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Companies Boost Profits By Squeezing Retiree Benefits To help pay medical bills left behind when her husband died of cancer, June Y., age 82 of Oakdale, Minnesota, was forced to use a portion of his $10,000 life insurance. Although she and her husband were eligible for Medicare and received supplemental benefits from his employer, his company, 3M, had altered its benefits package for retirees, increasing annual deductibles to $1,500 from $140 and cutting back on payments for doctor bills not covered by Medicare. Many retirees contend they had been promised lifetime benefits to stay with their companies, but now, fewer than one in four employers provide medical coverage of any kind for Medicare-eligible employees. In 1994, 40% of all employers provided health care benefits, but many companies cite the mammoth health care cost increases as the reason for reducing or eliminating retiree benefits. In addition to dropping health care coverage, an increasing number of companies are extricating themselves from certain pension benefits owed to workers. Companies use a variety of methods for shrinking benefits, using mergers, spin-offs and other deals. Drug companies are no exception. SmithKline Beecham for example, sold a division of their business to Quest Diagnostics in 1999. Employees who remained in their jobs had to accept a less generous pension plan under the new Quest ownership. Transferred employees lost their early-retirement subsidy they enjoyed under SmithKline Beecham. Other companies, like the pharmaceutical giant Merck, retain the pension plan for a division that has been sold, which allows them to continue to invest the pension assets, but at the same time freeze the pension rights of the transferred employees. Merck also cut retiree medical benefits. During the 1992/1993 period Merck estimated that the long-term health care liability for employees would be $90 million. By 1999 that figure had dropped to just $6 million, a 93% decline. While rank and file workers have lost millions in health and pension benefits, the drug companies have returned hefty profits. Merck`s five-year cumulative total return from 1994 to 1999 was 31%. During this time, drug companies, including Merck and SmithKline Beecham have spent millions to fight a Medicare prescription drug benefit saying it would lead to price controls. They warn that lower prices will mean less money for research and in turn, fewer miracle drugs, when actually they are concerned that lower prices could also mean fewer miracle pay packages for chief executives. Pfizer`s CEO, William Steere who recently ended tenure as CEO shows just how much they have to lose. Steere earned an estimated $32.6 million in 1999. That handily surpassed Merck`s Raymond Gilmartin who earned more than $26.5 counting stock options. Sources: `Pfizer`s Steere Shows How Well Drugmakers Pay,` Bloomberg News, January 5, 2001. `Cuts in Health Benefits Squeeze Retirees` Nest Eggs,` Milt Freudenheim, The New York Times, December 31, 2000. `Companies Quietly Use Mergers, Spin-offs to Cut Worker Benefits,` Ellen Schultz, The Wall Street Journal, December 27, 2000. `Retiree Medical Plans Are Transformed Into Source of Profits by Sears, Others,` Ellen E. Schultz, The Wall Street Journal, October 25, 2000. This article first appeared in Volume 6, Issue 6 of "The Social Security and Medicare Advisor" newsletter (May/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here. | ||||||||
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