and it will accept stock instead of cash for half of the $10 billion in payments Chrysler already owed to pay for benefits -- a deal that puts retiree health funding "on life support," according to Ron Gettelfinger, head of the United Auto Workers. More broadly, the deal underscores the precarious state of employer-funded retiree health benefits, and it's part of a bigger set of changes in the marketplace for supplemental retiree health insurance.

Many people assume that Medicare takes care of everything after age 65 -- and it's true that Medicare is fairly comprehensive. But it doesn't cover everything, and it's not free. Beneficiaries pay premiums for Medicare Part B outpatient coverage, and other out-of-pocket costs can be high in cases of prolonged, serious illness.

About three-quarters of beneficiaries have some kind of supplemental policy to help protect against potentially high out-of-pocket costs, and coverage gaps such as prescription drugs and dental care.

Much of that supplemental coverage comes from large employers like Chrysler. As recently as 2006, 35 percent of Medicare beneficiaries had coverage from an employer-sponsored health plan, according to The Henry J. Kaiser Family Foundation. For retirees, employer coverage is the secondary payer after Medicare.

But retiree coverage from employers has been declining as companies push to get out from under accelerating costs. Just 31 percent of employers provided coverage in 2008, down from 66 percent in 1988, according to Kaiser.

The Detroit automakers are the highest-profile example of this trend. The big three once represented the gold standard in employee benefits -- the result of decades of collective bargaining wins achieved by the UAW. As the industry's woes accelerated in recent years, the automakers have been wrangling with the UAW over their massive contractual obligations to provide retiree health coverage; in 2007 a deal was struck to spin off the retiree health plans into a standalone trust that would receive $60 billion in one-time payments from the companies.

As Chrysler and General Motors race to restructure and survive, it now appears that the trust will receive less than that. Under the terms of Chrysler's bankruptcy, existing shareholders -- Cerberus Capital Management and Daimler AG -- will lose all their holdings; the trust will be the new majority owner, controlling 55 percent of the revamped company. That means the trust will have to rely heavily on the performance of Chrysler stock to fund benefits.

Shrinking employer coverage likely will turn up the volume of debate about other forms of supplemental retiree health coverage -- a debate that will occur within the broader context of debate about national health care reform.

Just as employer coverage has been shrinking, the Bush-era individual supplemental plans have been gaining in popularity. Medicare Advantage -- which offers all-in-one medical and drug coverage via PPO, HMO and fee-for-service plans -- has seen participation double to about 10 million since 2003. That year, federal legislation was passed aiming to revitalize private plans through higher federal reimbursement rates to providers.

Another relatively new option -- Medicare Part D prescription drug plans -- also have been popular since their introduction in 2006.

Part D was the subject of intense debate when the enabling legislation program was passed in 2003. Republicans prevailed in arguing that the prescription drug benefit be offered through private insurers, over the loud objections of Democrats. Now, the Obama Administration and Congressional Democrats are indicating they'd like to reel in Medicare privatization in the context of broader health care reform.

President Obama criticized the Advantage program frequently as a candidate, and wants to cut as much as $177 billion from the program to fund broader health care reform. The Administration already has taken a step in this direction, announcing changes for next year's Advantage program aimed at reducing cost to participants and reducing the number of plans to make it easier for consumers to analyze and compare offerings.

Learn more about shopping for supplemental Medicare plans at RetirementRevised.