Retiree Health Benefits
Majority of Sponsors Continued to Offer Prescription Drug Coverage and Chose the Retiree Drug Subsidy Gao ID: GAO-07-572 May 31, 2007The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a prescription drug benefit for beneficiaries, called Medicare Part D, beginning in January 2006. The MMA resulted in options for sponsors of employment-based prescription drug benefits, such as a federal subsidy payment--the retiree drug subsidy (RDS)--when sponsors provide benefits meeting certain MMA requirements to Medicare-eligible retirees. The MMA required GAO to conduct two studies on trends in employment-based retiree health coverage and the MMA options available to sponsors. The first study, Retiree Health Benefits: Options for Employment-Based Prescription Drug Benefits under the Medicare Modernization Act (GAO-05-205), was published February 14, 2005. In this second study, GAO determined which MMA prescription drug coverage options sponsors selected, the factors they considered in selecting these options, and the effect these decisions may have on the provision of employment-based health benefits for retirees. GAO identified options that sponsors selected using data from employer benefit surveys and the Centers for Medicare & Medicaid Services (CMS), the federal agency that administers Medicare. To obtain sponsors' views about the factors they considered and the effects of their decisions, GAO also interviewed private and public sector sponsors and experts.
According to survey data GAO reviewed, a majority of retiree health benefit sponsors reported that for 2006 they continued to offer prescription drug coverage and accepted the RDS. However, the size of the reported majority differed across the surveys. For example, one survey of private sector sponsors with 1,000 or more employees found that 82 percent of these sponsors accepted the RDS for 2006. Another survey of private and public sponsors found that 51 percent of surveyed sponsors with 500 or more employees accepted the RDS for 2006. Data from CMS showed that more than 3,900 sponsors, representing about 7 million retirees, were approved for the RDS for 2006. According to the surveys GAO reviewed, much smaller percentages of sponsors reported selecting other MMA options for 2006. For 2007, according to one survey, 78 percent of surveyed employers reported that they planned to apply for the RDS for that year. CMS data showed that about 3,600 sponsors were approved for the RDS for 2007. Public and private sponsors GAO interviewed reported considering a variety of factors when selecting MMA prescription drug coverage options, including whether they could offer the same retiree health benefits they offered prior to the MMA and their ability to save on costs. In general, in order to implement most MMA options, sponsors would likely have to change the prescription drug benefits they offer. For example, sponsors that offer their own Medicare Part D plan must generally meet all CMS requirements for Part D plans, such as providing coverage for specific categories of prescription drugs. In contrast, sponsors that select the RDS option can offer the same retiree health benefits they offered prior to the MMA, as long as a sponsor's coverage remains at least actuarially equivalent to the standard Part D benefit. When deciding which, if any, options to pursue, public sponsors were affected by some factors that did not affect private sponsors. In the short term, sponsors' decisions regarding the MMA options appear to have resulted in benefits remaining relatively unchanged, in part because a majority of surveyed sponsors reported that they continued to offer prescription drug benefits and accepted the RDS the first 2 years the RDS was offered. Over the longer term, the effect of sponsors' decisions about the MMA options is unclear. For example, some experts GAO interviewed indicated that the MMA may extend the amount of time that sponsors offer benefits without reducing coverage, while other experts said the availability of the Medicare Part D benefit may make it more likely that sponsors will stop offering prescription drug benefits for retirees. In addition, it is unclear to what extent sponsors will continue to select the same MMA option in the future. To the extent that sponsors that have accepted the RDS select other MMA options, sponsors' provision of retiree health benefits may change. In commenting on a draft of this report, CMS and four experts agreed with the report's findings.
GAO-07-572, Retiree Health Benefits: Majority of Sponsors Continued to Offer Prescription Drug Coverage and Chose the Retiree Drug Subsidy
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
May 2007:
Retiree Health Benefits:
Majority of Sponsors Continued to Offer Prescription Drug Coverage and
Chose the Retiree Drug Subsidy:
GAO-07-572:
GAO Highlights:
Highlights of GAO-07-572, a report to congressional committees
Why GAO Did This Study:
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) created a prescription drug benefit for beneficiaries,
called Medicare Part D, beginning in January 2006. The MMA resulted in
options for sponsors of employment-based prescription drug benefits,
such as a federal subsidy payment”the retiree drug subsidy (RDS)”when
sponsors provide benefits meeting certain MMA requirements to Medicare-
eligible retirees. The MMA required GAO to conduct two studies on
trends in employment-based retiree health coverage and the MMA options
available to sponsors. The first study, Retiree Health Benefits:
Options for Employment-Based Prescription Drug Benefits under the
Medicare Modernization Act (GAO-05-205), was published February 14,
2005. In this second study, GAO determined which MMA prescription drug
coverage options sponsors selected, the factors they considered in
selecting these options, and the effect these decisions may have on the
provision of employment-based health benefits for retirees.
GAO identified options that sponsors selected using data from employer
benefit surveys and the Centers for Medicare & Medicaid Services (CMS),
the federal agency that administers Medicare. To obtain sponsors‘ views
about the factors they considered and the effects of their decisions,
GAO also interviewed private and public sector sponsors and experts.
What GAO Found:
According to survey data GAO reviewed, a majority of retiree health
benefit sponsors reported that for 2006 they continued to offer
prescription drug coverage and accepted the RDS. However, the size of
the reported majority differed across the surveys. For example, one
survey of private sector sponsors with 1,000 or more employees found
that 82 percent of these sponsors accepted the RDS for 2006. Another
survey of private and public sponsors found that 51 percent of surveyed
sponsors with 500 or more employees accepted the RDS for 2006. Data
from CMS showed that more than 3,900 sponsors, representing about 7
million retirees, were approved for the RDS for 2006. According to the
surveys GAO reviewed, much smaller percentages of sponsors reported
selecting other MMA options for 2006. For 2007, according to one
survey, 78 percent of surveyed employers reported that they planned to
apply for the RDS for that year. CMS data showed that about 3,600
sponsors were approved for the RDS for 2007.
Public and private sponsors GAO interviewed reported considering a
variety of factors when selecting MMA prescription drug coverage
options, including whether they could offer the same retiree health
benefits they offered prior to the MMA and their ability to save on
costs. In general, in order to implement most MMA options, sponsors
would likely have to change the prescription drug benefits they offer.
For example, sponsors that offer their own Medicare Part D plan must
generally meet all CMS requirements for Part D plans, such as providing
coverage for specific categories of prescription drugs. In contrast,
sponsors that select the RDS option can offer the same retiree health
benefits they offered prior to the MMA, as long as a sponsor‘s coverage
remains at least actuarially equivalent to the standard Part D benefit.
When deciding which, if any, options to pursue, public sponsors were
affected by some factors that did not affect private sponsors.
In the short term, sponsors‘ decisions regarding the MMA options appear
to have resulted in benefits remaining relatively unchanged, in part
because a majority of surveyed sponsors reported that they continued to
offer prescription drug benefits and accepted the RDS the first 2 years
the RDS was offered. Over the longer term, the effect of sponsors‘
decisions about the MMA options is unclear. For example, some experts
GAO interviewed indicated that the MMA may extend the amount of time
that sponsors offer benefits without reducing coverage, while other
experts said the availability of the Medicare Part D benefit may make
it more likely that sponsors will stop offering prescription drug
benefits for retirees. In addition, it is unclear to what extent
sponsors will continue to select the same MMA option in the future. To
the extent that sponsors that have accepted the RDS select other MMA
options, sponsors‘ provision of retiree health benefits may change.
In commenting on a draft of this report, CMS and four experts agreed
with the report‘s findings.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-572].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John E. Dicken at (202)
512-7119 or dickenj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Majority of Sponsors Reported Continuing to Offer Prescription Drug
Coverage and Accepting the RDS:
Sponsors Considered a Variety of Factors When Selecting MMA
Prescription Drug Coverage Options:
In the Short Term, Sponsors' Decisions Regarding MMA Options Resulted
in Benefits Remaining Relatively Unchanged, but over the Longer Term
the Effect Is Unclear:
Agency and Other External Comments:
Appendix I: Information on Employment-Based Retiree Health Coverage,
Updated since GAO's 2005 Report:
Appendix II: Alternative Approaches to Providing Retiree Health
Coverage Suggested by Sponsors and Experts:
Appendix III: Scope and Methodology:
Appendix IV: Comments from the Centers for Medicare & Medicaid
Services:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number and Percentage of Sponsors Approved for the RDS, and
Percentage of Retirees Affected, by Sponsor Type, for 2006 and 2007:
Table 2: Alternative Approaches to Providing Employment-Based Retiree
Health Coverage Described by Sponsors and Experts:
Figures:
Figure 1: Mercer Survey Results--Percentage of Employers with 500 or
More Employees Offering Health Benefits to Medicare-Eligible Retirees,
1993-2006:
Figure 2: Kaiser/HRET Survey Results--Percentage of Employers with 200
or More Employees Offering Health Benefits to All Retirees and to
Medicare-Eligible Retirees, 1991-2006:
Figure 3: Percentage of Medicare-Eligible Retirees and Their Insured
Dependents with Employment-Based Health Benefits, by Age Group, 1995-
2005:
Abbreviations:
CMS: Centers for Medicare & Medicaid Services:
CPS: Current Population Survey:
FEHBP: Federal Employees Health Benefits Program:
GASB: Governmental Accounting Standards Board:
HRA: health reimbursement arrangement:
HRET: Health Research and Educational Trust:
HSA: health savings account:
MA-PD: Medicare Advantage prescription drug:
MCBS: Medicare Current Beneficiary Survey:
MEPS: Medical Expenditure Panel Survey:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
MSA: medical savings account:
OPM: Office of Personnel Management:
PDP: prescription drug plan:
RDS: retiree drug subsidy:
VEBA: voluntary employees' beneficiary association:
United States Government Accountability Office:
Washington, DC 20548:
May 31, 2007:
Congressional Committees:
Before 2006, Medicare, the federal program that finances health care
benefits for nearly 43 million elderly and disabled beneficiaries, did
not generally provide coverage for outpatient prescription drugs. If
Medicare beneficiaries had such coverage at all, it was typically
obtained outside of the program--for example, through policies with
drug coverage that supplemented Medicare or through Medicaid. In
particular, Medicare beneficiaries who were retired could enroll in
health plans with prescription drug coverage offered through former
employers or other employment-based groups, such as unions. To help
Medicare beneficiaries with increasing prescription drug costs and
encourage employment-based health care coverage, especially for
prescription drug coverage for retirees, Congress passed the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).
Among its provisions, the MMA established an outpatient prescription
drug benefit, known as Medicare Part D, beginning January 1,
2006.[Footnote 1] The MMA also resulted in various options to encourage
retiree health benefit sponsors[Footnote 2] to offer prescription drug
benefits to retired Medicare beneficiaries.
Specifically, among the options resulting from the MMA, which in this
report we refer to as MMA options, sponsors can:
² offer health plans for retirees that provide comprehensive
prescription drug coverage, which retirees can use in lieu of Medicare
Part D; sponsors with plans that offer prescription drug benefits
meeting certain MMA requirements will receive a federal subsidy
payment, known as the retiree drug subsidy (RDS);
² offer health plans for retirees that supplement--or "wrap around"--
retirees' Part D prescription drug benefit;
² offer their own Medicare Part D plan;
² contract with private plans that provide Medicare Part D benefits;
or:
² pay for some or all of the Part D premiums for their eligible
retirees.
The MMA required that we conduct two studies on trends in employment-
based retiree health coverage and the MMA options sponsors selected for
providing employment-based prescription drug coverage for
retirees.[Footnote 3] In our first study, published in 2005, we
reported that the percentage of employers offering retiree health
coverage had declined beginning in the early 1990s but had leveled off
by the early 2000s.[Footnote 4] We also reported that many sponsors had
not made final decisions about which MMA prescription drug options they
would choose for their Medicare-eligible retirees,[Footnote 5] although
many sponsors were considering accepting the RDS as a primary option.
In this study, we are reporting on (1) which MMA prescription drug
coverage options sponsors selected, (2) the factors they considered in
selecting these options, and (3) the effect these decisions may have on
sponsors' provision of employment-based health benefits for retirees.
The MMA also required us to report information on employment-based
retiree health coverage, including information updated since our first
study. We are including this information in appendix I. In addition,
the MMA required us to describe alternative approaches for the
provision of employment-based retiree health coverage that sponsors and
others say may help maintain, expand, or improve upon retiree health
coverage. We are including this information in appendix II.
To determine which MMA prescription drug coverage options sponsors
selected, we reviewed survey data collected by benefit consulting firms
on the options that sponsors reported selecting for 2006 and the
options that sponsors reported that they planned to select for 2007.
The surveys we reviewed included a survey conducted by Mercer Health &
Benefits of employers--including large employers, defined as those with
at least 500 employees--that offered employment-based health benefits.
The Mercer survey, which was based on a random sample of private and
public employers, can be projected nationwide.[Footnote 6] We also
reviewed data from a survey conducted by the Kaiser Family Foundation
and Hewitt Associates for a nonrandom sample of large private sector
employers--those with 1,000 or more employees.[Footnote 7] We also
reviewed one survey of multiemployer plans[Footnote 8] and one survey
of state and local public sector sponsors conducted by The Segal
Company.[Footnote 9] The data from the surveys provided us with
information on sponsors' reported selections for 2006 and their plans
pertaining to the MMA options for 2007. In addition, we obtained and
analyzed data on the number and characteristics of sponsors that were
approved for the RDS for these 2 years. We obtained these data from the
Centers for Medicare & Medicaid Services (CMS), the federal agency that
administers Medicare and that is responsible for implementing and
administering the RDS program.
To describe both the factors that sponsors considered in selecting the
MMA options and the effect that sponsors' decisions about the MMA
options may have on the provision of health benefits for retirees, we
relied on the Mercer and Kaiser/Hewitt surveys of private and public
sector employers.[Footnote 10] We reviewed documents from the
literature, including CMS documents, on the factors that sponsors may
consider in selecting the MMA options. We also interviewed officials
from 13 of the 15 private and public sponsors of retiree health
benefits that we reported on in 2005, including the Office of Personnel
Management (OPM), which administers the Federal Employees Health
Benefits Program (FEHBP).[Footnote 11] We also interviewed 2 sponsors
that chose to offer their own Medicare Part D plan in 2006 instead of
implementing the RDS or another MMA option. We did not interview these
sponsors for our 2005 report. In addition, we interviewed several
experts on sponsors' decisions regarding the MMA options, including
experts from five firms providing benefit consulting services primarily
for large public and private sector sponsors; six organizations,
including one representing unions, one representing multiemployer
plans, two representing large employers, and two representing health
plans; one professional organization for actuaries; and other research
organizations. In our interviews with sponsor officials and experts, we
asked open-ended questions about the factors sponsors considered in
making decisions about the MMA options for 2006 and future years, as
well as the effect of these decisions on the provision of health
benefits for retirees. Because we asked the officials and experts we
interviewed open-ended questions, the frequency of our interviewees'
responses is not comparable. Therefore, we report interviewees'
responses without reporting the total number of officials or experts
associated with each response.
We assessed the reliability of the data from the employer benefit
surveys, CMS, and three large federal surveys and determined that the
data were sufficiently reliable for the purposes of our study. (App.
III provides more detailed information on our methodology.) We
performed our work from April 2006 through May 2007 in accordance with
generally accepted government auditing standards.
Results in Brief:
According to survey data we reviewed, a majority of retiree health
benefit sponsors reported that for 2006 they continued to offer
prescription drug coverage and accepted the RDS. However, the size of
the reported majority differed across the surveys. For example, the
2006 Kaiser/Hewitt survey of private sector employers with 1,000 or
more employees found that 82 percent of these employers continued to
offer prescription drug coverage and accepted the RDS for 2006. Another
survey, the 2006 Mercer survey of private and public employers, found
that 51 percent of surveyed employers with 500 or more employees
continued to offer prescription drug coverage and accepted the RDS for
2006. Data from CMS showed that more than 3,900 sponsors, representing
about 7 million retirees, were approved for the RDS for 2006. According
to the surveys we reviewed, much smaller percentages of sponsors
reported selecting other MMA options. For example, the percentage of
sponsors that reported offering supplemental, or "wrap-around,"
coverage ranged from 0 to 13 percent across the surveys. For 2007,
according to the Kaiser/Hewitt survey, 78 percent of surveyed employers
reported that they planned to apply for the RDS for that year. CMS data
showed that about 3,600 sponsors were approved for the RDS for 2007.
Public and private sponsors we interviewed reported considering a
variety of factors when selecting MMA prescription drug coverage
options, including whether they could offer the same retiree health
benefits they offered prior to the MMA and their ability to save on
costs. In general, in order to implement most MMA options other than
the RDS, sponsors would likely have to change the prescription drug
benefits they offer. For example, sponsors that offer their own
Medicare Part D plan must generally meet all CMS requirements for Part
D plans, such as providing coverage for specific categories of
prescription drugs. In contrast, sponsors that select the RDS option
are able to offer the same retiree health benefits they offered prior
to the MMA, as long as a sponsor's coverage remains at least
actuarially equivalent to the standard Part D benefit. Most sponsors we
interviewed told us that the ability to offer the same retiree health
benefits they offered prior to the MMA was an advantage of the RDS.
Sponsors also reported that when selecting an MMA option, they
considered how the RDS and the other MMA options would affect their
ability to save on costs.
While, in the short term, sponsors' decisions regarding the various MMA
options appear to have resulted in the provision of retiree health
benefits remaining relatively unchanged, the effect over the longer
term is unclear. The short-term effect of sponsors' decisions appears
to have resulted in benefits remaining relatively unchanged, in part
because a majority of surveyed sponsors reported that they continued to
offer prescription drug benefits and accepted the RDS for the first 2
years the RDS was offered. In addition, according to the 2005 Mercer
survey, 72 percent of respondents reported that their decisions about
the MMA options would have no effect on their ability to provide
retiree health coverage. Similarly, many sponsors we interviewed told
us that they did not make changes to their retiree health benefits--
including decreasing coverage--in direct response to their decisions in
selecting MMA options. Over the longer term, some experts we
interviewed indicated that the MMA may extend the amount of time that
sponsors offer benefits without reducing coverage. Other experts said
that it was possible the availability of the Medicare Part D benefit
may make it more likely that sponsors will stop offering prescription
drug benefits for retirees. In addition, it is unclear to what extent
sponsors will continue to select the same MMA option in the future. If
sponsors that have accepted the RDS thus far select other MMA options
in subsequent years, their future provision of retiree health benefits
may change.
In commenting on a draft of this report, CMS and four experts agreed
with the report's findings.
Background:
For retirees aged 65 and older, Medicare is typically the primary
source of health insurance coverage. Medicare covers nearly 43 million
beneficiaries. The program covers hospital care as well as physician
office visits and outpatient services and, effective January 1, 2006,
prescription drugs.
Private Supplemental Insurance for Medicare Beneficiaries:
Medicare beneficiaries may rely on private retiree health coverage
through former employment or through individually purchased Medicare
supplemental insurance (known as Medigap) to cover some or all of the
costs Medicare does not cover, such as deductibles, copayments, and
coinsurance. For 2004, the most recent data available, the Medicare
Current Beneficiary Survey (MCBS) found that about one-third of
Medicare-eligible beneficiaries obtained supplemental coverage from a
former employer or union.[Footnote 12] Employment-based retiree health
benefits are typically offered as a voluntary benefit to retirees,
thereby giving sponsors of these benefits the option of decreasing or
eliminating benefits. However, some sponsors may be prevented from
making immediate changes to coverage because of union contracts, for
example. Benefit surveys have found that the percentage of employers
offering retiree health benefits has decreased, beginning in the early
1990s. For example, according to a series of surveys conducted by
Mercer, the percentage of employers with 500 or more employees offering
health insurance to Medicare-eligible retirees declined from 44 percent
in 1993 to 29 percent in 2006, although this trend had leveled off from
2001 through 2006.[Footnote 13] (See app. I for more information on
employment-based retiree health coverage.)
Sponsors typically integrate their retiree health benefits with
Medicare once retirees reach age 65, with Medicare as the primary payer
and the sponsor as the secondary payer. Several types of integration
occur between sponsors and Medicare. For example, some sponsors
coordinate through a carve out approach, in which the sponsor
calculates its normal benefit and then subtracts (or carves out) the
Medicare benefit, generally leaving the retiree with out-of-pocket
costs comparable to having the employment-based plan without Medicare.
Another approach used by sponsors is full coordination of benefits, in
which the plan pays the difference between the total health care
charges and the Medicare reimbursement amount, often providing retirees
complete coverage and protection from out-of-pocket costs.
The provision of employment-based retiree health benefits may vary
depending on a variety of factors, including whether the sponsor is in
the private or public sector, and by industry type. The 2006 Kaiser
Family Foundation and Health Research and Educational Trust (HRET)
survey, for example, showed that 82 percent of state and local
government employers with 200 or more employees offered coverage to
retirees, compared with 35 percent of employers with 200 or more
employees across all employer industries that offered coverage to
retirees.[Footnote 14] Coverage can also differ between retirees under
age 65 and those eligible for Medicare, although sponsors often cover
both groups of retirees. For example, some sponsors offer retirees
under age 65 a preferred provider organization plan but offer a fee-
for-service plan for retirees eligible for Medicare. While the
provision of employment-based retiree health benefits varies by
employer size, plan type, industry, and whether retirees are Medicare-
eligible, these benefits almost always include coverage of prescription
drugs.
The MMA Prescription Drug Benefit:
MMA created a prescription drug benefit for beneficiaries, called
Medicare Part D, which became effective January 1, 2006. This voluntary
benefit is available to all Medicare beneficiaries and is the first
comprehensive prescription drug benefit ever offered under the Medicare
program.[Footnote 15] In January 2007 (the most recent data available)
CMS reported that approximately 39 million beneficiaries were receiving
prescription drug coverage from a combination of Medicare Part D,
employment-based coverage, and other sources, such as the Department of
Veterans Affairs.[Footnote 16]
The drug benefit is offered primarily through two types of private
plans created as a result of the MMA: stand-alone prescription drug
plans (PDP) that supplement fee-for-service Medicare, and Medicare
Advantage prescription drug (MA-PD) plans, such as coordinated care
plans, that cover drugs and other Medicare benefits.[Footnote 17] To be
in operation for 2006, prospective PDPs and MA-PD plans had to apply by
March 2005 and were approved in September 2005. At a minimum, these
plans were required to offer the standard Medicare Part D benefit or
alternative coverage that was at least equal in value.[Footnote 18]
According to the Kaiser Family Foundation, plans approved for 2006
often varied from the standard Part D benefit in benefit design and
covered drugs. For example, although the standard Part D benefit had a
$250 deductible for 2006, Kaiser reported that 58 percent of PDPs and
79 percent of MA-PD plans approved for 2006 had no deductible
requirement. In 2007, a total of 1,875 PDPs are offered nationally
across 34 PDP regions.
The standard Medicare Part D benefit in 2007 has a $265 deductible (up
from $250 in 2006) and 25 percent coinsurance up to an initial coverage
limit of $2,400 in total drug costs ($2,250 in 2006), followed by a
coverage gap in which enrollees pay 100 percent of their drug costs
until they have spent $3,850 out of pocket ($3,600 in 2006).
Thereafter, the plan pays approximately 95 percent of total drug costs.
The standard benefit amounts are set to increase annually by the rate
of per capita Part D spending growth. Assistance with drug benefit
premiums and cost-sharing is available for certain low-income
beneficiaries.
Options Available to Sponsors under Medicare Part D:
The MMA resulted in several options for sponsors of employment-based
retiree health plans to provide prescription drug coverage to Medicare-
eligible retirees. These options are as follows:
Retiree Drug Subsidy (RDS). Sponsors with plans ending in 2007 that
offer prescription drug coverage that is actuarially equivalent to that
under Part D can receive a federal tax-free subsidy equal to 28 percent
of the allowable gross retiree prescription drug costs[Footnote 19]
over $265 (up from $250 for plans ending in 2006) through $5,350 (up
from $5,000 for plans ending in 2006), with a maximum subsidy of $1,423
per beneficiary for each individual eligible for Part D who is enrolled
in the employment-based plan instead of Part D. Actuarial equivalence,
which is attested to by a qualified actuary, is intended to certify
that a retiree health benefit sponsor's coverage is at least as
generous as the standard Part D coverage.[Footnote 20] Sponsors must
demonstrate actuarial equivalence to qualify for the RDS, and sponsors
will only receive the RDS for those Medicare beneficiaries who do not
enroll in the Part D benefit. Sponsors may opt to receive RDS payments
on a monthly, quarterly, or annual basis.
In order to receive the RDS, sponsors must apply to and receive
approval from CMS. For 2007 and subsequent years, sponsors are required
to apply for the RDS no later than 90 days prior to the beginning of
the plan year.[Footnote 21] For example, sponsors that applied for a
calendar year 2007 plan would have had to apply no later than midnight
on October 2, 2006. Additional steps involved in applying for and
receiving the RDS include:
² submitting a qualified actuary's attestation that the plan meets the
RDS actuarial equivalence standard;
² certifying that the creditable coverage status of the plan has been
or will be disclosed to plan participants and CMS;[Footnote 22]
² electronically submitting and periodically updating enrollment
information about retirees and dependents; and:
² electronically submitting aggregate data about drug costs incurred
and reconciling costs at year-end.
Provide Supplemental Coverage. Sponsors can set up their own separate
plans that supplement, or wrap around, Part D coverage.
Apply to Offer Own PDP or MA-PD Plan. Sponsors can apply to CMS to
offer their own PDP or MA-PD plan for retirees.[Footnote 23] CMS has
waived or modified Part D requirements added by the MMA that hinder the
design of, the offering of, or the enrollment in a Part D plan offered
by a sponsor. For example, CMS has issued guidance that allows sponsors
to limit coverage to retirees only, whereas other Part D plans must
offer coverage to all eligible individuals residing within a certain
location.
Contract with a PDP or MA-PD Plan. Sponsors can contract with a PDP or
MA-PD plan to offer the standard Part D prescription drug benefits or
enhanced benefits to the sponsors' retirees who are eligible for
Medicare. For example, an enhanced benefit could allow retirees to pay
a lower deductible or lower copayment than the standard Part D benefit
requires. As with the previous MMA option, CMS has waived or modified
Part D requirements that hinder the design of, the offering of, or the
enrollment in these types of arrangements.
Payment of Part D Premiums. Sponsors can pay for some or all of the
Part D premiums for their eligible retirees.
Majority of Sponsors Reported Continuing to Offer Prescription Drug
Coverage and Accepting the RDS:
According to survey data we reviewed, the majority of surveyed retiree
health benefit sponsors reported that they continued to offer
prescription drug coverage and accepted the RDS for 2006. Survey data
also indicated that much smaller percentages of sponsors took other MMA
options--such as offering supplemental, or wrap-around, prescription
drug coverage or contracting with a PDP or MA-PD plan.
Majority of Sponsors Reported Accepting the RDS:
According to survey data we reviewed, the majority of surveyed sponsors
reported that they continued to offer prescription drug coverage and
accepted the RDS for plans ending in 2006. However, the size of the
reported majority differed across the surveys. For example, the 2006
Kaiser/Hewitt survey, which surveyed private sector employers that
offered retiree health benefits and had 1,000 or more employees, found
that 82 percent of these employers accepted the RDS for 2006.[Footnote
24] In contrast, the 2006 Mercer survey found that 51 percent of
surveyed private and public employers that offered retiree health
benefits and had 500 or more employees continued to offer prescription
drug coverage and accepted the RDS for 2006.[Footnote 25] Another
survey of state and local public sector sponsors that offered retiree
health benefits found that 79 percent reported accepting the RDS for
2006.[Footnote 26] Similarly, a survey of multiemployer plan sponsors
that offered retiree health benefits found that 71 percent reported
accepting the RDS for 2006.[Footnote 27]
According to representatives from both Kaiser/Hewitt and Mercer, the
percentages of surveyed employers that reported accepting the RDS--82
percent and 51 percent, respectively--may be different because the
employers surveyed differed in size between the two surveys. According
to the 2005 Mercer survey, smaller employers may have such a limited
number of Medicare-eligible retirees that they do not believe the RDS
would be worth the cost and administrative burden associated with
applying for the RDS.[Footnote 28] Furthermore, experts we interviewed
told us that a minimum of 50 to 100 retirees is needed to make it
worthwhile for employers to apply for the RDS.[Footnote 29]
Data from CMS show that more than 3,900 sponsors, representing
approximately 7 million retirees, were approved for the RDS for
2006.[Footnote 30] The number of retirees represented by sponsors that
year ranged widely, from 1 to 444,818, with a median of 174 retirees.
According to CMS data, commercial and government sponsors[Footnote 31]
made up approximately 70 percent of sponsors approved for the RDS and
represented approximately 90 percent of retirees covered by the RDS for
2006. Nonprofit, religious, and union sponsors made up the remaining
approximately 30 percent of sponsors and approximately 10 percent of
retirees covered by the RDS for 2006.
For 2007, the Kaiser/Hewitt survey reported that the majority of
surveyed employers planned to take the RDS. Specifically, 78 percent of
surveyed private sector employers that offered retiree health benefits
and had 1,000 or more employees planned to take the RDS for 2007--
compared with 82 percent that took the RDS for 2006. CMS preliminary
data for 2007 showed that the number of sponsors approved for the RDS
decreased somewhat from 2006, to about 3,600 sponsors.[Footnote 32] CMS
officials indicated that the decrease in the number of sponsors between
2006 and 2007 could be explained by a combination of several factors,
including mergers by sponsors offering retiree health benefits,
differences in the time of year when data were extracted,[Footnote 33]
and the movement of some sponsors from the RDS to other MMA options.
According to CMS data, in 2007 the number of retirees represented by
sponsors approved for the RDS continued to show a wide range as in
2006, from 1 to 196,840, with a median of 169 retirees. The percentage
of sponsors approved for the RDS by sponsor type, such as commercial or
government, remained relatively consistent from 2006 to 2007. (See
table 1.)
Table 1: Number and Percentage of Sponsors Approved for the RDS, and
Percentage of Retirees Affected, by Sponsor Type, for 2006 and 2007:
Sponsor type[C]: Commercial;
2006[A]: Number of sponsors (percentage)[D]: 1,433 (36);
2006[A]: Percentage of retirees[E]: 58;
2007[B]: Number of sponsors (percentage)[D]: 1,287 (36);
2007[B]: Percentage of retirees[E]: 53.
Sponsor type[C]: Government;
2006[A]: Number of sponsors (percentage)[D]: 1,307 (33);
2006[A]: Percentage of retirees[E]: 30;
2007[B]: Number of sponsors (percentage)[D]: 1,220 (34);
2007[B]: Percentage of retirees[E]: 33.
Sponsor type[C]: Nonprofit;
2006[A]: Number of sponsors (percentage)[D]: 566 (14);
2006[A]: Percentage of retirees[E]: 5;
2007[B]: Number of sponsors (percentage)[D]: 515 (14);
2007[B]: Percentage of retirees[E]: 5.
Sponsor type[C]: Religious;
2006[A]: Number of sponsors (percentage)[D]: 107 (3);
2006[A]: Percentage of retirees[E]: 1;
2007[B]: Number of sponsors (percentage)[D]: 93 (3);
2007[B]: Percentage of retirees[E]: 1.
Sponsor type[C]: Union;
2006[A]: Number of sponsors (percentage)[D]: 526 (13);
2006[A]: Percentage of retirees[E]: 6;
2007[B]: Number of sponsors (percentage)[D]: 492 (14);
2007[B]: Percentage of retirees[E]: 8.
Total (100%);
2006[A]: Number of sponsors (percentage)[D]: 3,939;
2006[A]: Percentage of retirees[E]: [Empty];
2007[B]: Number of sponsors (percentage)[D]: 3,607;
2007[B]: Percentage of retirees[E]: [Empty].
Source: GAO analysis of CMS data.
[A] Data on the characteristics of sponsors that were approved for the
RDS for 2006 are based on all complete applications that were accepted
by CMS for the RDS as of September 11, 2006.
[B] Preliminary data on the characteristics of sponsors that were
approved for the RDS for 2007 are based on all complete applications
that were accepted by CMS for the RDS as of February 16, 2007.
[C] Sponsor types are self-reported on the RDS application using the
categories listed in the table.
[D] Percentages do not add to 100 because of rounding.
[E] This percentage is based on the number of retirees covered by plans
whose sponsors were approved for the RDS. We only report percentages of
retirees because CMS data by sponsor type double counts certain types
of retirees, such as those who have duplicate coverage and those who
switch plans midyear. CMS did not provide a unique number of retirees
linked to the number of sponsors that were approved for the RDS for
plans ending in 2006 and 2007. According to CMS officials, the RDS
program has no current business or operational need to calculate the
unique number of retirees linked to the number of sponsors that were
approved for the RDS for plans ending in 2006 and 2007 and therefore
CMS has not expended the RDS system development resources it has to
code its system to allow for this calculation.
[End of table]
Smaller Percentages of Sponsors Reported Selecting MMA Options Other
than the RDS:
All of the surveys we reviewed reported much smaller percentages of
sponsors taking MMA options other than the RDS for 2006. In these
surveys, the percentage of sponsors that reported offering
supplemental, or "wrap-around," prescription drug coverage in 2006
ranged from 0 to 13 percent. For example, the Mercer survey of private
and public employers that offered retiree health benefits and had 500
or more employees reported that 13 percent offered supplemental
coverage in 2006. Similarly, among the surveys we reviewed, the
percentage of sponsors that reported contracting with a PDP or MA-PD
plan ranged from 3 percent to 7 percent. For example, the Kaiser/Hewitt
survey reported that 3 percent of surveyed private sector employers
that offered retiree health benefits and had 1,000 or more employees
contracted with a PDP or MA-PD plan in 2006. In addition, CMS reported
that few sponsors applied to offer their own PDP or MA-PD plan for 2006
and 2007. Specifically, CMS reported that for the 2006 and 2007
contract years, there were 10 approved sponsors that offered their own
PDP and none that offered their own MA-PD plan.
Sponsors Considered a Variety of Factors When Selecting MMA
Prescription Drug Coverage Options:
Public and private sponsors we interviewed reported considering a
variety of factors when selecting MMA prescription drug coverage
options. Sponsors cited factors such as whether they could offer the
same retiree health benefits they offered prior to the MMA, their
ability to save on costs, the ease of explaining the option to
retirees, the administrative requirements associated with each option,
and the extent of information available on the options. When making
decisions about which, if any, MMA option to pursue, public sponsors we
interviewed were affected by some factors that private sponsors did not
face.
Sponsors Considered Ability to Offer the Same Retiree Health Benefits:
Sponsors we interviewed told us that when selecting an MMA prescription
drug coverage option, they considered the extent to which they would be
able to continue to offer the same retiree health benefits they had
offered before implementing the MMA option. In general, in order to
implement most MMA options other than the RDS, sponsors would likely
have to change the prescription drug benefits they offer. For example,
sponsors that offer their own PDP or MA-PD plan must generally meet all
CMS requirements for Part D plans,[Footnote 34] such as including
specific categories of prescription drugs on their
formularies.[Footnote 35] One sponsor we interviewed also told us that
it did not consider the option of paying Part D premiums because that
option alone would result in a reduction in the level of prescription
drug coverage offered to retirees, compared with coverage offered
through the sponsor. In contrast, sponsors that select the RDS option
are able to offer the same retiree health benefits they offered prior
to the MMA, as long as a sponsor's coverage remains at least as
generous as the standard Part D benefit, thus meeting the actuarial
equivalence standard to qualify for the RDS.[Footnote 36] In addition,
the final rule implementing the MMA prescription drug benefit that was
published in January 2005 gave sponsors flexibility in terms of how
they could meet the actuarial equivalence standard.[Footnote 37] Some
of the sponsors and experts we interviewed credited this flexibility
with allowing sponsors to meet actuarial equivalence without having to
change the retiree health benefits they offered. For example, one
sponsor told us that it was able to combine multiple benefit options to
meet actuarial equivalence, which allowed the sponsor to collect the
RDS for most retirees--including those paying the full cost of their
coverage--without making changes to the benefits offered. Prior to the
final rule, this sponsor did not plan on collecting the RDS for the
group of retirees paying the full cost of coverage because the coverage
would not have met the actuarial equivalence standard on its own. Most
sponsors we interviewed told us that the ability to offer the same
retiree health benefits they offered prior to the MMA was an advantage
of the RDS. In addition, experts we interviewed reported that some
sponsors are unable to change the benefits they offer in the short term
because union contracts prevent them from doing so, thus making the RDS
the only MMA option for which they likely would qualify.
Sponsors Considered Their Ability to Save on Costs:
Sponsors reported that when selecting an MMA option, they considered
how the various options would affect their ability to save on costs.
While all of the MMA prescription drug coverage options may provide
sponsors with an opportunity for cost savings, the amount of savings
may vary based on a sponsor's tax status. For example, in guidance to
employers, CMS estimated that the average cost savings to a sponsor
that offers its own PDP or MA-PD plan for 2006 would be close to $900
per participating retiree, and the average tax-free payment for
sponsors that took the RDS would be $668 per participating retiree.
Because RDS payments are tax-exempt, CMS estimates indicate that the
relative value of savings from the RDS as compared with savings from
offering a PDP or MA-PD plan would be greater for private, tax-paying
sponsors than it would be for public, non-tax-paying sponsors.
In addition, some sponsors said they considered the trade-off between
the cost savings associated with the different MMA options and the
effect the options would have on the prescription drug benefits
sponsors would be able to offer. For example, depending on their tax
status, some sponsors might save more money by taking the RDS, while
others might save more by offering or contracting with a PDP or MA-PD
plan. However, as previously discussed, while most MMA options likely
require a change of benefits, the RDS allows sponsors to continue
offering the benefits they offered prior to the implementation of the
MMA as long as the benefit is at least actuarially equivalent to the
Part D benefit. In one case, a sponsor we interviewed reported that it
chose the RDS, even though the sponsor could have reduced costs by
choosing one of the other MMA options. As one expert explained, the RDS
allows sponsors to save money without significantly changing their
retiree health plans.
Sponsors Considered the Ease of Explaining MMA Options to Retirees:
Sponsors also reported considering how easy it would be to explain an
option to retirees. In particular, sponsors we interviewed told us that
they considered how benefit changes made as a result of implementing
the various MMA options would complicate communications with retirees.
For example, one sponsor we interviewed indicated that a disadvantage
of some MMA options was that they would require a great effort to
communicate changes to retirees, who range in age from 50 to 105 and
who might find benefit changes difficult to understand. Conversely,
sponsors that take the RDS are able to preserve their benefit structure
and may find it easier to communicate this option to retirees,
according to CMS.
In addition, depending on the option they choose, sponsors have to meet
different MMA requirements for communicating information about the
options to retirees. For example, sponsors that take the RDS are
required to explain how their prescription drug coverage compares to
the Medicare Part D benefit.[Footnote 38] In contrast, sponsors that
offer their own PDP or MA-PD plan are required to meet more strict CMS
communication requirements on Part D plans--such as developing and
sending more detailed information about prescription drug coverage to
retirees.[Footnote 39]
Sponsors Considered the Administrative Requirements Associated with
Each MMA Option:
According to CMS and the experts and sponsors we interviewed, each
option has different administrative requirements--some of which take up
a considerable amount of time and resources, so sponsors also
considered these requirements when selecting an option. For example,
according to CMS, sponsors that offer their own PDP or MA-PD plan are
required to calculate "true out-of-pocket" costs[Footnote 40] and
adjust premiums for low-income retirees,[Footnote 41] among other
administrative requirements. One sponsor we interviewed that offered
its own PDP for 2006 indicated that it took 11 full-time employees and
13 part-time employees over 15,000 hours to implement the PDP.[Footnote
42] Conversely, according to CMS, sponsors that take the RDS are not
required to calculate true out-of-pocket costs, adjust premiums for low-
income retirees, or meet many of the other administrative requirements
required of other options. Some sponsors we interviewed told us that
the RDS would be administratively easy or easier than other MMA
options, although many reported some first-year implementation issues,
such as issues in submitting a list of eligible retirees to CMS, which
made administration of the RDS more difficult than originally
anticipated.[Footnote 43]
Sponsors Considered the Extent of Available Information Regarding MMA
Options:
Sponsors also reported that the extent of available information
regarding the MMA options at the time they needed to make decisions was
a factor they considered in selecting an option. CMS did not approve
PDP and MA-PD plans until September 2005--the same month in which
sponsors had to apply for the RDS for plans ending in 2006.[Footnote
44] Some sponsors we interviewed reported that they did not have enough
information about the PDP and MA-PD plan options at the time they had
to make their decision for 2006. For example, one sponsor we
interviewed that took the RDS told us that there were too many unknowns
at the time it had to make its decision for 2006 and that if the
sponsor wanted to make changes to its retiree health benefits, it would
need to provide a transition period for retirees in order to prepare
them for plan changes. In addition, according to the 2005 Mercer
survey, the timing of the plan and rate information available from
health plans in the Medicare market was a key factor that led many
employers to seek the RDS or to delay taking any action for 2006.
When selecting an option for 2007, sponsors we interviewed continued to
have concerns about the extent of the information available about the
PDP and MA-PD plans. For example, one sponsor we interviewed told us
that while there was better information available when it had to make
its decision for 2007 compared with 2006, the sponsor still did not
have a full year's worth of data on PDPs when it had to make its
decision. As the markets for PDPs and MA-PD plans mature and more
detailed information becomes available, the availability of information
on the various MMA prescription drug coverage options may become less
of a factor in future years. According to one expert we interviewed,
when employers are making their decisions for 2008, there should be a
full year of information on the MMA prescription drug coverage options
so that sponsors will be able to make more fully informed decisions.
Public Sponsors May Have to Consider Unique Factors:
When making decisions about which, if any, MMA option to pursue, public
sponsors may have to consider some factors that private sponsors do
not. For example, some public sponsors may be influenced at the state
level to either offer health insurance or choose a certain MMA option.
One public sponsor we interviewed was directed by the budget committee
of its state legislature to take the RDS in 2007 even though the
sponsor--a state retirement system--had concluded that contracting with
a PDP would allow the sponsor to decrease premiums for the state,
contracting agencies, and some enrollees; decrease prescription drug
copayments for enrollees; or both. As we stated earlier in this report,
CMS estimates indicate that the relative value of savings from the tax-
free RDS, as compared with savings from offering a PDP or MA-PD plan,
for example, would be greater for private, tax-paying sponsors than it
would be for public, non-tax-paying sponsors. In addition, OPM, which
administers FEHBP, opted to continue offering prescription drug
coverage to retirees without taking the RDS or any of the other MMA
options. We reported previously that OPM officials told us OPM did not
apply for the RDS for FEHBP because they said the intent of the RDS was
to encourage sponsors to continue offering prescription drug coverage
to enrolled Medicare beneficiaries, which all FEHBP plans were already
doing.[Footnote 45] As such, OPM officials told us, the government
would be subsidizing itself to provide coverage for prescription drugs
to Medicare-eligible federal employees and retirees.
In the Short Term, Sponsors' Decisions Regarding MMA Options Resulted
in Benefits Remaining Relatively Unchanged, but over the Longer Term
the Effect Is Unclear:
Sponsors' decisions regarding the various MMA options appear to have
resulted in the provision of retiree health benefits remaining
relatively unchanged in the short term, although the effect over the
longer term on the provision of health benefits to retirees is unclear.
The short-term effect of sponsors' decisions appears to have resulted
in benefits remaining relatively unchanged, in part because the
majority of sponsors continued to offer prescription drug benefits and
accepted the RDS during the first 2 years this option was offered. In
addition, according to the 2005 Mercer survey, 72 percent of employers
with 500 or more employees reported that the MMA options would have no
effect on their ability to provide retiree health coverage. Similarly,
many sponsors we interviewed told us that they did not make changes to
their retiree health benefits--including decreasing coverage--in direct
response to the MMA. Only one of the sponsors we interviewed that
selected the RDS for 2006 reported making any changes to its benefits
to meet the RDS actuarial equivalence standard. This sponsor told us it
eliminated one of its plans that did not meet CMS's actuarial
equivalence standard for the RDS, but the sponsor said it moved all
affected Medicare-eligible retirees into coverage that did qualify for
the RDS. In addition, some sponsors we interviewed told us that they
shared part of the subsidy they received from accepting the RDS with
retirees by reducing retiree premiums. Furthermore, the 2005 Mercer
survey reported that only 3 percent of employers with 500 or more
employees indicated they were likely to terminate drug coverage for
Medicare-eligible retirees--rather than choosing one of the MMA
options--in response to the availability of the Part D prescription
drug benefit.
While, in the short term, sponsors' decisions regarding the MMA options
resulted in benefits remaining relatively unchanged, the effect over
the longer term of sponsors' decisions on the provision of employment-
based retiree health benefits is unclear. Experts we interviewed
differed in their assessments of what the effect is likely to be over
the longer term. In particular, some experts we interviewed indicated
that the MMA may extend the amount of time that sponsors offer benefits
without reducing coverage. Furthermore, one sponsor we interviewed
indicated that the RDS increased the number of years that its retiree
health benefits program would be solvent. On the other hand, other
experts said that it was possible that the availability of the Medicare
Part D benefit may make it more likely that sponsors will stop offering
prescription drug benefits for retirees. Nearly all experts we
interviewed told us that it was unlikely that an employer or other
potential sponsor that did not offer retiree prescription drug coverage
prior to the MMA would begin sponsoring these benefits in response to
the new options resulting from the MMA. According to experts, employers
are not planning to improve or expand retiree health coverage and do
not want the additional financial liability of providing these
benefits.
Furthermore, it is unclear to what extent sponsors will continue to
select the same MMA option in the future. For example, the 2006 Kaiser/
Hewitt survey reported that of those respondents that accepted the RDS
for 2006, only 54 percent said they were very or somewhat likely to
accept the RDS for 2010. Furthermore, 25 percent said they did not know
whether they would accept the RDS for 2010. Most of the sponsors that
we interviewed that took the RDS for 2006 and planned to take the RDS
for 2007 said they were unsure which option they would be taking for
2008. The 2006 Kaiser/Hewitt survey also reported that employers that
are unlikely to take the RDS in the future are considering a number of
other MMA options, including contracting with a PDP to offer enhanced
coverage.[Footnote 46] To the extent that sponsors that have accepted
the RDS select other MMA options in subsequent years, sponsors'
provision of retiree health benefits may change.
In addition to the MMA options, a host of other long-standing factors
may affect a sponsor's provision of health benefits to retirees. These
include the existence of union contracts that may require the provision
of certain health benefits, increasing costs for health care, the
degree of industry competition, and the strength of sponsors' financial
conditions. For example, in 2005 we reported that sponsors that
negotiated retiree health benefits with unions might not have as much
flexibility to change these benefits prior to negotiations.[Footnote
47] Sponsors we interviewed also cited the competitiveness of the
industry as another factor that affected retiree coverage, with one
sponsor stating that it strove to have benefit packages that were in
line with the overall market as well as the specific industry.
Agency and Other External Comments:
We provided a draft of this report to CMS and experts on retiree health
benefits at the Employee Benefit Research Institute, Hewitt Associates,
Mercer Health & Benefits, and the National Opinion Research
Center.[Footnote 48]
In its written comments on a draft of this report, CMS stated that the
report provided an excellent summary of available information
concerning the choices sponsors made among MMA options. (CMS's comments
are included in app. IV.)
CMS agreed with the finding that the majority of sponsors reported
continuing to offer prescription drug coverage and accepting the RDS
for 2006, with smaller percentages of sponsors reporting selecting
other MMA options. In commenting on the draft report's identification
of several factors that may have contributed to the differences in the
surveys' reported percentages of employers accepting the RDS for 2006,
CMS suggested an additional factor that may have contributed to the
differences in the survey finding. Specifically, CMS said that some of
the surveys reported what sponsors said they intended to do or were
considering doing at the time of the survey, and it was possible that a
portion ultimately decided not to pursue those options. However, both
the 2006 Kaiser/Hewitt survey--which reported that 82 percent of
surveyed employers accepted the RDS for 2006--and the 2006 Mercer
survey--which reported that 51 percent of surveyed employers accepted
the RDS for 2006--were reporting decisions surveyed employers said they
had already made, not what they planned to do. Therefore, it is not
likely this factor would explain the difference in the survey results.
CMS also agreed with the draft report's related finding regarding the
number of sponsors participating in the RDS program. CMS suggested that
we identify the 2007 data as preliminary, since it was compiled in
February. We have made this clarification to the final report.
CMS stated that it agreed with the report's second finding, that
sponsors considered a variety of factors when selecting which MMA
prescription drug coverage options to pursue, with one clarification.
The draft report stated that, in general, in order to implement most
MMA options other than the RDS, sponsors would likely have to change
the prescription drug benefits they offer. CMS stated that the report
did not fully acknowledge that CMS has used its statutory waiver
authority for several MMA options to afford flexibility in benefit
design, and as a result, MMA options may require minimal (if any)
adjustments to premiums, cost-sharing, and other primary elements of
benefit design. The draft report did describe CMS's authority to waive
or modify Part D requirements added by the MMA that hinder the design
of, offering of, or enrollment in certain employer-or union-sponsored
Part D retiree plans. In response to CMS's comments, we have included
additional information clarifying that CMS has waived or modified Part
D requirements for multiple MMA options. However, while CMS has used
this waiver authority, our report notes that sponsors may still need to
make changes to benefits--such as changing the drugs included on their
formularies--and, according to sponsors we interviewed, any changes to
benefits can complicate communications with retirees.
CMS also agreed with the draft report's finding that in the short term
sponsors' decisions regarding MMA options resulted in benefits
remaining relatively unchanged, but over the longer term the effect is
unclear. However, CMS stated that the examples of differing experts'
assessments of the likely effect over the longer term lacked sufficient
context to be included in the findings. CMS also stated that there was
no indication in the finding of the preponderance of expert opinion in
favor of one or the other point of view. Our report states that the
effect over the longer term is unclear and that experts we interviewed
differed in their assessments of what the effect was likely to be. The
report describes both the opinions of experts who said the MMA may
extend the amount of time that sponsors offer benefits without reducing
coverage and those who said the Medicare Part D benefit may make it
more likely that sponsors will stop offering prescription drug benefits
for retirees, and there was not a preponderance of opinion for either
perspective.
The experts who reviewed the draft report generally indicated that the
report provided an accurate portrayal of employment-based retiree
health benefits and sponsors' decisions about the options available
under the MMA.
CMS and several of these experts also provided technical comments,
which we incorporated into the report as appropriate.
We will send copies of this report to the Administrator of CMS and
interested congressional committees. We will also provide copies to
others on request. In addition, the report is available at no charge on
GAO's Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please
contact me at (202) 512-7119 or dickenj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix V.
Signed by:
John E. Dicken:
Director, Health Care:
List of Committees:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Michael B. Enzi:
Ranking Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
The Honorable George Miller:
Chairman:
The Honorable Howard P. "Buck" McKeon:
Ranking Member:
Committee on Education and Labor:
House of Representatives:
The Honorable John D. Dingell:
Chairman:
The Honorable Joe Barton:
Ranking Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Jim McCrery:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Information on Employment-Based Retiree Health Coverage,
Updated since GAO's 2005 Report:
This appendix describes information on employment-based retiree health
coverage since the initial mandated GAO study, published in
2005.[Footnote 49] We reported in 2005 that the long-term decline in
employment-based retiree health coverage had leveled off, and retirees
were paying an increasing share of the costs. We reported that the
percentage of employers offering health benefits to retirees, including
those who are Medicare-eligible, had decreased beginning in the early
1990s, but had leveled off by the early 2000s. This leveling off has
continued since the initial mandated study. We also reported in 2005
that the percentage of Medicare-eligible retirees aged 65 and older
with employment-based coverage remained relatively consistent from 1995
through 2003. Since issuance of our 2005 report, we received data for
2004 and 2005 showing that the overall percentage remained relatively
consistent from 2003 through 2005 at about 31 percent, although some
modest changes occurred within specific age cohorts. Sponsors continued
to respond to increasing costs by implementing strategies that required
retirees to pay more for coverage and thus contributed to a gradual
erosion of the value and availability of benefits. For example, one
employer benefit survey reported that over half of surveyed employers
reported increases in retiree contributions to premiums between 2005
and 2006.
Employer Benefit Surveys Showed a Decline, then a Leveling Off, in
Share of Employers Offering Health Benefits to Retirees; New Data
Showed Continuation of Leveling-Off Trend:
According to surveys of sponsors of retiree health benefits, the
percentage of employers offering health benefits to retirees declined
beginning in the early 1990s and then remained relatively stable by the
early 2000s through 2005. In our 2005 report, we reported that a series
of surveys conducted by Mercer Human Resource Consulting indicated that
the percentage of employers with 500 or more employees offering health
insurance to retirees who are eligible for Medicare[Footnote 50]
declined from 1993 to 2001, although this decline had leveled off from
2001 through 2004. Data obtained after the publication of our 2005
report showed that this leveling-off trend continued, with
approximately 29 percent of employers with 500 or more employees
offering the benefits to Medicare-eligible retirees in 2006.[Footnote
51] (See fig. 1.)
Figure 1: Mercer Survey Results--Percentage of Employers with 500 or
More Employees Offering Health Benefits to Medicare-Eligible Retirees,
1993-2006:
[See PDF for image]
Source: GAO analysis of Mercer Health and Benefits; Mercer Human
Resources Consulting; William M. Mercer Incorporated; and Foster
Higgins data.
Note: Based on employer benefit surveys from 1993 through 2006. The
Mercer data include employers that offer coverage on a continuing basis
to newly hired employees as well as employers that may limit coverage
to individuals who were hired or who retired before a specified year.
The dotted line from 2001 to 2003 indicates that comparable 2002 data
were not available because of a wording change on the 2002 survey
questionnaire. In 2003, Mercer modified the survey questionnaire again
to make the data comparable to prior years (except 2002). Thus,
consistent with the Mercer 2003 survey, we have excluded data for 2002.
[End of figure]
We also reported in our 2005 report that a series of surveys conducted
by the Kaiser Family Foundation and Health Research and Educational
Trust (HRET) estimated that the percentage of employers with 200 or
more employees offering retiree health coverage decreased from 46
percent in 1991 to 36 percent in 1993. This decline leveled off from
1993 through 2004, with approximately 36 percent of employers with 200
or more employees offering coverage to these groups in 2004.[Footnote
52] Data obtained after our 2005 report showed that this trend
continued. According to the Kaiser/HRET survey, approximately 33
percent and 35 percent of employers with 200 or more employees offered
retiree health benefits in 2005 and 2006, respectively. For Medicare-
eligible retirees specifically, the percentage of employers reporting
that they offered health benefits to this group has generally not
changed since our 2005 report, in which we reported that 27 percent of
employers with 200 or more employees offered coverage, according to
Kaiser/HRET. (See fig. 2.)
Figure 2: Kaiser/HRET Survey Results--Percentage of Employers with 200
or More Employees Offering Health Benefits to All Retirees and to
Medicare-Eligible Retirees, 1991-2006:
[See PDF for image]
Source: GAO analysis of kaiser/HRET and KPMG Peat Marwick data.
Notes: Based on KPMG Peat Marwick surveys from 1991 through 1998 and
Kaiser/HRET surveys from 1999 through 2006. The data for "all" retirees
may include employers that offer health benefits to Medicare-eligible
retirees, retirees under age 65, or both. Data for all retirees were
unavailable for 1994 and 1996. Data for Medicare-eligible retirees were
unavailable from 1991 through 1994 and for 1996.
In 2003, Kaiser/HRET made changes to its survey methodology that
resulted in adjustments to some of the estimates reported in prior-year
reports. The differences resulting from these adjustments for the
retiree health benefits data were not statistically different.
[End of figure]
For retirees under age 65, we reported in our 2005 report that coverage
showed a steady decline from 1993, when 50 percent of employers with
500 or more employees offered coverage to this group of retirees, to
2001, although this percentage generally leveled off from 2001 through
2004.[Footnote 53] New data reported by Mercer showed that 39 percent
of employers with 500 or more employees offered coverage to these
retirees in 2006.
The survey data we reviewed for our current report indicated that some
types of employers are more likely to provide health benefits to
retirees than others. Data on retiree health coverage showed that
larger employers, for example, are more likely than smaller employers
to offer coverage to retirees, including Medicare-eligible retirees.
The 2006 Mercer survey reported that 56 percent of employers with
20,000 or more employees offered coverage to Medicare-eligible
retirees, compared with about 22 percent of employers with 500 to 999
employees. The 2006 Kaiser/HRET survey also showed that 54 percent of
employers with 5,000 or more employees offered health benefits to
retirees, while 35 percent of employers with 200 or more employees
offered health benefits to retirees. For smaller employers in the
Kaiser/HRET survey--those with 3 to 199 employees--approximately 9
percent offered retiree health benefits. These data are similar to the
data reported in our 2005 report, although the percentage of employers
with 5,000 or more employees offering health benefits to retirees is
slightly lower than in previous surveys.
In addition, employers with a union presence continued to be more
likely to offer retiree health coverage than employers without a union
presence. For example, in the 2006 Kaiser/HRET survey, among employers
with 200 or more employees, 50 percent of those employers that had
union employees offered health coverage to retirees, compared with 27
percent without union employees.
According to federal and employer benefit surveys, certain industries
continued to be more likely to offer retiree health coverage than
others. For example, the most recent Agency for Healthcare Research and
Quality's Medical Expenditure Panel Survey (MEPS) data showed that
approximately 88 percent of state entities offered health insurance for
retirees aged 65 and older.[Footnote 54] In addition, new data released
from Kaiser/HRET in 2006 showed that 82 percent of state and local
government employers with 200 or more employees offered coverage to
retirees.[Footnote 55] Furthermore, these data are similar to the data
reported in our 2005 report. Recent data released by Kaiser/HRET
continued to list the transportation/communication/utility industry as
the second likeliest industry, after government, to offer health
benefits to its retirees, with 52 percent of all employers with 200 or
more employees in this industry sector offering health benefits to
their retirees.[Footnote 56] This survey also continued to show, as we
reported in 2005, that the industries least likely to offer coverage
were health care and retail, with 15 percent and 11 percent,
respectively, of employers with 200 or more employees in these industry
sectors offering retiree health benefits.
Percentage of Medicare-Eligible Retirees with Employment-Based Health
Coverage Remained Consistent:
In our 2005 report, we stated that the overall percentage of Medicare-
eligible retirees and their insured dependents aged 65 and older
obtaining employment-based health benefits through a former employer
remained relatively consistent from 1995 through 2003, based on data
from the U.S. Census Bureau's Current Population Survey (CPS). Since
issuance of that report, we received subsequent data for 2004 and 2005
showing that the overall percentage remained relatively consistent from
2003 through 2005, although some modest changes occurred within
specific age cohorts (see fig. 3).
Figure 3: Percentage of Medicare-Eligible Retirees and Their Insured
Dependents with Employment-Based Health Benefits, by Age Group, 1995-
2005:
[See PDF for image]
Source: GAO analysis of CPS data.
Notes: Based on the March CPS Supplement from 1996 through 2002 and the
Annual Social and Economic Supplement to the CPS from 2003 through
2006. The age categories for insured dependents are based on the age of
the actual individual, not the primary policyholder. For example, an 80-
year-old insured dependent is counted as 80 years of age regardless of
the age of the primary policyholder. Differences for ages 65 to 69 and
age 80 and older are statistically significant.
As noted in Census Bureau press release dated March 23, 2007, the
Census Bureau will be revising the historical health insurance coverage
estimates from the CPS due to an identified programming error.
According to the Census Bureau, the impact of the required revisions is
small--the original and revised estimates for 2004 and 2005 differ by
less than 1 percent--and the Census Bureau's assessment is that the
impact of the required revisions is relatively constant from one year
to the next.
[End of figure]
According to our analysis of CPS data, for those aged 65 and older,
approximately 32 percent had coverage in 1995 and approximately 31
percent had coverage in 2005 (no change from last report). Medicare-
eligible retirees and their insured dependents for two groups--those
aged 65 through 69 and those aged 80 and older--continued to show
approximately the same modest decline and increase, respectively, in
the percentage with employment-based health coverage. For those aged 70
through 79, the modest decline reported in our initial report was no
longer statistically significant.[Footnote 57]
Employer Strategies Implemented to Mitigate Increased Costs of
Providing Coverage Continued to Require Greater Retiree Contribution:
According to employer benefit surveys and our interviews with sponsors
and experts, sponsors have continued to rely on various strategies, as
we noted in our 2005 report, for mitigating the increasing costs of
providing health benefits to retirees that have contributed to a
gradual erosion of the value and availability of health benefits. These
strategies included the same strategies identified in our 2005 report:
restricting retirees' eligibility for health benefits; limiting
sponsors' contributions to retirees' health benefits; and increasing
retirees' copayments, coinsurance, and premiums.
Sponsors Have Limited Retirees' Eligibility for Benefits:
Employers participating in the 2006 Kaiser/Hewitt Associates survey
reported that between 2005 and 2006 they limited retiree eligibility
for health benefits by restricting eligibility to certain groups of
retirees and by increasing age, years of service, or both, needed to be
eligible for such benefits. For example, according to 2006 Kaiser/
Hewitt survey data, 11 percent of employers that currently offer
retiree health benefits reported that they would not provide future
employer-subsidized health benefits to a particular group of
individuals, such as those hired after January 1, 2006, if they retire
under the age of 65.[Footnote 58] Nine percent of the surveyed
employers reported that they would not provide future employer-
subsidized health benefits to a particular group of individuals if they
retire at age 65 or older. In addition, 4 percent of surveyed employers
reported that they raised the age requirements, years of service
requirements, or both, for retiree health benefit eligibility for
retirees under the age of 65, and 2 percent made such changes for
retirees at age 65 or older. Similarly, one sponsor we interviewed told
us about changes the sponsor had made to coverage for future retirees
since our 2005 report. This sponsor told us about coverage beginning
January 1, 2007, in which future retirees will have the option to
receive a lump sum of money that can then be used to purchase coverage
in the individual market at the time of retirement.
Sponsors Have Limited Their Contributions to Retirees' Health Benefits:
Data from the 2006 Mercer survey showed that 20 percent of employers
with 500 or more employees have implemented limits--often referred to
as caps--on contributions to retirees' health benefits. The survey data
also showed that an additional 8 percent of such employers were
considering such caps. Caps were most common among the employers in the
Mercer study with the largest number of employees; 47 percent of
employers with 20,000 or more employees had implemented caps and 4
percent were considering implementing caps. Data from the 2006 Kaiser/
Hewitt survey showed that 50 percent of employers with 1,000 or more
employees reported having capped contributions to the health benefits
for Medicare-eligible retirees. Of these employers, 61 percent reported
hitting the cap and another 20 percent expected to hit the cap within
the next 1 to 3 years. One sponsor we interviewed with financial caps
in place but not yet reached told us that sponsors generally have two
options once they reach these spending limits: (1) negotiate plan
design changes to bring spending under the limits or (2) pass costs on
to retirees through higher premiums.
Sponsors Have Increased Retirees' Copayments, Coinsurance, and
Premiums:
More than one-fourth of employers participating in the 2006 Kaiser/
Hewitt survey reported that between 2005 and 2006 they increased
required out-of-pocket contributions from retirees and increased the
use of other cost-sharing strategies. In addition, some of these
strategies were intended to address the costs of providing prescription
drug coverage to retirees.[Footnote 59] For example, according to the
2006 Kaiser/Hewitt survey, 25 percent of employers raised copayments or
coinsurance for prescription drugs for retirees aged 65 and older, and
10 percent of employers replaced fixed dollar copayments for
prescription drugs with coinsurance, which can increase retirees' out-
of-pocket expenses as the total cost of the benefit rises.[Footnote 60]
More than one-half of employers in the 2006 Kaiser/Hewitt survey also
reported that between 2005 and 2006 they increased retiree
contributions to health care premiums for retirees aged 65 and
older.[Footnote 61] However, the survey reported a lower rate of
increase in the amount that retirees aged 65 and older contributed to
premiums as compared to the amount that retirees under age 65
contributed to premiums, which the survey largely attributed to the
Medicare Part D program. Sponsors we interviewed also told us that they
had increased retiree premiums to compensate for the trend in
increasing health care costs.[Footnote 62] For example, one public
sponsor told us that premiums for its coverage designed for active
workers and retirees under the age of 65 increased 9 percent for 2005
and 2006. Finally, according to the 2006 Mercer survey, about 41
percent of retiree health plans for employers with 500 or more
employees required Medicare-eligible retirees to pay the full cost of
their employment-based health benefits plan.[Footnote 63]
[End of section]
Appendix II: Alternative Approaches to Providing Retiree Health
Coverage Suggested by Sponsors and Experts:
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) required GAO to describe both (1) alternative approaches to
providing employment-based retiree health coverage suggested by retiree
health benefit sponsors and (2) recommendations by sponsors and other
experts for improving and expanding such coverage. In this appendix we
present a range of alternative approaches to providing employment-based
retiree health coverage and options for expanding and improving these
alternative approaches, as described by retiree health benefit sponsors
and experts we interviewed. To obtain this information, we interviewed
officials from 15 private and public sponsors of retiree health
benefits and several experts on areas relating to the provision of
employment-based retiree health coverage, including five benefit
consulting firms; six organizations, including one representing unions,
one representing multiemployer plans, two representing large employers,
and two representing health plans; one professional organization for
actuaries; and other research organizations. The alternative approaches
we describe are not intended to be a comprehensive list but rather
represent the approaches that were mentioned by the sponsors and
experts we spoke with.
Many of the alternative approaches to providing employment-based
retiree health coverage that were described to us rely on tax
advantages that provide an incentive for a sponsor, an employee, or
both to set aside funds for future health care needs. Some of these tax-
advantaged approaches are made available as part of consumer- directed
health plans, which usually consist of a savings account--such as a
health savings account (HSA) or health reimbursement arrangement (HRA)--
and a health plan with a high deductible. In addition to consumer-
directed health plans, there are other tax-advantaged accounts and
trusts that do not require enrollment in a high-deductible health plan,
such as a voluntary employees' beneficiary association (VEBA). Some
sponsors and experts described a third category of arrangement,
generally without tax advantages, that assists sponsors in providing
retiree health care coverage, such as establishing savings accounts
that provide a sponsor's match to the employee's contribution. Although
there is no requirement that retiree health benefit sponsors prefund
their retiree health benefit plans, many of the approaches sponsors and
experts described are prefunded vehicles--wherein the sponsor directly
contributes, rather than earmarks, dedicated funds to an account or
trust. The alternative approaches these sponsors and experts described
are listed in table 2.
Table 2: Alternative Approaches to Providing Employment-Based Retiree
Health Coverage Described by Sponsors and Experts:
Consumer-directed health plans.
Approach: Health savings account (HSA);
Funding/tax advantage status: Prefunded/tax advantaged;
Details:
* Allows limited individual (tax-deductible) or sponsor-based (tax-
exempt) contributions; however, Medicare enrollees are not eligible to
make contributions;
* Requires a minimum deductible amount and a maximum limit on enrollee
out-of-pocket spending;
* Allows tax-free withdrawals for qualifying medical expenses;
* Is portable from job to job.
Approach: Health reimbursement arrangement[A] (HRA);
Funding/tax advantage status: Not prefunded[B]/tax advantaged;
Details:
* Allows sponsors to establish accounts that are not prefunded;
however, individuals are not eligible to make contributions;
* Distributions for medical care expenses are tax-free;
* Provides that sponsors' credits to an HRA may accumulate tax-free on
an annual basis;
* Places no limit on contributions;
* Is not required to be portable from job to job.
Approach: Medical savings account (MSA);
Funding/tax advantage status: Prefunded/tax advantaged;
Details:
* Was designed for small businesses (with 50 or fewer employees) and
the self- employed;
* Allows limited individual (tax-deductible) or sponsor-based (tax-
exempt) contributions, but not both in the same year;
* Is portable from job to job.
Other tax-advantaged arrangements.
Approach: Retiree medical account;
Funding/tax advantage status: Not prefunded[B] /tax advantaged;
Details:
* Allows sponsors to establish accounts that are not prefunded to track
dollars that will be available for an employee to spend on health
benefits in retirement;
* Allows individual contributions on an after-tax basis;
* Distributions for retiree health benefits are tax-free;
* Is dedicated exclusively to the use of medical expenses during
retirement.
Approach: Voluntary employees' beneficiary association (VEBA);
Funding/tax advantage status: Prefunded/tax advantaged;
Details:
* Employs a trust to fund certain benefit plans;
* Must be based on voluntary membership;
* Allows limited sponsor contributions, which are tax-deductible;
* Allows the tax-free withdrawal of funds by retirees for qualifying
health care expenses.
Approach: Section 420 transfer/401(h) subaccount;
Funding/tax advantage status: Prefunded/tax advantaged;
Details:
* Permits the transfer of excess pension assets of an overfunded
defined benefit plan (the "Section 420 transfer") into a 401(h)
subaccount for the payment of retiree health benefits;
* Has certain restrictions to the subaccount relative to the size and
method of the defined benefit plan. Medical benefits, together with
life insurance benefits, must be subordinate to the defined plan's
retirement benefits.
Sponsor/industry arrangements[C].
Approach: Employer-sponsored savings account;
Funding/tax advantage status: Prefunded/tax advantaged;
Details:
* Specifies a sponsor-provided match (e.g., dollar-for-dollar) to an
employee contribution;
* Is available upon retirement to pay for retiree medical premiums;
* Earnings and sponsor match are not taxed upon withdrawal.
Approach: Purchasing coalition;
Funding/tax advantage status: Not prefunded/not tax advantaged;
Details:
* Used to increase leverage in the marketplace to gain better prices
for both active and retired employees of certain trades.
Approach: Premium reimbursement;
Funding/tax advantage status: Not prefunded/not tax advantaged;
Details:
* Provides capped premium reimbursement to retirees who purchase health
care coverage outside of the sponsor's plan.
Source: GAO interviews with retiree health benefit sponsors and other
experts.
[A] Although HRAs are usually combined with a high-deductible health
insurance plan, this is not required.
[B] These accounts are generally set up as notional accounts, which
means they do not require prefunding, although sponsors may choose to
do so.
[C] The details of these arrangements were provided by sponsors and
experts we interviewed. The specific details of these arrangements may
vary across sponsors.
[End of table]
In addition to describing examples of the alternative approaches to
traditional employment-based retiree health coverage, sponsors and
experts we interviewed provided a variety of recommendations for
improving and expanding these approaches. For example, some sponsors
and experts recommended permitting tax-advantaged contributions by
Medicare-eligible retirees to HSAs and allowing stand-alone HSAs that
do not require an accompanying high-deductible health plan.[Footnote
64] Another expert also suggested increasing the maximum annual
contribution that is currently allowed for an HSA and expanding the
ability of retirees to use HSA funds to pay for health insurance
premiums.[Footnote 65] One sponsor we interviewed highlighted the
increased portability of an HSA as a factor in the sponsor's decision
to stop offering an HRA at the end of 2006 and to begin instead to
offer an HSA option for early retirees and active workers. In addition,
according to one expert we interviewed, because sponsors are not
required to make unused HRA balances available to employees when they
change jobs, individuals may have an incentive to spend down
accumulated funds.[Footnote 66] Several sponsors and other experts also
suggested creating additional tax-advantaged arrangements for retiree
health benefit sponsors. For example, one expert suggested allowing the
tax-free transfer of funds from individual tax-preferred vehicles--such
as 401(k) retirement accounts--and pensions to pay for health care
costs, including health care premiums.
Overall, a majority of the sponsors we interviewed indicated that
sponsors are willing to use or consider alternative approaches, such as
the ones described above, to assist retirees with their future health
care needs without increasing their costs. Indeed, one sponsor
indicated that it would support anything that would expand its ability
to offer and fund retiree health coverage, such as additional subsidies
or favorable tax treatment. Moreover, one expert indicated that
alternative approaches such as HSAs offer a level of predictability
that allows sponsors to sustain their retiree benefit packages. One
reason for this predictability is that contributions by the sponsor in
many of these alternative approaches are limited to a defined
contribution.
Most alternatives that sponsors and experts described in our interviews
were established (or are currently under consideration) for active
employees to use for current and future expenses rather than for those
who are currently retired. For example, among the alternative
approaches described, few of the sponsors we interviewed indicated that
they make such approaches available to current retirees. Specifically,
only one sponsor we interviewed told us that it makes consumer-directed
health plans available to current retirees.[Footnote 67] Seven sponsors
told us that their current use (or consideration) of consumer-directed
health plans is targeted to active employees for current and future
health care costs. Two experts we interviewed, however, noted flaws
with using consumer-directed health plans as adequate savings
mechanisms for retiree health care costs because this approach assumes
that active employees will not need the account funds for current
health care expenses. Similarly, one sponsor noted that because many of
the alternative approaches are geared toward active employees, they
were less likely to be effective solutions for retiree health care
needs.
[End of section]
Appendix III: Scope and Methodology:
This appendix describes in detail the scope and methodology used to
address the three report objectives--(1) which MMA prescription drug
coverage options sponsors selected, (2) the factors they considered in
selecting these options, and (3) the effect these decisions may have on
sponsors' provision of employment-based health benefits for retirees.
It also addresses the mandated update on employment-based retiree
health coverage since our 2005 report (reported in app. I) and
sponsors' and others' views on alternative approaches for the provision
of employment-based retiree health coverage that may help maintain,
expand, or improve retiree health coverage (reported in app. II).
Because some of the methodologies apply to more than one objective or
appendix, we have organized this appendix by data source. Specifically,
this appendix briefly describes the methodologies by objective and then
discusses (1) surveys of employment-based health benefits, (2) federal
surveys, (3) data from the Centers for Medicare & Medicaid Services
(CMS), and (4) interviews with sponsors and other experts.
Methodology by Objective:
To determine which MMA prescription drug coverage options sponsors
selected, we reviewed data from four surveys collected by three benefit
consulting firms on the options that sponsors reported selecting for
2006 and the options that sponsors reported that they planned to select
for 2007. One survey is an annual survey of employer health benefits,
including private and public sector employers, conducted since the
early 1990s through 2006, and one is a private sector survey on retiree
health benefits conducted in 2006. We obtained and analyzed data
provided by CMS on the number and characteristics of sponsors that were
approved for the retiree drug subsidy (RDS) for plans ending in 2006
and 2007. To describe the factors that sponsors considered in selecting
the MMA options and the effect their decisions about the options may
have on the provision of benefits for retirees, we relied on two of the
employer benefit surveys and reviewed documents from the literature on
the factors that sponsors may consider in selecting the MMA options. We
also interviewed private and public sponsors and experts on sponsors'
decisions regarding the MMA options and employment-based retiree health
benefits, including benefit consultants and officials at health plans,
groups representing large employers, and other organizations.
To update information on employment-based retiree health coverage since
our 2005 report, we reviewed data from employer benefit surveys and
data from three large federal surveys that contained information either
on Medicare beneficiaries or on the percentage of public sector
employers that offer retiree health benefits. We also obtained this
information in our interviews with sponsors and experts. We focused on
trends particularly affecting Medicare-eligible retirees, but in some
cases when information specific to Medicare-eligible beneficiaries was
not available, we reported on trends affecting all retirees, including
those who were under age 65 and those who were eligible for Medicare.
To describe alternative approaches for the provision of employment-
based retiree health coverage, we reviewed data from several of the
same sources used to address the other report objectives, including
employer benefit surveys, reports and analyses from the literature, and
interviews with sponsors and experts.
Surveys of Employment-Based Health Benefits:
We relied on data from annual surveys of employment-based health
benefit plans. Kaiser/HRET and Mercer each conduct an annual survey of
employment-based health benefits, including a section on retiree health
benefits. Each survey has been conducted for at least the past decade,
including 2006.[Footnote 68] We also used data from a survey focused
solely on retiree health benefits that Kaiser/Hewitt conducted in 2006.
For each of these surveys of employment-based benefits, we reviewed the
survey instruments and discussed the data's reliability with the
sponsors' researchers and determined that the data were sufficiently
reliable for our purposes. We also reviewed two 2006 surveys by The
Segal Company. The first represented a nonrandom sample of
multiemployer plans from a range of industries and geographic regions;
the second collected data from a nonrandom sample of public sponsors
that offered prescription drug coverage to Medicare-eligible retirees.
Kaiser/HRET:
Since 1999, Kaiser/HRET has surveyed a sample of employers each year
through telephone interviews with human resource and benefits managers
and published the results in its annual report--Employer Health
Benefits.[Footnote 69] Kaiser/HRET selects a random sample from a Dun &
Bradstreet list of private and public sector employers with three or
more employees, stratified by industry and employer size. It attempts
to repeat interviews with some of the same employers that responded in
prior years. For the most recently completed annual survey--conducted
from January to May 2006 and published in September 2006--2,122
employers responded to the full survey, giving the survey a 48 percent
response rate. In addition, Kaiser/HRET asked at least one question of
all employers it contacted--"Does your company offer or contribute to a
health insurance program as a benefit to your employees?"--to which an
additional 1,037 employers, or cumulatively about 72 percent of the
sample, responded. By using statistical weights, Kaiser/HRET is able to
project its results nationwide. Kaiser/HRET uses the following
definitions for employer size: (1) small--3 to 199 employees--and (2)
large--200 and more employees. In some cases, Kaiser/HRET reported
information for additional categories of small and large employer
sizes.
Mercer:
Since 1993, Mercer has surveyed a stratified random sample of employers
each year through mail questionnaires and telephone interviews and
published the results in its annual report--National Survey of Employer-
Sponsored Health Plans.[Footnote 70] Mercer selects a random sample of
private sector employers from a Dun & Bradstreet database, stratified
into eight categories, and randomly selects public sector employers--
state, county, and local governments--from the Census of Governments.
The random sample of private sector and government employers represents
employers with 10 or more employees. For the 2006 survey, which was
published in 2007, Mercer mailed questionnaires to employers with 500
or more employees in July 2006 along with instructions for accessing a
Web-based version of the survey instrument, another option for
participation. Employers with fewer than 500 employees, which,
according to Mercer, historically have been less likely to respond
using a paper questionnaire, were contacted by phone only. Telephone
follow-up was conducted with employers with 500 or more employees in
the random sample and some mail and Web respondents were contacted by
phone to clear up inconsistent or incomplete data. A total of 2,136
employers responded to the complete survey, yielding a response rate of
24 percent. By using statistical weights, Mercer projects its results
nationwide and for four geographic regions.[Footnote 71] The Mercer
survey report contains information for large employers--500 or more
employees--and for categories of large employers with certain numbers
of employees as well as information for small employers (fewer than 500
employees). We have excluded from our analysis Mercer's 2002 data on
the percentage of employers that offer retiree health plans because
Mercer stated in its 2003 survey report that the 2002 data were not
comparable to data collected in other years because of a wording change
on the 2002 survey questionnaire. In 2003, Mercer modified the survey
questionnaire again to make the data comparable to prior years (except
2002).
Kaiser/Hewitt:
The 2006 Kaiser/Hewitt study--Retiree Health Benefits Examined:
Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health Benefits-
-is based on a nonrandom sample of employers because there is no
database that identifies all private sector employers offering retiree
health benefits from which a random sample could be drawn. Kaiser/
Hewitt used previous Hewitt survey respondents and its proprietary
client databases, which list private sector employers potentially
offering retiree health benefits. Kaiser/Hewitt conducted the survey
online from June through October 2006 and obtained data from 302 large
(1,000 or more employees) employers. Its results were published in
December 2006. According to the survey, these employers represented 36
percent of all Fortune 100 companies and 22 percent of all Fortune 500
companies. They accounted for more than one quarter of the Fortune 100
companies with the largest retiree health liability in 2005. Because
the sample is nonrandom and does not include the same sample of
companies and plans each year, survey results for 2006 cannot be
compared with results from prior years.
Segal:
We reviewed two nonrandom surveys conducted and published by The Segal
Company in 2006 that report on responses by non-private-sector sponsors
to the availability of prescription drug coverage under Medicare Part
D. The first survey, which was published in spring 2006, was based on
data collected in January and February 2006 from a nonrandom sample of
273 multiemployer plans that provided prescription drug coverage to
Medicare-eligible retirees.[Footnote 72] The 273 multiemployer plans
that participated in the survey are Segal clients and, according to
Segal, represented a range of industries and geographic regions. The
second survey, which was published in summer 2006, was conducted by
Segal in conjunction with the Public Sector HealthCare Roundtable, a
national coalition of public sector health care purchasers.[Footnote
73] This survey was based on data collected in May 2006 from a
nonrandom sample of 109 public sponsors, including state and local
sponsors, 82 of which offered prescription drug coverage to Medicare-
eligible retirees.
Federal Surveys:
We analyzed three federal surveys containing information either on
Medicare beneficiaries or on the percentage of public sector employers
that offer retiree health benefits. We obtained information on retired
Medicare beneficiaries' sources of health benefits coverage--including
former employers and unions--from the CPS, conducted by the U.S. Census
Bureau for the Bureau of Labor Statistics. We obtained data on the
sources of coverage for all health care expenditures and for
prescription drug expenditures for retired Medicare beneficiaries from
the Medicare Current Beneficiary Survey (MCBS), sponsored by CMS. We
obtained data on the percentage of public sector employers that offer
retiree health benefits from the Medical Expenditure Panel Survey
(MEPS), sponsored by the Agency for Healthcare Research and Quality.
Each of these federal surveys is widely used for policy research, and
we reviewed documentation on the surveys to determine that they were
sufficiently reliable for our purposes.
Current Population Survey:
We analyzed the Annual Supplement of the CPS for information on the
demographic characteristics of Medicare-eligible retirees and their
access to insurance.[Footnote 74] The survey is based on a sample
designed to represent a cross section of the nation's civilian
noninstitutionalized population. In the 2006 CPS Annual Supplement,
about 83,800 households were included in the sample for the survey, a
significant increase in sample size from about 60,000 households prior
to 2002. The total response rate for the 2006 CPS Annual Supplement was
about 83 percent. We present only those differences that were
statistically significant at the 95 percent confidence level.
The CPS asked whether a respondent was covered by employer-or union-
sponsored, Medicare, Medicaid, private individual, or certain other
types of health insurance in the last year. The CPS questions that we
used for employment status, such as whether an individual is retired,
are similar to the questions on insurance status. Respondents were
considered employed if they worked at all in the previous year and not
employed only if they did not work at all during the previous year.
The CPS asked whether individuals had been provided employment-based
insurance "in their own name" or as dependents of other policyholders.
We selected Medicare-eligible retirees aged 65 and older who had
employment-based health insurance coverage in their own names because
this coverage could most directly be considered health coverage from a
former employer. For these individuals, we also identified any retired
Medicare-eligible dependents aged 65 or older, such as a spouse, who
were linked to this policy. We used two criteria to determine that
these policies were linked to the primary policyholder: (1) the
dependent lived in the same household and had the same family type as
the primary policyholder and (2) the dependent had employment-based
health insurance coverage that was "not in his or her own name."
Medicare Current Beneficiary Survey:
MCBS is a nationally representative sample of Medicare beneficiaries
that is designed to determine for Medicare beneficiaries (1)
expenditures and payment sources for all health care services,
including noncovered services, and (2) all types of health insurance
coverage.[Footnote 75] The survey also relates coverage to payment
sources. The MCBS Cost and Use file links Medicare claims to survey-
reported events and provides expenditure and payment source data on all
health care services, including those not covered by Medicare. We used
the 2004 MCBS Cost and Use file, the most current data available, to
determine the percentage of Medicare-eligible beneficiaries obtaining
supplemental coverage from a former employer or union. We also used the
MCBS data to determine the percentage of all health care expenditures
for retired Medicare beneficiaries paid by employment-based insurance
for prescription drug expenditures.
Medical Expenditure Panel Survey:
MEPS consists of four surveys and is designed to provide nationally
representative data on health care use and expenditures for U.S.
civilian noninstitutionalized individuals.[Footnote 76] We used data
from one of the surveys, the MEPS Insurance Component, to identify the
percentage of state entities that offered retiree health benefits in
2004. Insurance Component data are collected through two samples. The
first, known as the "household sample," is a sample of employers and
other insurance providers (such as unions and insurance companies) that
were identified by respondents in the MEPS Household Component, another
of the four surveys, as their source of health insurance. The second
sample, known as the "list sample," is drawn from separate lists of
private and public employers. The combined samples provide a nationally
representative sample of employers. The target size of the list sample
is approximately 40,000 employers each year.
CMS Data:
We analyzed data provided by CMS on the number and characteristics of
sponsors approved for the RDS for plans ending in 2006 and of sponsors
approved for the RDS for plans ending in 2007. The data include
selected variables from applications that were approved for the RDS.
For plans ending in 2006, the CMS data are current as of September 11,
2006; for plans ending in 2007, the CMS data are current as of February
16, 2007. Based on conversations with CMS and data reliability checks
that we performed, we have determined that these data were sufficiently
reliable for our purposes.
Interviews with Sponsors and Experts:
To learn more about retiree health benefit trends, the factors that
sponsors considered in selecting the MMA options, the effect that
sponsors' decisions about the MMA options may have on the provision of
health benefits for retirees, and alternative approaches for the
provision of employment-based retiree health coverage, we interviewed
13 of the 15 private and public sector sponsors of employment-based
retiree health benefits that we interviewed for the initial mandated
study published in 2005.[Footnote 77] In our 2005 study, we interviewed
officials of 12 Fortune 500 employers that provided retiree health
benefits; the Office of Personnel Management, which administers the
Federal Employees Health Benefits Program; and two state retirement
systems. To select the 12 Fortune 500 employers in our 2005 study, we
judgmentally selected 10 employers from a stratified random sample of
50 Fortune 500 employers. We interviewed at least 1 employer from each
of the five groups of 100 Fortune 500 employers that were stratified on
the basis of annual revenues. In addition to considering revenues,
where data were available, we considered each employer's industry,
number of employees, postretirement benefit obligations, preliminary
MMA option decision as reported on its annual financial statement, and
union presence when making our selection. We also interviewed officials
at two additional Fortune 500 employers at the recommendation of a
benefit consultant. In our 2005 study, we judgmentally selected two
large states' retiree health benefits systems on the basis of a review
of selected state data and referrals from a benefit consultant that
works with public sector clients. For our current study, we also
interviewed 2 sponsors that chose to offer their own Medicare Part D
plans instead of implementing the RDS or another MMA option. These
sponsors were not interviewed for our 2005 report.
To obtain broader-based information about retiree health benefit
trends, MMA options, and alternative approaches for the provision of
employment-based retiree health coverage, we interviewed benefit
consultants and other experts at several other organizations.
Specifically, we interviewed representatives of five large employer
benefit consulting firms. Benefit consultants help their clients, which
include private sector employers, public sector employers, or both,
develop and implement human resource programs, including retiree health
benefit plans. While most of these benefit consulting firms' clients
were large Fortune 500 or Fortune 1,000 employers, some also had
smaller employers as clients. One benefit consulting firm that we
interviewed, in particular, provided actuarial, employee benefit, and
other services to a range of public sector clients, including state and
local governments, statewide retirement systems and health plans, and
federal government agencies. It also provided consulting services to
multiemployer plans. We also interviewed officials from the American
Academy of Actuaries, America's Health Insurance Plans and its members,
AARP, the American Benefits Council, the BlueCross BlueShield
Association and its members, the Employee Benefit Research Institute,
the National Business Group on Health, and the National Coordinating
Committee for Multiemployer Plans. Finally, we reviewed other available
literature on retiree health benefit trends, factors affecting
sponsors' decisions about the MMA options, and alternative approaches
for the provision of employment-based retiree health coverage.
[End of section]
Appendix IV: Comments from the Centers for Medicare & Medicaid
Services:
Department Of Health & Human Services:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
Date: May - 3 2001:
To: John E. Dicken:
Director:
Health Care:
Government Accountability Office:
From: Leslie V. Norwalk. Esq.
Acting Administrator:
Centers for Medicare & Medicaid Services:
Subject: Government Accountability Office (GAO) Draft Report: Retiree
Health Benefits: Majority of Sponsors Chose the Retiree Drug Subsidy
and Continued to Offer Prescription Drug Coverage (GAO-07-572):
Thank you for the opportunity to review and comment on the GAO Draft
Report referenced above. The Medicare Prescription Drug. Improvement,
and Modernization Act of 2003 (MMA) required the GAO to conduct two
studies on trends in employment-based retiree health coverage. This
draft report is the second of those studies. In this study the GAO
determined: which MMA options made available to private and public
retiree drug plan sponsors were selected by plan sponsors; the factors
plan sponsors considered in selecting these options; and the effect
these decisions may have on the provision of employment-based health
benefits for Medicare-eligible retirees.
We appreciate the GAO's thorough review of these important issues. In
general, the draft report provides an excellent summary of available
information concerning the choices plan sponsors made among MMA
options. We appreciate the hard work of the GAO staff and their
thoughtful consideration of our previous comments provided during the
preparation of the draft report.
Al the time the MMA was enacted, many expressed concern that creation
of the Medicare drug benefit would cause employers to terminate
employment-based retiree drug coverage. As a direct result of the
successful implementation of the RDS program and other MMA Part D
employer options, fears that MMA would accelerate the loss of
employment-based retiree drug coverage were unfounded.
Implementation of the MMA options in the short time frame provided by
the statute posed extraordinary challenges for CMS, including how to
design a Retiree Drug Subsidy (RDS) program that could effectively and
securely interact with the wide range of benefit plan designs and
information systems used by plan sponsors and their vendors. Despite
these many challenges, by partnering with plan sponsors and their
vendors, benefits experts, and many other stakeholders, CMS
successfully launched its online RDS application process in the summer
of 2005, followed by successful implementation of electronic drug cost
and payment request submissions in 2006 and payment reconciliation
earlier this year.
While the report understandably focuses primarily on the RDS, which is
the dominant plan sponsor choice to date, CMS" achievement in
implementing the MMA Part D employer group options identified in the
draft report, most notably the Part D employer/union-only group waiver
plan (EGWP) program, was no less remarkable. EGWWs can be used by plan
sponsors to offer supplemental coverage that is integrated with
Medicare products. By using its statutory authority to waive or modify
requirements that hinder the design of, the offering of, or the
enrollment in these products, CMS successfully implemented the Part D
EGWP application, bid and contracting processes. In doing so, CMS not
only issued a series of waivers it determined necessary for the initial
establishment and implementation of the program but also reviewed and
acted upon numerous individual waiver requests from entities seeking to
offer, sponsor or administer a Part D EGWP in order to remove obstacles
related to providing this integrated coverage.
Given the daunting task of designing, establishing and implementing the
RDS and EGWP programs to meet the needs of diverse private and public
employment-based retiree drug plans, the results achieved by CMS and
documented in the GAO report far exceeded expectations. While program
participation statistics cited in the report and elsewhere are
impressive in their own right - thousands of participating plan
sponsors providing prescription drug coverage through all the MMA
options to an overall total of nearly 9 million Medicare-eligible
retirees - the achievement is all the more remarkable in light of the
heterogeneous nature of plan sponsors' and vendors' benefit programs.
With respect to the specific findings in the GAO draft report, the
Centers for Medicare & Medicaid Services (CMS) agrees with the first
draft report finding that the majority of sponsors continued to offer
prescription drug coverage and accepted the Retiree Drug Subsidy (RDS)
for plans year ending in 2006, with much smaller percentages of
sponsors reported selecting the other available MMA options. With
respect to the draft report's observation that the size of the reported
majority actually choosing the RDS option differed across plan sponsor
surveys, the draft report findings identified several factors that may
have contributed to these differences. An additional factor CMS would
like to highlight is that some of the surveys reported what plan
sponsors said they intended or were considering doing at the time of
the survey. As the RDS participation levels demonstrate, of those
reportedly considering other options, a portion ultimately decided not
to pursue those options. CMS also agrees with the draft report's
related finding regarding the number of plan sponsors participating in
the RDS program, with one clarification. The data for 2006 was compiled
in September. In contrast, the data for 2007 was compiled in February
and thus should be considered and identified as a preliminary rather
than a final tabulation of RDS plan sponsor participation for 2007.
CMS agrees with the second draft report finding that plan sponsors
considered a variety of factors when selecting which MMA prescription
drug coverage option to pursue, with one clarification. The draft
fording states that "in order to implement most MMA options other than
the RDS, sponsors would likely have to change the prescription drug
benefits they offer." With respect to the issue of benefit design
changes, the report does not fully acknowledge that for several MMA
options (e.g., plan sponsors that choose to offer their own Medicare
Part D plan or purchase customized coverage by contracting with a
Medicare Part D plan), CMS has utilized its statutory waiver authority
to afford the utmost flexibility in benefit design (and in many other
regards, including the mechanisms for communicating to retirees about
these benefits). As a result, these other MMA options may require
minimal (if any) adjustments to premiums, cost sharing and other
primary elements of benefit design. We are concerned that readers could
misunderstand this finding and mistakenly conclude that a plan sponsor
choosing any MMA option other than the RDS is likely to cause most
retirees to experience a change in retiree drug benefits. As we have
noted above, because of the flexible manner in which CMS has
implemented other MMA options, it is likely that selecting these other
options may result in minimal benefit design changes. Moreover, as the
findings demonstrate, the vast majority of retirees in 2006 and 2007
are covered by RDS plans that did not require any changes in benefits.
CMS agrees with the third draft report finding that, in the short term,
sponsors' decisions regarding MMA options resulted in benefits
remaining relatively unchanged, but over the longer term the effect is
unclear. However, CMS is concerned that the examples of contrasting
expert opinions included in this draft finding lack sufficient context
to be appropriate for inclusion in the report's draft findings.
Moreover, there is no indication in the draft finding of the
preponderance of expert opinion in favor of one or the other point of
view. While the cited expert opinions may be appropriate to include in
the appendix discussing interviews and expert opinions, we are
concerned about the appearance of elevating opinions to the status of
findings by including them in the findings sections of the report. The
inclusion of these opinions in the report findings also may create the
mistaken impression that GAO has analyzed and/or validated the opinions
being expressed concerning a particular MMA option.
In conclusion, the Medicare prescription drug benefit program and the
RDS program represent important sources of financial support that can
help private and public employer and union plan sponsors continue to
provide high quality drug coverage for their retirees. While RDS has
proven to be the most popular approach to date, CMS continues to
promote and support the other MMA options which allow employers to
utilize Part D and/or Medicare Advantage (MA) plans in instances where
they may be better suited to the needs of some plan sponsors. CMS has
provided maximum flexibility, consistent with its statutory authority,
in the RDS program and the various Medicare Part D and MA employer and
union group plan options made available by the MMA. CMS continues to
reach out to employer and union plan sponsors to ensure they are
informed about the host of MMA options for providing coverage. The
findings in the draft report validate our efforts to make these
programs accessible and workable for plan sponsors in order to increase
the likelihood that these sources of financial support will improve the
short and long term prospects for retiree drug coverage, enhancing both
its quality and security.
Thank you again for your efforts to study this matter and for the
opportunity to review and comment on the draft report. Attached are our
technical comments on the draft report which are included for your
consideration.
Attachment:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
Contact:
John E. Dicken, (202) 512-7119 or dickenj@gao.gov:
Acknowledgments:
In addition to the contact named above, Kristi A. Peterson, Assistant
Director; George Bogart; Kevin Dietz; Laura Sutton Elsberg; Krister
Friday; Gregory Giusto; Elizabeth T. Morrison; Giao N. Nguyen; and
Suzanne Worth made key contributions to this report.
[End of section]
(290541):
FOOTNOTES
[1] Pub. L. No. 108-173, §101, 117 Stat. 2066, 2071-2152.
[2] In this report, we use the term sponsor to refer to a sponsor of
employment-based retiree group health coverage, including private
sector employers; public sector employers (federal, state, or local
governments); sponsors of church plans; and sponsors of plans
(including multiemployer plans) offered under collectively bargained
agreements. In some instances, when reporting data from surveys of
various sponsors, we use the term employer instead of sponsor to
describe a specific subset of sponsors.
[3] MMA, §111, 117 Stat. 2174-2176.
[4] See GAO, Retiree Health Benefits: Options for Employment-Based
Prescription Drug Benefits under the Medicare Modernization Act, GAO-05-
205 (Washington, D.C.: Feb. 14, 2005).
[5] For this report, we specify when information is for Medicare-
eligible retirees (primarily those aged 65 or older) and when it is for
retirees under the age of 65. If information is not specific to
Medicare-eligible retirees or to those under the age of 65, we use the
term retirees to refer to those that may be Medicare-eligible, under
65, or both.
[6] Mercer Health & Benefits, National Survey of Employer-Sponsored
Health Plans: 2006 Survey Report (New York, N.Y.: Mercer Health &
Benefits, LLC, 2007).
[7] Frank McArdle, Amy Atchison, and Dale Yamamoto, Hewitt Associates;
and Michelle Kitchman Strollo and Tricia Neuman, The Kaiser Family
Foundation, Retiree Health Benefits Examined: Findings from the Kaiser/
Hewitt 2006 Survey on Retiree Health Benefits (Menlo Park, Calif.: The
Henry J. Kaiser Family Foundation; Lincolnshire, Ill.: Hewitt
Associates, December 2006).
[8] A multiemployer plan is a pension, health, or other employee
benefit plan to which more than one employer is required to contribute;
that is maintained under one or more collective bargaining agreements
between one or more employee organizations, such as a union, and more
than one employer; and that satisfies such other requirements the
Secretary of Labor may prescribe by regulation. 29 U.S.C. § 1002(37)
(2000).
[9] The Segal Company, Results of the Segal Survey of Multiemployer
Health Funds' Response to the Initial Availability of Medicare Part D
Coverage (New York, N.Y.: Spring 2006), and Results of the Segal
Medicare Part D Survey of Public Sector Plans (New York, N.Y.: Summer
2006).
[10] Mercer Health & Benefits, National Survey of Employer-Sponsored
Health Plans: 2005 Survey Report (New York, N.Y.: Mercer Health &
Benefits, LLC, 2006), and Kaiser/Hewitt, Retiree Health Benefits
Examined: Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health
Benefits.
[11] In addition to OPM, the 13 sponsors included 10 Fortune 500
employers and two state retirement systems.
[12] Other sources of supplemental coverage for Medicare-eligible
beneficiaries may include individually purchased coverage or Medicaid.
Some Medicare-eligible beneficiaries have a combination of employment-
based and individually purchased coverage.
[13] See, for example, Mercer Health & Benefits, National Survey of
Employer-Sponsored Health Plans: 2006 Survey Report.
[14] Gary Claxton and others, Kaiser Family Foundation; Samantha
Hawkins, HRET; and Jeremy Pickreign, Heidi Whitmore, and Jon Gabel,
Center for Studying Health System Change, Employer Health Benefits:
2006 Annual Survey (Menlo Park, Calif.: The Henry J. Kaiser Family
Foundation; Chicago, Ill.: HRET, 2006).
[15] Enrollment in the program is voluntary for most beneficiaries,
except dual eligibles--low-income Medicare beneficiaries who also
qualify for full Medicaid benefits. All dual eligibles were
automatically enrolled in a Medicare Part D plan by December 31, 2005,
to ensure that these beneficiaries continued to have prescription drug
coverage when their Medicaid coverage ended on December 31, 2005.
However, these individuals had the option to opt out of the Medicare
Part D benefit.
[16] Specifically, a January 30, 2007, CMS press release reported that
these Medicare beneficiaries, totaling approximately 39 million,
received prescription drug coverage through the following sources:
Medicare prescription drug plans or Medicare Advantage prescription
drug plans (nearly 24 million); sponsors approved for the RDS (7
million); federal retiree programs, such as FEHBP or TRICARE, the
Department of Defense's health system (3 million); and other sources,
such as the Department of Veterans Affairs (5 million).
[17] The MMA created the Medicare Advantage program to replace the
Medicare+Choice program (MMA § 201, 117 Stat. 2176). Medicare+Choice
was established in the Balanced Budget Act of 1997 (Pub. L. No. 105-33,
sec. 4001, §§ 1851-1859, 111 Stat. 251, 275-327 (codified at 42 U.S.C.
§§ 1395w-21-1395w-28)) to expand Medicare beneficiaries' health plan
options and encourage wider availability of health maintenance
organizations and other types of health plans, such as preferred
provider organizations, as an alternative to traditional fee-for-
service. H.R. Conf. Rep. No. 108-391, at 524 (2003). While retaining
many of the same provisions in Medicare+Choice, including the
eligibility, enrollment, grievance, and appeals provisions, Medicare
Advantage provides additional features, such as increased payment rates
and a new option for Medicare beneficiaries--regional preferred
provider organizations. MMA § 221, 117 Stat. 2180-93.
[18] Plans could also offer enhanced benefits.
[19] Allowable costs are nonadministrative costs actually paid for any
prescription drugs that would be covered under the Part D benefit, net
of any discounts, rebates, and similar price concessions.
[20] To demonstrate actuarial equivalence sponsors must satisfy a two-
prong test. The first prong is a gross value test, in which the
expected amount of paid claims for Medicare beneficiaries in the
sponsor's plan must be at least equal to the expected amount of paid
claims for the same beneficiaries under Part D standard coverage. The
second prong is a net value test, which takes into account the impact
of retiree contributions to the plan, as well as the impact that
sponsors' supplemental coverage, if provided, has on the value of the
standard Part D benefit.
[21] Sponsors can also request an automatic 30-day extension of this
deadline.
[22] With certain exceptions, sponsors must disclose to all of their
Medicare-eligible retirees whether their prescription drug coverage is
considered "creditable" as compared to the Part D benefit. To be
creditable, the expected amount of paid claims under the sponsor's drug
coverage generally must be at least equal to the expected amount of
paid claims under the standard Part D benefit. A Part D eligible
individual must pay a late enrollment penalty if there is a continuous
period of 63 days or longer during which the individual was not covered
under any creditable prescription drug coverage. This disclosure can be
incorporated into other plan communications and is required to be sent
to retirees prior to certain events, such as the first day of the Part
D annual enrollment period.
[23] Others have referred to this option as "becoming a PDP or MA-PD
plan."
[24] Kaiser/Hewitt, Retiree Health Benefits Examined: Findings from the
Kaiser/Hewitt 2006 Survey on Retiree Health Benefits.
[25] Mercer Health & Benefits, National Survey of Employer-Sponsored
Health Plans: 2006 Survey Report.
[26] Segal, Results of the Segal Medicare Part D Survey of Public
Sector Plans.
[27] Segal, Results of the Segal Survey of Multiemployer Health Funds'
Response to the Initial Availability of Medicare Part D Coverage.
[28] Mercer Health & Benefits, National Survey of Employer-Sponsored
Health Plans: 2005 Survey Report. In its survey results, Mercer
reported that larger employers were more likely than smaller employers
offering retiree health benefits to take the RDS for 2006. For example,
30 percent of employers with 500 to 999 employees planned to take the
RDS for 2006, while 61 percent of employers with 5,000 to 9,999
employees planned to take the RDS for 2006.
[29] According to CMS data, about 78 percent of sponsors that were
approved for the RDS for 2007 represented more than 50 retirees and
about 63 percent of sponsors that were approved for the RDS for 2007
represented more than 100 retirees.
[30] According to CMS officials, these approximately 7 million retirees
represent the number of retirees covered by the RDS as of June 11,
2006, and may include retirees enrolled in plans approved for the RDS
for 2007. As a result, these 7 million retirees are not necessarily
linked to the 3,900 sponsors approved for the RDS for 2006. According
to CMS officials, the RDS program has no current business or
operational need to calculate the unique number of retirees linked to
the number of sponsors that were approved for the RDS for plans ending
in 2006, and therefore CMS has not expended the RDS system development
resources it has to code its system to allow for this calculation.
[31] The sponsor categories "commercial" and "government" are used by
CMS on the RDS application and are self-reported by applicants.
[32] As was the case with 2006 data, CMS did not provide a unique
number of retirees linked to the number of sponsors that were approved
for the RDS for plans ending in 2007. However, in January 2007, CMS
published a press release that again reported that approximately 7
million Medicare-eligible retirees received coverage through sponsors
approved for the RDS.
[33] CMS officials told us that because the 2006 data were compiled
late in the year (September), most of the technical difficulties
sponsors experienced had been resolved by that time and their
applications had been approved, and therefore the approved application
total by that time of the year was close to the final total for the
year. In contrast, the preliminary 2007 approved application data were
compiled early in the year (February) when some sponsors, especially
those participating in the RDS program for the first time, were still
experiencing technical difficulties, and therefore their applications
had not yet been approved.
[34] CMS has issued guidance for multiple MMA options to waive or
modify Part D requirements added by the MMA that hinder the design of,
the offering of, or the enrollment in an employer-or union-sponsored
Part D retiree plan (including a PDP or MA-PD plan). For example,
sponsors that contract with CMS to offer their own PDP or MA-PD plan
can limit coverage to retirees only, while other Part D plans must
offer coverage to all individuals who reside in one or more specified
regions. According to CMS, the guidance was needed to ensure that
certain MMA options, such as a sponsor's option to contract with or
offer its own PDP, are viable options for sponsors seeking to retain
high-quality retiree coverage.
[35] A formulary is a preferred list of drug products that typically
limits the number of drugs available within a therapeutic class for
purposes of drug purchasing, dispensing, reimbursement, or for all
three purposes. According to CMS, the Part D formulary must include at
least two drugs in each approved drug category and class (unless only
one drug is available for a particular category or class), regardless
of the classification system used.
[36] According to a 2005 Kaiser/Hewitt survey on retiree health
benefits, 94 percent of surveyed employers indicated that their 2005
benefits had an actuarial value that was equal to or greater than the
standard Medicare prescription drug benefit for 2006. See Frank
McArdle, Amy Atchison, and Dale Yamamoto, Hewitt Associates; and
Michelle Kitchman Strollo and Tricia Neuman, The Kaiser Family
Foundation, Prospects for Retiree Health Benefits as Medicare
Prescription Drug Coverage Begins: Findings from the Kaiser/Hewitt 2005
Survey on Retiree Health Benefits (Menlo Park, Calif.: The Henry J.
Kaiser Family Foundation; Lincolnshire, Ill.: Hewitt Associates,
December 2005).
[37] As we stated earlier, each health benefit option offered by
sponsors has to pass both a gross and a net value test to meet
actuarial equivalence. The final rule gave sponsors with multiple
benefit options the ability to aggregate benefit options to pass the
net test or to pass the net test separately for each benefit option. 70
Fed. Reg. 4194, 4579 (Jan. 28, 2005) (codified at 42 C.F.R. §884
(d)(5)(iv)). As a result, sponsors that have benefit options that would
not be able to meet the actuarial equivalence standard on their own can
aggregate these options with other benefit options that are more
generous than the standard Part D benefit, which may allow sponsors to
collect the RDS for all of the options. In addition, sponsors that
include both medical and drug coverage and have a single premium for
this coverage have the discretion and flexibility to allocate a portion
of the premium to the drug coverage for the purpose of the net value
test of actuarial attestation. 70 Fed. Reg. 4579 (codified at 42 C.F.R.
§884 (d)(ii)(B)). For example, a sponsor of an integrated medical and
drug plan that has a premium of $30 can attribute a small portion of
that amount to drug coverage when it does the calculations for the net
value test. Experts we interviewed told us that this flexibility was
helpful to sponsors in meeting the actuarial equivalence standard.
[38] With certain exceptions, sponsors that provide prescription drug
coverage to Medicare Part D-eligible individuals must disclose to
retirees whether the coverage is or is not "creditable prescription
drug coverage" (i.e., the coverage would be able to pass the gross
benefit test used in calculating actuarial equivalence).
[39] Among other CMS communication requirements, sponsors that offer
their own PDP or MA-PD plan are required to send retirees certain
marketing-related communications, such as the Annual Notice of Change,
Summary of Benefits, and Evidence of Coverage. The Annual Notice of
Change explains changes that a PDP or MA-PD plan has made to its
coverage from the previous year. The Summary of Benefits provides
benefit design details. The Evidence of Coverage explains the rights,
benefits, and responsibilities of plan members.
[40] Part D enrollees with standard coverage must have $3,850 in true
out-of-pocket costs in 2007 before Part D catastrophic coverage begins.
True out-of-pocket costs include only those payments made by the
individual; made by another person (which may include another family
member, individual, corporation, or charity) on behalf of the
individual; made on behalf of the individual under the low-income
subsidy provisions; or made under a state pharmaceutical assistance
program. Payments by insurance, a group health plan, a government-
funded health program, or other third-party payment arrangement, such
as those from employers and other retiree health benefit sponsors, do
not count toward this limit.
[41] Sponsors that contract with or become a PDP or MA-PD are required
to adjust premiums for retirees eligible for the low-income subsidy.
For most beneficiaries entitled to the low-income subsidy, CMS pays the
beneficiary's premium (up to the low-income premium subsidy amount).
CMS requires that the low-income premium subsidy first be used to
reduce the portion of the monthly beneficiary premium paid for by the
beneficiary, with any remainder then used to reduce the employer's
premium contribution. For example, if, under the terms of the retiree
plan, the beneficiary is responsible for paying $20 of a $40 monthly
premium with the employer paying the remaining $20, a monthly low-
income premium subsidy of $35 would be used first to reduce the
beneficiary's liability to $0 and then to reduce the employer's
liability from $20 to $5.
[42] This sponsor told us that these additional resources were needed
to address a number of issues related to offering its own PDP, such as
researching and keeping up with CMS guidance in a timely manner. This
sponsor, however, also said that most of the issues had been resolved
for 2007.
[43] For example, sponsors applying for the RDS must submit a retiree
file to CMS that contains data about the retirees for whom a sponsor
has applied for the subsidy and that CMS uses to determine whether the
submitted retirees are eligible for the subsidy. Several sponsors we
interviewed told us they experienced difficulties when they submitted
the retiree file, such as having some of their submitted retirees
rejected by CMS without an explanation for why this occurred. According
to one sponsor, retirees were rejected for reasons such as an incorrect
Social Security number or a name misspelling, and it was the
responsibility of the sponsor to determine why the retirees were
rejected. Another sponsor we interviewed had difficulty with the online
application, indicating that it was slow and nonintuitive. Several of
the sponsors we interviewed expected that these implementation issues
would be fixed by the second year of the RDS. Other RDS-related
administrative issues, such as difficulties in determining whether a
drug should be submitted for reimbursement under Medicare Part B or
Medicare Part D, may be longer lasting. According to the 2006 Kaiser/
Hewitt survey, the operational and administrative issues associated
with the RDS were among the reasons some employers cited for not
planning to take the RDS in the future.
[44] After CMS published its final rule implementing the MMA
prescription drug benefit, in January 2005, the various companies that
planned to issue private PDPs began to assess the feasibility of
entering the market and what products they should offer, but most of
these companies focused on signing up individual beneficiaries for Part
D rather than on developing the alternative employer options created by
the MMA, such as contracting with employers to offer a PDP or MA-PD
plan. See Dale H. Yamamoto, "What Comes After the Retiree Drug
Subsidy?" Benefits Quarterly, vol. 22, no. 3 (2006).
[45] In a recent report, we discussed the potential effect of the RDS
on FEHBP premiums. Specifically, we reported that "plan officials
differed on whether the subsidy would have affected growth in FEHBP
premiums in 2006 had OPM applied for the subsidy and used it to
mitigate premium growth. Most plan officials we interviewed stated that
the subsidy would have had a small effect on premium growth. Officials
from two large plans with higher-than-average shares of retirees stated
that the subsidy would have lowered their plans' premium growth--
officials from one plan claimed by at least 3.5 to 4 percentage points
for their plan. We estimated that the subsidy would have lowered the
growth in premiums across all FEHBP plans for 2006 by more than 2
percentage points on average, from 6.4 percent to about 4 percent." See
GAO, Federal Employees Health Benefits Program: Premium Growth Has
Recently Slowed, and Varies among Participating Plans, GAO-07-141
(Washington, D.C.: Dec. 22, 2006).
[46] Sponsors we interviewed told us that they were considering
alternative options other than the RDS for the future, such as offering
MA-PD plans--which may have lower premiums than sponsors' current
plans. Some sponsors also told us they may be forced to move away from
the RDS in the future because limits on their contributions to retiree
health plans jeopardize their ability to meet CMS's actuarial
equivalence standard for the RDS. For public sponsors, experts we
interviewed told us that requirements published in June 2006 by the
Governmental Accounting Standards Board (GASB) that limit the ability
of public sector sponsors to account for future RDS payments on their
financial statements may affect the long-term MMA options selected by
public sponsors. See GASB Technical Bulletin No. 2006-1, Accounting and
Financial Reporting by Employers for Payments from the Federal
Government Pursuant to the Retiree Drug Subsidy Provisions of Medicare
Part D (Norwalk, Conn.: GASB, June 30, 2006).
[47] GAO-05-205.
[48] The researcher with the National Opinion Research Center who
reviewed our report is also an author of the 2006 Kaiser/HRET survey.
[49] See GAO, Retiree Health Benefits: Options for Employment-Based
Prescription Drug Benefits under the Medicare Modernization Act, GAO-05-
205 (Washington, D.C.: Feb. 14, 2005).
[50] Medicare-eligible generally refers to retirees aged 65 and over.
[51] See Mercer Health & Benefits, National Survey of Employer-
Sponsored Health Plans: 2006 Survey Report (New York, N.Y.: Mercer
Health & Benefits, LLC, 2007). Mercer Health & Benefits is a business
of Mercer Human Resource Consulting.
[52] Gary Claxton and others, Kaiser Family Foundation; Samantha
Hawkins, HRET; and Jeremy Pickreign, Heidi Whitmore, and Jon Gabel,
Center for Studying Health System Change, Employer Health Benefits:
2006 Annual Survey (Menlo Park, Calif.: The Henry J. Kaiser Family
Foundation; Chicago, Ill.: HRET, 2006).
[53] Data based on Mercer surveys from 1993 through 2004.
[54] MEPS data are for 2004.
[55] As we reported in 2005, there continues to be a concern that
standards adopted by the Governmental Accounting Standards Board (GASB)
in 2004, which affect the reporting of postretirement benefit
obligations, may put new pressures on public sector funding of retiree
health care benefits. The 2005 Mercer survey reported that although the
GASB changes do not require sponsors to fund health plan liabilities,
it is possible that the changes will prompt a decline in coverage in
the public sector. GASB Statement No. 43: Financial Reporting for
Postemployment Benefit Plans other than Pension Plans (Norwalk, Conn.:
GASB, April 2004) and GASB Statement No. 45: Accounting and Financial
Reporting by Employers for Postemployment Benefits other than Pensions
(Norwalk, Conn.: GASB, June 2004). The standards are effective in three
phases, depending on a public sector entity's total annual revenues.
For the largest employers, the effective date for Statements No. 43 and
No. 45 began in the first period after December 15, 2005, and December
15, 2006, respectively.
[56] Kaiser/HRET, Employer Health Benefits: 2006 Annual Survey.
[57] In our 2005 report, we reported a modest decline for those aged 70
through 79 from 1995 through 2003 (33 percent in 1995; 31 percent in
2003) that was statistically significant. When updated with the 2005
CPS data, the change from 1995 to 2005 was no longer statistically
significant.
[58] In the survey, nearly half of the employers that terminated
subsidized coverage for future retirees indicated that they provide a
form of access-only coverage--where retirees have the option to buy
into a health plan at a group rate, but without any financial
assistance from a sponsor.
[59] In 2005 we reported that, according to 2001 Medicare Current
Beneficiary Survey (MCBS) data, prescription drug expenditures for
retired Medicare beneficiaries that were paid by employment-based
insurance accounted for 45 percent of all health care expenditures for
these beneficiaries. See GAO-05-205. In 2004, these costs accounted for
52 percent of all health care expenditures for these beneficiaries,
based on MCBS data.
[60] Coinsurance requires beneficiaries to pay a percentage of benefit
costs as opposed to a fixed amount, such as a copayment.
[61] In a previous survey, Kaiser/Hewitt also reported how the increase
in retiree contributions to premiums compared to the rate of increase
for total health care premium costs. In the 2005 Kaiser/Hewitt survey,
42 percent of surveyed employers with 1,000 or more employees increased
retiree premiums for retirees aged 65 or older at a rate that was
higher than the reported increase in total premium costs, suggesting an
increase in the share of premiums these retirees were required to pay.
However, the survey researchers noted that this subgroup of employers
tended to require retirees to contribute a lower share of premiums than
other surveyed employers in that year. Comparable information is not
reported in the 2006 Kaiser/Hewitt survey.
[62] Benefit surveys also reported increased health care costs for
retirees. The 2006 Kaiser/Hewitt survey reported that the total cost of
providing health benefits to all retirees for surveyed employers
increased, on average, by an estimated 6.8 percent between 2005 and
2006. Respondents to the 2006 Mercer survey were asked about their
retiree costs for both 2005 and 2006, and Mercer used this information
to estimate an average annual cost increase of approximately 2.6
percent per Medicare-eligible retiree from 2005 to 2006. Because of the
low response rate for this part of the survey, these results are not
projectable nationwide and should be viewed only as a general indicator
of retiree medical plan cost.
[63] Data reflect retiree contributions for health plans for retiree-
only coverage.
[64] Under current law, ongoing contributions to HSAs must be
accompanied by active enrollment in a high-deductible health plan.
[65] The Health Opportunity Patient Empowerment Act of 2006 makes
several adjustments to federal policy regarding HSAs. First, the annual
deductible limit on contributions to HSAs was repealed. Second,
individuals can now make a onetime transfer of funds from their HRA or
flexible spending account (an annual employer-sponsored "use-it-or-
lose-it" fund for medical expenses not covered by health insurance) to
their HSA. However, the contribution must be made prior to 2012.
Finally, individuals can now also make a onetime transfer of funds from
retirement accounts such as individual retirement accounts, subject to
certain penalties, taxes, and limitations, to their HSA. Pub. L. No.
109-432, §§ 302, 303, 307, 120 Stat. 2922, 2948, 2949, 2951.
[66] Currently, employers are not required to make unused HRA balances
available to employees upon job separation.
[67] According to the 2006 Kaiser/Hewitt survey on retiree health
benefits, 10 percent of those surveyed among large private sector
employers (defined as those with 1,000 or more employees) offering
retiree health benefits offered retirees under age 65 an account-based
retiree health plan such as an HSA or HRA in 2006, whereas fewer (3
percent) did so for retirees aged 65 and older.
[68] Year-to-year fluctuations in these employer benefit survey results
need to be interpreted with caution. These surveys are based on random
samples designed to be representative of a broader employer population
and are used widely, but may not have the precision needed to
distinguish small changes in coverage from year to year because of
their response rates and the number of firms surveyed.
[69] Kaiser/HRET has been conducting the survey of small and large
employers beginning in 1999. From 1991 through 1998, KPMG Peat Marwick
conducted the survey using the same instrument. However, data for all
sizes of employers are not available for all years. For example, KPMG
Peat Marwick sampled only large employers in 1991, 1992, 1994, and 1997
and sampled both large and small employers in 1993, 1995, 1996, and
1998.
[70] Foster Higgins, which later merged with Mercer Human Resource
Consulting, began conducting the survey in 1986. Mercer Health &
Benefits, a business of Mercer Human Resource Consulting, conducted the
2005 and 2006 surveys.
[71] However, the 2006 Mercer report stated that the average annual
cost increase data cited for Medicare-eligible retirees are not
projectable.
[72] A multiemployer plan is a pension, health, or other employee
benefit plan to which more than one employer is required to contribute;
that is maintained under one or more collective bargaining agreements
between one or more employee organizations, such as a union, and more
than one employer; and that satisfies such other requirements the
Secretary of Labor may prescribe by regulation. 29 U.S.C. § 1002(37)
(2000).
[73] According to the survey, the goal of the Public Sector HealthCare
Roundtable is to represent the interests of the public sector during
the formulation and debate of federal health care reform initiatives.
[74] See Hyperlink, http://www.census.gov/hhes/www/income/p60_231sa.pdf
(downloaded Apr. 3, 2007) for additional information. We analyzed data
from the March CPS Supplement from 1996 through 2002 and the Annual
Social and Economic Supplement to the CPS from 2003 through 2006.
[75] See Hyperlink, http://www.cms.hhs.gov/apps/mcbs/Overview.asp
(downloaded Feb. 21, 2007) for additional information.
[76] See Hyperlink,
http://www.meps.ahrq.gov/mepsweb/about_meps/survey_back.jsp (downloaded
Apr. 4, 2007) for additional information.
[77] See GAO-05-205. Two private sector employers that participated in
the 2005 study declined to be interviewed for this study.
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