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How Pfizer Saved Millions by Dumping Its Retirees on Medicare

A change in Pfizer's (PFE) healthcare benefits is saving the company hundreds of millions of dollars but leaving retirees mostly dependent on Medicare and their own money unless they suffer a catastrophic illness. The cut to post-retirement health benefits has spurred a small rebellion among Pfizer's 23,000 retirees. Many of them have participated in a letter-writing campaign to the company's board and HR department, suggesting that a healthcare company ought to provide, well, healthcare for its people.

The cuts were made by former Pfizer CEO Jeff Kindler, who received a bonus in 2009 for working with the Obama administration to pass the healthcare reform bill. Now some retirees believe the reason Kindler was so keen on the bill was because he knew Pfizer's retirees would be more dependent on government care after he cut their benefits.

Part of the retirees' anger comes from the confusing way Pfizer introduced the change: It sent a letter saying "We're pleased to announce a change to healthcare benefits" that would leave former employees with "the same benefit options for medical coverage" (click to enlarge):

In fact, Pfizer was drastically reducing coverage. From 2010 onwards, Pfizer retirees over age 65 receive almost all of their healthcare coverage from Medicare, and Pfizer's benefits will only kick in if a patient runs up $4,500 in out-of-pocket costs and deductible fees. For this, some retirees are now being asked to pay up to $1,333 per month in premiums if they want their spouse and family covered.

The "Medicare Carve Out"
Prior to 2010, employees of Pfizer and the "legacy" companies it acquired over the years -- Pharmacia, Upjohn, Warner-Lambert, Parke Davis, Searle and Wyeth -- enjoyed generous retirement benefits. One plan was called the "90 Option" because it paid for 90 percent of a retiree's health expenses beyond those covered by Medicare. (Generally, Medicare pays for 80 percent of all "reasonable and customary" medical fees for anyone aged over 65.) In 2010, Pfizer replaced its "90 Option," and all the other legacy plans, with a plan called the "Medicare Carve Out":

A brochure alerting retirees to the change presented their coverage and payment arrangements alongside those of regular employees. The brochure appeared to indicate that the "coinsurance" under new plan would pay for 80 percent of all costs "after deductible," just as it did for employees not yet on Medicare (see the bottom half of the document):

However, when retirees attempted to use their health benefits they discovered that the "80%" referred to the costs that Medicare was covering. The "coinsurance" would only kick in after a retiree had exhausted a $500 deductible and $4,000 in out-of-pocket costs.

Premiums also took a steep hike. Back in 1999, a typical Pfizer retiree paid a maximum of $108 a month to cover her whole family. If she had enough years of service, her premiums might be zero dollars. Today, those premiums start at $80 a month and go all the way up to $1,333 for a family:

Benefits for trophy wives
The plan looks like terrible value -- why would you pay hundreds of dollars a month for a plan that has few benefits unless you incur more than $4,500 in bills? But many retirees are afraid to drop it because, at that age, your health can deteriorate suddenly and expensively. The plan is useful, for instance, if you get cancer or need surgery. It isn't useful, however, for anyone in reasonably good health.

To add insult to injury for female retirees, the plan still covers in-vitro fertilization -- a benefit they cannot use themselves but that is useful for retired men with very young wives:

The "Medicare Carve Out" has been successful for Pfizer. Between the end of 2009 and 2010, it reduced losses in its employee benefit trusts by $326 million and reduced its future obligations by $208 million (see page 53):

  • Employee benefit trust losses
    2009: $333 million
    2010: $7 million
    Saving: $326 million
  • Postretirement benefit obligations
    2009: $3.2 billion
    2010: $3 billion
    Saving: $208 million
Clinton's problem became Kindler's problem
For years, employees at companies such as Upjohn and Pharmacia enjoyed generous benefits. Some workers accepted lower salaries at places like UpJohn's Kalamazoo, Mich., site because they believed the retirement benefits would make up for it. In 1993, however, Upjohn warned its employees in a memo its benefits might not last forever:
... because the expense of providing previously unlimited future post-retirement medical coverage results in an increasingly larger financial liability for the company, Upjohn is setting an annual limit on the total number of dollars it will spend toward retiree medical coverage.
The total was set at 140 percent of the 1993 cost per person. Upjohn said costs after that would be met by retirees themselves, but that it may never happen:
Before then, anticipated changes to the U.S. health care system may result in new regulations that would make this limit obsolete.
Of course, President Clinton's healthcare reform bill failed to pass, leaving an unfunded liability dangling in the future for retirees of Upjohn, which was bought by Pharmacia, which was bought by Pfizer. Fast forward to 2009, and Clinton's failure to reform healthcare is now Kindler's problem. Pfizer's retiree benefits become a lot cheaper if they can be outsourced to the government. Now, all Pfizer retirees will have only the Medicare Carve Out plan in their retirement, the company confirmed to BNET:
Beginning January 1, 2010, Pfizer consolidated its many legacy retiree medical plans into a single benefit program for all retirees. Those retirees age 65 and above can choose between two plans -â€" one to supplement Medicare and a prescription drug only option. The annual out-of-pocket maximum for the Medicare Supplement program is $4,000.
Employees of Wyeth -- acquired by Pfizer in 2009 -- will enter the new plan in 2012, the company said. Retirees will still receive all Pfizer drugs free of charge. Employees who write to board members to protest the plan receive this form letter in reply, which notes the 1993 limit set by Upjohn:
Pfizer has not breached any contract or covenant as you assert in your letter, but rather has continued the retiree subsidy limits adopted by the Upjohn Company.
Related: Image by Martin Cathrae, CC.
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