Office of Administration Announces Plan to Preserve Health Care Benefits for Current, Future Retired Commonwealth... (ducing cost increases that challenge fis...)

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Office of Administration Announces Plan to Preserve Health Care Benefits for Current, Future Retired Commonwealth Employees

Date:9/28/2007

ducing cost increases that challenge fiscal stability of the program. In announcing these changes, we want to stress that coverage is not being eliminated for any retiree.

Retiree health care benefits have long been important to the Commonwealth. The Commonwealth of Pennsylvania began providing health care coverage to its retirees in 1963. When this coverage first was offered, the commonwealth paid just $4 million on an annual basis for the entire program. Even after the commonwealth began to offer paid benefits to its annuitants in 1977, the annual cost of the REHP still was only $68 million. Today, the commonwealth funds in excess of $550 million for the REHP benefit programs, which equates to approximately $9,250 per year per retiree.

Retiree health care coverage is an important benefit that unfortunately has become increasingly rare in America. The cost of these benefits has escalated dramatically in the past two decades. Such increases, among other factors, have caused many employers to eliminate these benefits, leaving retirees without coverage and/or entirely dependent on the Medicare system. The commonwealth remains committed today, as it has been for more than 40 years, to providing these benefits. In so doing, we also must consider the economic realities of the modern health care marketplace.

In just the last four years, the REHP costs have increased 63%. Looking ahead, we see little relief from these escalating costs. In fact, by fiscal year 2008/09, it is expected that the REHP costs will account for 18% of payroll, whereas just five years ago these costs were 9% of payroll. An added pressure point for the commonwealth takes effect this year in the form of a new government accounting standard that requires the commonwealth to account for the entire future cost of retiree health care benefits. We estimate this liability, absent cost containment measures, to be a staggering $14 billion, or nearly one-half of this year's General Fund.

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