Proposed changes to retiree medical benefits explained

On Jan. 19, Provost John Etchemendy will hold a second town hall meeting for current faculty and staff to discuss proposed changes to retiree medical benefits. Below, he answers frequently asked questions about the proposed changes, all of which are still under consideration.

How does Stanford's current retiree medical benefit work?Currently, a Stanford retiree who is over 65 relies on Medicare to pay his or her primary medical costs. Stanford's benefit is basically a contribution toward a Medicare supplement plan: additional insurance to help pay medical costs not fully covered by Medicare.

Stanford's current program contributes, for the retiree, an amount equal to the cost of the lowest-cost supplement plan—currently Health Net Seniority Plus. In 2004, this amount was $2,472 for the year, and could be applied toward any of the Medicare supplement plans the university offers. If the retiree is married, Stanford also contributes 60 percent of the cost of the lowest-cost Medicare supplement for the spouse—in 2004, this came out to $1,483.

What changes are being proposed in the retiree medical benefits?There are two changes being proposed. And again, this is still all in flux. First, under the new program, the university's contribution to the medical plans of retirees would be linked to their years of employment. In other words, the university would no longer cover the cost for retirees of the lowest-priced health plan. It would, instead, calculate a dollar contribution toward the cost of medical benefits based on the number of years of service at retirement. Second, the amount of the contribution would be increased each year to match the percentage increase in the salary/benefit program for active employees, rather than being tied to the cost of the lowest-cost plan.

How exactly will this affect Stanford's contribution?It depends on the years of service of the retiree.

Under Stanford's current program and based on 2004 contributions, the university pays $2,472 toward the retiree's Medicare supplement and an additional $1,483 toward the spouse's supplement.

Under the proposed plan—and it is important to remember that these numbers are all quite tentative and will likely be adjusted—a retiree with 30 years of service would be credited with $3,000 toward the cost of his or her medical premiums ($100 per year of service). If married, the 30-year retiree would be credited with an additional $1,800 for the cost of the spouse's medical benefits ($60 per year of service). Thus, in this example, the retiree would receive a larger amount under the new program than under the old program.

In contrast, a retiree with 20 years of service would not receive as generous a contribution. This employee would be credited with $2,000 ($100 x 20) toward his or her Medicare supplement and, if married, $1,200 ($60 x 20) toward the spouse's coverage.

From then on, increases in the dollar contribution would be tied to the increase in Stanford's salary/benefit program for active employees, an amount that generally outpaces inflation. But the increase would not be linked to the cost of the lowest-cost insurance plan, which in some years will go up at an even faster rate than inflation.

Incidentally, under either program, if the retiree does not enroll in a Stanford-sponsored medical plan, the university makes no retiree medical contributions. The retiree does not receive the money in lieu of medical plan contributions.

What about retirees who are under 65?In the current program, these retirees receive the same health benefit as active employees. In the new program, they will still participate in the same medical insurance plans, but the dollar amount of the university's contribution will be calculated in the same way as for over-65 retirees, and so will depend on the retiree's years of service.

How will the change affect current retirees?It will have no effect on current retirees. They will remain in the old program.

Will current employees be grandfathered into the current plan?We haven't made a final decision about how to grandfather existing employees when we change to the new plan. But this is our tentative plan. First, the university will grandfather all employees who are currently eligible to retire (regardless of age) into the existing program. In other words, if you could retire now, you will still be able to receive the old program, even if you don't choose to retire for many years to come. Second, for current employees not yet eligible to retire, when they do retire from Stanford, we will credit them with 25 years of service or their actual years of service, whichever is greater. So, for example, if a current employee who has recently come to Stanford retires after just 10 years of service, that employee will still receive credit for 25 years of service (instead of 10) when calculating the medical benefit. On the other hand, if that same employee retires after 35 years at Stanford, he or she will receive credit for all 35 years. This will mitigate the effects of the change for current employees.

How does Stanford determine eligibility for retiree medical benefits?To be eligible for retiree medical benefits, an employee must have a minimum of 10 years of service; in addition, the employee's age plus years of service must equal 75. This would not change under the proposed plan. (Employees hired prior to 1992 will continue to be eligible when they are 55 and have 10 years of service.)

Why is this being proposed?The changes are necessary to control the soaring cost of providing benefits, which has stymied our efforts to provide a competitive salary program over the last few years. Since fiscal year 1999, the university's contribution to retiree medical benefits has risen 438 percent. During that same period, the cost of benefit contributions for active employees increased 90 percent—31 percent of that increase attributed to the Stanford Contributory Retirement Plan (SCRP) and 59 percent to the cost of health care benefits. These increases pushed the total cost of benefits, in inflation-adjusted dollars, from $193 million in FY 99 to $286 million in FY 04, a 48 percent increase. Clearly, this is not sustainable.

One objective in proposing the change is to better distribute limited resources among active and retired employees, since it allows the university to give the same percentage "raise" to the two groups. Another objective is to provide predictability for the university budget in terms of health care cost increases, while guaranteeing some level of coverage for retirees.

How was this proposal created and how will this issue be decided?The proposal was created by a benefits task force formed at the joint request of the University Budget Group and the Board of Trustees. They have consulted with the Committee on Faculty and Staff Benefits, as well as other groups. The president and I will make a decision on what modifications to make in February. The changes would be implemented in January 2006.

If the changes are enacted, how will Stanford's retiree medical benefits compare to those of other employers?From the data we have already gathered, Stanford's benefits will still be equivalent to or more generous than virtually any employers the university competes with, whether local businesses or peer institutions.

How can I ask more questions?Come to a town hall meeting to discuss the proposals at noon on Jan. 19 in Tresidder Union's Oak Lounge. Bring your lunch. In addition, you can direct questions or concerns via e-mail to retiree-questions@lists.stanford.edu.