1901 - 2007 ODYSSEY:
MEDICAL OPTIONS FOR SOLUTIA CLASS V RETIREES
Articles Archive - By Stephen R. Hinds
In 1901 John F. Queeny founded Monsanto Chemical Works and began producing saccharin as his first product. Over the following ninety-five years Monsanto grew to be the third largest multifaceted chemical company in the United States with 1996 sales totaling $9.3 billion. This occurred via the efforts of John F. Queeny, Edgar M. Queeny, Charles Allen Thomas and a host of other very capable CEOs and senior executives -- along with the creative intelligence and dedication of a hundred thousand professional and hourly employees over that time frame.
In 1996 Monsanto embarked upon a new strategy that forever changed the company. Decisions were made to spin-off the $3 billion Chemicals business in 1997 and to form a new Life Sciences company from the remaining operations in Searle Pharmaceuticals, Agricultural Products, planned developments in plant biotechnology and acquisitions of seed companies.
The Chemicals business was subsequently renamed Solutia and given a large debt burden which severely limited its options. The Monsanto name remained with the new Life Sciences company which embarked upon a gargantuan acquisition program of major seed companies. That acquisition program quickly created a financial crisis forcing Monsanto to seek a merger with American Home Products which, unfortunately, fell apart before it could be consummated. Monsanto then sought other merger/acquisition opportunities and was eventually acquired by Pharmacia in 2000. Later that year Pharmacia created an IPO of approximately 15% of the Agricultural Products business and in late 2001 stated their intention to spin-off the remaining 85% to stockholders in 2002. That then means that Pharmacia will be left with only the Searle Pharmaceuticals business -- their original primary objective in the acquisition -- while the balance of the original Monsanto Company is left in two separate pieces to struggle. What a tragedy the last five years have wrought -- for Monsanto, for Solutia and for all of their employees and retirees!
Additionally, as part of the introduction of the spin-off plan, Robert B. Shapiro, Monsanto’s CEO, sent a letter to all retirees on December 16, 1996 stating, “We have no intention of changing retiree pension and medical benefits. Both new companies will be financially strong; capable of maintaining the same standards as in the past.” Sadly, that did not happen. In 1998 Solutia filed a Class Action Law Suit against all of its retirees alleging the right to amend or end the medical benefits that Monsanto or Solutia had provided in the Plan in effect when the individual retired. That suit resulted in a settlement which was approved by the court on November 1, 2001 and its implications are discussed in the following sections.
THE INFORMATION CONTAINED IN THE BALANCE OF THIS ARTICLE WAS DEVELOPED FOR MY OWN PERSONAL USE AND IS BELIEVED TO BE ACCURATE. SINCE IT MAY BE OF SIGNIFICANT VALUE TO OTHER CLASS V RETIREES, I HAVE ELECTED TO SHARE IT VIA THE NEW ST. LOUIS RETIREE WEBSITE -- WITH A DISCLAIMER AND CAVEAT AS FOLLOWS.
THIS ARTICLE ATTEMPTS TO GIVE SOME EARLY UNDERSTANDING AND GUIDANCE TO CLASS V RETIREES AND THEIR SPOUSES AS THEY ADDRESS THE PERIOD WHEN THEIR SOLUTIA MEDICAL BENEFITS END. HOWEVER, THE AUTHOR MAKES NO CLAIMS FOR THE COMPLETENESS AND ACCURACY OF THE INFORMATION CONTAINED HEREIN. THE RESPONSIBILITY FOR THE COLLECTION OF INFORMATION, THE PROJECTIONS AND ANALYSES OF DATA, THE FORMATION OF CONCLUSIONS AND THE ULTIMATE DECISION OF WHAT TO DO -- MUST OBVIOUSLY REST WITH EACH INDIVIDUAL RETIREE AND SPOUSE!
With that disclaimer and caveat, let’s begin.
The Solutia Class Action Law Suit on Retiree Medical Benefits has created some very adverse impacts on salaried individuals who retired on or after June 25, 1992 through October 18, 2001 (hereafter referred to as Class V retirees). The latter date was specified in the last paragraph of page 6 of Judge Roger Vinson’s “Order and Final Judgment” dated November 1, 2001.
The Class Action Settlement specifies that Solutia’s Class V retirees and spouses will have coverage for the longer of the following two periods:
1) Through December 31, 2006; or
2) Until the retiree or spouse reach Medicare eligible age, but not longer than the fifteenth anniversary of the Settlement Date (November 1, 2016).
To prepare for this Post-Solutia Coverage period, every retiree should visit their local Social Security office to obtain and thoroughly read copies of the documents noted below.
· Medicare & You - 2002, Publication No. CMS-10050; and
· Medigap Policies & Protections, Publication No. 10139.
Prior to reaching Medicare eligible age (age 65), Solutia’s Maximum Aggregate Benefit is $1,500,000 per individual. Upon becoming Medicare eligible, however, Solutia’s subsequent lifetime maximum coverage is reduced to only $65,000 per individual -- and includes the company’s cost of prescription drug charges. Since this $65,000 has caused considerable concern among some retirees, it needs to be explained in a more understandable manner as follows.
Keep in mind that Medicare pays for 80% of the “Medicare-Approved Amount” which is defined as “The fee Medicare sets as reasonable for a covered medical service.” In general the Medicare-Approved amount will typically run about 35-45% of the billed amount -- and most hospitals and doctors will accept that Medicare-Approved amount as their payment in full. Next, Solutia will pay 80% of the remaining 20% of the Medicare-Approved Amount or 16% -- and the individual will be responsible for the balance of 4% (i.e., 100% - 80% - 16% = 4%).
So what will $65,000 of Solutia coverage really provide you? The quick answer is $65,000 divided by 0.16 or $406,250, but here’s the answer using the long method which may be more understandable for many individuals.
Solutia Pays 80%(406,250 - 325,000) 65,000
Individual Pays the 4% Balance 16,250
Keep in mind that Solutia’s $65,000 must include the company’s cost of prescription drugs and, therefore, the actual total coverage being provided will be something less than $406,250. You also need to remember that there are Medicare and Solutia deductibles as well as Solutia co-pays that must be absorbed by the individual.
One additional comment is necessary. If an individual is incurring exceptionally high medical expenses and believes there is a possibility of exhausting the $65,000 of Solutia coverage before the five-year period expires, an HMO should be considered since they usually do not impose a lifetime maximum on incurred medical expenses.
POST-SOLUTIA MEDICAL COVERAGE
Now let’s get to the meat of this article -- a discussion of the Post-Solutia Medical Options for Class V Retirees and their financial implications.
1) 2001 Financial Benchmark
To set the stage, let’s remember that the total premiums paid by a retiree and spouse in the mid-1990s was extremely small at only $288 per year. That premium increased to $770 in 2000, then $888 in 2001 -- and with the new Settlement has now reached $1,440 in 2002.
Since we’re going to use 2001 as the benchmark for our retiree plus spouse financial comparisons to future options, we must add approximately $150 in various office co-pays (10 visits total at $15 each) plus the out-of-pocket cost of prescription drugs. The latter might range from $300 - 1,000 per year which is approximately 15% of the total prescription cost -- with the difference of $1,700 - 5,667 being borne by Solutia/UHC. This quickly shows how important prescription drug coverage is to retirees -- but also how expensive it is for Solutia/UHC and other corporations. All retirees should determine their actual 2001 out-of-pocket and total prescription drug costs by checking with their pharmacy.
Summing up all the figures, the total retiree plus spouse cost for 2001 then becomes a range of $1,338 - 2,038. However, since we are going to make financial comparisons with the year 2007, six years in the future, we must adjust these figures for the inflationary impact of health care expenses. Many agencies (i.e., Hewitt and Mercer) are expecting health care costs to escalate at a 13 - 16% annual rate for the next several years -- although that rate obviously can’t continue for an indefinite period. Even if we arbitrarily use a low rate of 12% annually for the total six-year period, it means that the $1,338 - 2,038 range noted above will essentially double (actual multiplier is 1.974) and become $2,641 - 4,023 by year-end 2007. Big time increases!
2) Background on Medigap Protections Available When Solutia Coverage Ends
As noted on page 7 of the “Medigap Policies & Protections” publication, there are ten federally defined Medigap policies available to individuals at age 65 which are called Plans A through Plan J. Those policies are commonly known as “Medicare Supplement Insurance” and available through most insurance companies.
At age 65 an individual has a six-month “Open Enrollment” period with a guaranteed right to enroll in any one of those ten plans. During that period the individual cannot be denied coverage or charged a higher premium due to one’s medical history. The six-month period begins on the first day of the month an individual reaches age 65.
As noted on pages 10 and 15-18 of the Medigap publication, there are also four other situations where one has the guaranteed right to buy a Medigap policy even when you are not in your Medigap “Open Enrollment” period. Situation #2 on page 10 is the one applicable to Solutia Class V retirees and states (in abbreviated fashion), “Your health coverage (like ………….., an employer group health plan that supplemented or paid some of the costs not paid for by Medicare, ………) ends through no fault of your own, including your moving outside of the plan’s service area.” The only problem here is that if one is beyond the six-month “Open Enrollment” period at age 65, you are limited to only Plans A, B, C and F -- which do not include prescription drug coverage!
With that background in place, let’s now examine the options and financial implications for Class V retirees.
3) Reaching Age 65 Within Six Months of December 31, 2006
In late 2006 there is a fork in the road for Class V retirees depending on one’s age at that time. The first fork is for those who, by chance at that moment, reach age 65 with its six-month guaranteed right to enroll in any of ten federally defined Medigap policies offered by insurance companies.
Those very fortunate individuals would probably choose either a Plan F (no drug coverage) -- or more probably a Plan H or Plan J Medigap policy with the latter two providing prescription drug coverage that pays 50% of drug costs up to a maximum of $1,250 per year (Plan H) and $3,000 per year (Plan J) -- after first absorbing a $250 deductible charge (see pages 5-8 of Medigap Policies & Protections).
The annual 2001 cost of these three policies is shown below based upon an “Issue Age of 65”. This information was supplied to me in mid-2001 by AARP/UnitedHealthcare (800/272-2146) and by AIChE/Life Investors Insurance Company of America (800/749-6983). As you will note in the following table, the AIChE/LIICA premiums are considerably less than the AARP/UHC amounts, and the reason given to me is that LLICA operates from a central headquarters in Baltimore without the burdensome costs of multiple locations throughout the nation (i.e., a concept similar to that used by AARP/Hartford and Geico operations for auto insurance). Additionally, I’m told LLICA provides Medigap insurance for members of most professional organizations, not just the AIChE. When you are interested in Medigap insurance, be sure to check it out.
ANNUAL PREMIUMS (2001 $)
Plan F Plan H Plan J
AARP/UHC $3,030 $3,996 $5,196
AIChE/LIICA 1,584 2,616 4,464
Difference $1,446 $1,380 $ 732
Using a 12% inflation rate to convert these figures to 2007 dollars generates the revised table shown below.
ANNUAL PREMIUMS (2007 $)
Plan F Plan H Plan J
AARP/UHC $5,981 $7,887 $10,256
AIChE/LIICA 3,127 5,164 8,811
Difference $2,854 $2,723 $ 1,445
Shocking numbers! The only positive note is that since these are “Issue Age” premiums, they cannot increase after your enrollment -- unless the insurance company increases them for all holders of the same policy within your specific state. For reference, the last increase on the LIICA Plan F policy for Missouri was 7.5% in 1994.
To these figures we must add the appropriate prescription drug charges borne by the retiree and spouse which can be derived as shown below. However, there is one caveat. The “2001$ Low” figures should reflect actual 2001 costs, but the “2001$ High” figures may need to be modified to reflect each retiree/spouse’s judgmental estimate of what their particular situation might be over the balance of their lives.
100% of Costs (2001 $) $2,000 $6,667
100% of Costs (2007 $) 3,948 13,159
ANNUAL DRUG COSTS (2007 $)
Plan F Plan H Plan J
100% of Drug Costs $3,948 – 13,159 $3,948 – 13,159 $3,948 –13,159
Plan Coverage* NA 1,724 – 2,500 1,724 – 6,000
Net Costs $3,948 – 13,159 $2,224 – 10,659 $2,224 – 7,159
*Deductible NA $500 $500
*50% Max Coverage NA 2,500 6,000
Which then yields the following total premium and prescription drug costs for the two companies’ plans:
TOTAL PLAN COSTS (2007 $) – AARP/UHC
Plan F Plan H Plan J
Premium Costs $5,981 $7,887 $10,256
Net Drug Costs 3,948 – 13,159 2,224 – 10,659 2,224 – 7,159
Net Costs $9,929 – 19,140 $10,111 – 18,546 $12,480 –17,415
TOTAL PLAN COSTS (2007 $) – AIChE/LIICA
Plan F Plan H Plan J
Premium Costs $3,127 $5,164 $8,811
Net Drug Costs 3,948 – 13,159 2,224 – 10,659 2,224 – 7,159
Net Costs $7,075 – 16,286 $7,388 – 15,823 $11,035 –15,970
For simplicity in understanding this information, let’s restructure it into the following table and use the letter k to designate thousands (i.e., $9.9k means $9,900).
TOTAL PLAN COSTS (2007 $k)
LOW DRUG COSTS HIGH DRUG COSTS
UHC LIICA UHC LIICA
Plan F $9.9 $7.1 $19.1 $16.3
Plan H 10.1 7.4 18.5 15.8
Plan J 12.5 11.0 17.4 16.0
When compared to the 2001 Solutia Financial Benchmark costs (in 2007 $) of -- $2.6k - 4.0k, one concludes:
· All Plans have extremely onerous cost increases (2.7X – 4.8X), particularly at the high end of the drug cost range;
· Within each supplier’s offerings, the total costs for Plans F and H are virtually identical at the low end of the drug cost range and within $600 of each other at the high end of the drug cost range -- which means Plan H is preferable because of its greater safety in coverage;
· Plan J appears to be warranted only if drug costs are expected to be very high -- but unfortunately, the long-range drug outlook can’t be known with any precision when the decision must be made; and finally
· The single most important factor in the total analysis is -- the inflation rate on health care expenses! Hopefully the future inflation rate will turn out to be to be something significantly less than the 13 - 16% currently being forecast for the next several years and also significantly less than the 12% average used for the six years of this analysis.
4) Reaching Medicare Eligible Age (Age 65) Beyond December 31, 2006
The individuals in this group can still use the final financial table in the preceding section to get some sense of the possible impact -- with one adjustment. The figures must be increased at a 12% annual rate of inflation for the number of years involved (or fractions thereof).
5) Reaching Medicare Eligible Age (Age 65) Before July 1, 2006
These individuals would, unfortunately, be beyond their six-month “Open Enrollment” period and, therefore, be eligible for only Plans A, B, C and F -- with the latter being the preferred coverage. The final financial table in Section 3 specifies the probable cost impact.
The loss of Solutia Medical Benefits for Class V Retirees will have a major adverse impact on most individuals. Hopefully, this analysis has provided some insight into the possible ramifications and alternatives so that all can begin to take action to meet those new challenges.
There are two additional subjects I’ve researched which I will relay to you.
First, I’ve discussed an interesting potential with an expert in the Medicare/Medigap area in Jefferson City, Missouri (Missouri Patient Care - Customer Services Help Line; 800/347-1016, Ext. 191). We begin with the premise that prescription drug coverage is desirable for a retiree after Solutia’s medical coverage ends, but is available only during the six-month Open Enrollment period at age 65. My question was, ”If a retiree will reach that Open Enrollment period at any time before July 1, 2006, can he or she purchase a Plan H or Plan J policy -- and then cancel the Solutia coverage once the new Medigap policy is in effect?” The essence of the answer was that it’s done all the time -- but it’s absolutely critical that the new policy be in effect before the old policy is cancelled in order to avoid a lapse in healthcare coverage that could have disastrous consequences. Additionally, the individual should check with the employer (Solutia) in advance to be sure that the employer’s medical coverage can be terminated during the year at the discretion of the retiree.
If used, this option would give retirees additional flexibility in obtaining prescription drug coverage. The downside is that it would increase near-term costs in order to possibly reduce long-term expenses. The final decision must then be based upon net cost comparisons, similar to those presented earlier in this article, of: 1) The new Medigap Plan (H or J) versus Solutia coverage for the remaining period through December 31, 2006; plus 2) The new Medigap Plan (H or J) versus Plan F over the expected balance of the retiree’s life.
Secondly, I’ve discussed the subject of individual (not corporately sponsored) Medicare HMOs with United Healthcare (Kevin Donovan, 314/592-7996) and Mercy Health Plans (Michael Keeven, 314/214-8038) here in St. Louis. These plans might be of some future interest to retirees depending on their situation and needs. I’ve provided a capsule summary of three offerings -- compared to the Solutia/UHC Medicare Complete HMO which was offered to St. Louis employees and retirees in 2002 (all figures are in 2002 $). The Mercy Premier Select plan should be of significant interest because of its unlimited generic drug coverage and its lower daily and maximum charges for hospital expenses.
HMOs (2002 $)
Solutia/UHC Individ. UHC Individ. Mercy Premier Plus
MC Complete MC Complete Basic Select
Annual Premiums (H+W) $678 $-0- $1,416 $1,896
Hospital Cost ($/Day):
Days 1 – 60 $100 - $100 $100
Days 1 – 90 - $225 - -
$Max $500 $500
Generic - 30 day supply $8 $12 $15 $15
Brand - 30 day supply $20 $50 $40 $40
Annual Limits/Person Unlimited(UL) $300 Total $500 Total UL Generic
Two final comments are necessary.
I’ve done my best to help Solutia’s Class V retirees gain some understanding of their medical options -- but as noted in the earlier disclaimer and caveat, the responsibility for all facets of the analysis and decision process must rest with each individual retiree and spouse!
Finally, I’ve communicated everything I know in this article and have also provided various contacts and sources of information. Now the task is for each retiree/spouse to do their own personal investigation and analysis. If they find information that would be helpful to our group at large, I encourage them to share it by publishing an article on this website.