Retiree Health Insurance

Employer-provided insurance for retirees has experienced a slow but persistent decline since the early 1990s. Rising health care costs have spurred companies to find ways to control their benefit expenditures, including eliminating retiree coverage and increasing cost sharing. Moreover, a new financial accounting standard developed in the late 1980s has changed employers' perceptions of retiree health benefits and may have served as a catalyst to reduce retiree coverage. The Health Insurance Portability and Accountability Act of 1996 mandates continued access to health insurance for persons losing group coverage. The legislation does not, however, guarantee that the continued coverage will be affordable. Because state laws governing the operation of the individual market can vary, the premiums faced by early retirees vary substantially. Moreover, considering that large companies typically pay 70 to 80 percent of the premium, costs in the individual market may come as a rude awakening for early retirees. Persons who are already retired when a company terminates coverage are not eligible to temporarily continue that firm's health plan at their own expenses. COBRA coverage is only available to active employees who quit or retire or are fired or laid off. To address this potential gap in coverage when a former employer unexpectedly terminates health insurance, Congress and the President have proposed allowing affected retirees to purchase continuation coverage at a cost that reflects their higher utilization of services until they become eligible for Medicare.

GAO noted that: (1) retiree access to and participation in private insurance through an employer has undergone a slow but persistent decline since the early 1990s; (2) there are several explanations for this erosion in coverage: (a) high and rising health care costs have spurred employers to look for ways to control their benefit expenditures, including eliminating retiree coverage and increasing cost sharing; and (b) a new financial accounting standard developed in the late 1980s has changed employers' perceptions of retiree health benefits and may have acted as a catalyst for reductions in retiree coverage; (3) the new rule makes employers much more aware of the future liability inherent in retiree health benefits by requiring them to account for its estimated value; (4) losing access to employer-based coverage poses major challenges for retirees; (5) the 1997 implementation of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) has eliminated one potential obstacle for retirees who lose group coverage through their former employer--the possibility that coverage in the individual market will be denied or restricted by a preexisting medical condition; (6) because state laws governing the operation of the individual market differ, the premiums faced by early retirees vary substantially; (7) moreover, considering that large companies typically pay 70 to 80 percent of the premium, costs in the individual market may come as a rude awakening for early retirees; (8) early evidence from the implementation of HIPAA suggests that rates developed by insurance carriers for HIPAA guaranteed access products are substantially higher than the prices of standard products available in the individual market to those who are healthy; (9) as a result, these 1996 rates may understate the cost of a HIPAA product purchased in 1998; (10) a key characteristic of America's voluntary, employer-based system of health insurance is an employer's freedom to modify the conditions of coverage or to terminate benefits; (11) when an employer has terminated retiree health benefits, federal courts have turned to the nature of the written agreements and other pertinent evidence covering the provision of retiree benefits to determine the legitimacy of the action; and (12) to address the potential gap in coverage when a former employer unexpectedly terminates health insurance, Congress as well as the President have proposed allowing affected retirees to purchase continuation coverage at a cost that reflects their higher utilization of services until they become eligible for Medicare.