Retiree Health Benefits
Options for Employment-Based Prescription Drug Benefits under the Medicare Modernization Act Gao ID: GAO-05-205 February 14, 2005The 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 included incentives for sponsors of employment-based retiree health plans to offer prescription drug benefits to Medicare-eligible retirees, such as a federal subsidy when sponsors provide benefits meeting certain MMA requirements. Plan sponsors cannot receive a subsidy for retired Medicare beneficiaries who enroll in part D. In response to an MMA mandate, GAO determined (1) the trends in employment-based retiree health coverage prior to the MMA and (2) which MMA prescription drug options plan sponsors said they would pursue and the effect these options might have on retiree health benefits. GAO identified trends using data from federal and private sector surveys of employers' health benefit plans and financial statements of 50 randomly selected Fortune 500 employers. Where data for Medicare-eligible retirees were not available, GAO reported data for all retirees, including Medicare-eligible retirees. To obtain plan sponsors' views about options they were likely to pursue, GAO reviewed the 50 employers' financial reports and interviewed benefit consultants; private and public sector plan sponsors, including the Office of Personnel Management for federal employees' health benefits; and other experts.
A long-term decline in the percentage of employers offering retiree health coverage has leveled off in recent years, but retirees face an increasing share of costs, eligibility restrictions, and benefit changes that contribute to an overall erosion in the value and availability of coverage. Although the percentages and time frames differed, two employer benefit surveys showed that the percentage of employers offering health coverage to retirees has declined since the early 1990s; this trend, however, has leveled off. The cost to provide retiree health coverage, including coverage for Medicare-eligible retirees, has increased significantly: one employer benefit survey cited double-digit increases each year from 2000 through 2003. Prescription drugs for Medicare-eligible retirees constituted a large share of retiree health costs. Employers and other plan sponsors have used various strategies to limit overall benefit cost growth that included increasing retiree cost sharing and premiums, restricting eligibility for benefits, placing financial caps on health care expenditures, and revising prescription drug benefits. Many plan sponsors had not made final decisions about which MMA prescription drug options they would choose for their Medicare-eligible retirees at the time of GAO's review. Specifically, 13 of the 15 private and public plan sponsors GAO interviewed were undecided for some or all retirees. However, most plan sponsors interviewed had chosen the federal subsidy option for some or all retirees or were considering the subsidy as one of several options. Alternatively, some plan sponsors that had set caps on their retiree health benefit obligations were considering supplementing (known as "wrapping around") the new Medicare prescription drug benefit for some or all retirees rather than providing their own comprehensive prescription drug coverage in lieu of the Medicare drug benefit. Also, some plan sponsors and benefit consultants said they were waiting to see how the market for other MMA options, such as Medicare Advantage plans, develops. About two-thirds of financial statements GAO reviewed for Fortune 500 employers reporting obligations for retiree health benefits had begun to reflect reduced obligations resulting from the MMA options. While plan sponsors contacted said they did not anticipate reducing their drug coverage in view of new coverage offered through the MMA, increasing health care costs might cause them to do so in the future. Benefit consultants and other experts interviewed said that the MMA was not likely to induce employers to begin to provide prescription drug coverage or to supplement the Medicare drug benefit if they had not previously offered retiree health coverage. In commenting on a draft of this report, the Centers for Medicare & Medicaid Services and four experts generally agreed with the report's findings. The Office of Personnel Management indicated that it has not made final decisions about which MMA prescription drug option it would choose for the Federal Employees Health Benefits Program, but it does not expect to choose the subsidy option.
GAO-05-205, Retiree Health Benefits: Options for Employment-Based Prescription Drug Benefits under the Medicare Modernization Act
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
February 2005:
Retiree Health Benefits:
Options for Employment-Based Prescription Drug Benefits under the
Medicare Modernization Act:
GAO-05-205:
GAO Highlights:
Highlights of GAO-05-205, 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 included
incentives for sponsors of employment-based retiree health plans to
offer prescription drug benefits to Medicare-eligible retirees, such as
a federal subsidy when sponsors provide benefits meeting certain MMA
requirements. Plan sponsors cannot receive a subsidy for retired
Medicare beneficiaries who enroll in part D. In response to an MMA
mandate, GAO determined (1) the trends in employment-based retiree
health coverage prior to the MMA and (2) which MMA prescription drug
options plan sponsors said they would pursue and the effect these
options might have on retiree health benefits.
GAO identified trends using data from federal and private sector
surveys of employers‘ health benefit plans and financial statements of
50 randomly selected Fortune 500 employers. Where data for Medicare-
eligible retirees were not available, GAO reported data for all
retirees, including Medicare-eligible retirees. To obtain plan
sponsors‘ views about options they were likely to pursue, GAO reviewed
the 50 employers‘ financial reports and interviewed benefit
consultants; private and public sector plan sponsors, including the
Office of Personnel Management for federal employees‘ health benefits;
and other experts.
What GAO Found:
A long-term decline in the percentage of employers offering retiree
health coverage has leveled off in recent years, but retirees face an
increasing share of costs, eligibility restrictions, and benefit
changes that contribute to an overall erosion in the value and
availability of coverage. Although the percentages and time frames
differed, two employer benefit surveys showed that the percentage of
employers offering health coverage to retirees has declined since the
early 1990s; this trend, however, has leveled off. The cost to provide
retiree health coverage, including coverage for Medicare-eligible
retirees, has increased significantly: one employer benefit survey
cited double-digit increases each year from 2000 through 2003.
Prescription drugs for Medicare-eligible retirees constituted a large
share of retiree health costs. Employers and other plan sponsors have
used various strategies to limit overall benefit cost growth that
included increasing retiree cost sharing and premiums, restricting
eligibility for benefits, placing financial caps on health care
expenditures, and revising prescription drug benefits.
Many plan sponsors had not made final decisions about which MMA
prescription drug options they would choose for their Medicare-eligible
retirees at the time of GAO‘s review. Specifically, 13 of the 15
private and public plan sponsors GAO interviewed were undecided for
some or all retirees. However, most plan sponsors interviewed had
chosen the federal subsidy option for some or all retirees or were
considering the subsidy as one of several options. Alternatively, some
plan sponsors that had set caps on their retiree health benefit
obligations were considering supplementing (known as ’wrapping around“)
the new Medicare prescription drug benefit for some or all retirees
rather than providing their own comprehensive prescription drug
coverage in lieu of the Medicare drug benefit. Also, some plan sponsors
and benefit consultants said they were waiting to see how the market
for other MMA options, such as Medicare Advantage plans, develops.
About two-thirds of financial statements GAO reviewed for Fortune 500
employers reporting obligations for retiree health benefits had begun
to reflect reduced obligations resulting from the MMA options. While
plan sponsors contacted said they did not anticipate reducing their
drug coverage in view of new coverage offered through the MMA,
increasing health care costs might cause them to do so in the future.
Benefit consultants and other experts interviewed said that the MMA was
not likely to induce employers to begin to provide prescription drug
coverage or to supplement the Medicare drug benefit if they had not
previously offered retiree health coverage.
In commenting on a draft of this report, the Centers for Medicare &
Medicaid Services and four experts generally agreed with the report‘s
findings. The Office of Personnel Management indicated that it has not
made final decisions about which MMA prescription drug option it would
choose for the Federal Employees Health Benefits Program, but it does
not expect to choose the subsidy option.
www.gao.gov/cgi-bin/getrpt?GAO-05-205.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Kathryn G. Allen at (202)
512-7118.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Long-term Decline in Employment-Based Retiree Health Coverage Has
Leveled Off, with Retirees Paying an Increasing Share of the Costs:
Employers and Plan Sponsors Considering MMA Options for Prescription
Drug Coverage, Often Considering Subsidy as Primary Option for Some or
All Medicare-Eligible Retirees:
Concluding Observations:
Agency and Other External Comments:
Appendix I: Scope and Methodology:
Surveys of Employment-Based Health Benefits:
Federal Surveys:
Financial Data from Fortune 500 Employers:
Interviews with Benefit Consultants, Plan Sponsors, and Others:
Appendix II: Comments from the Centers for Medicare & Medicaid
Services:
Appendix III: Comments from the Office of Personnel Management:
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Status of Decisions by 15 Private and Public Sector Plan
Sponsors Interviewed regarding the MMA Subsidy Option for Prescription
Drug Coverage:
Table 2: Actions Taken in Response to the MMA by 50 Randomly Selected
Fortune 500 Employers, Most as of the Quarter Ending September 30,
2004:
Figures:
Figure 1: Medicare Part D Standard Prescription Drug Benefit:
Figure 2: Mercer Survey Results--Percentage of Employers with 500 or
More Employees Offering Health Benefits to Medicare-Eligible Retirees,
1993-2004:
Figure 3: Kaiser/HRET Survey Results--Percentage of Employers with 200
or More Employees Offering Health Benefits to All Retirees and to
Medicare-Eligible Retirees, 1991-2004:
Figure 4: Percentage of Medicare-Eligible Retirees and Their Insured
Dependents with Employment-Based Health Benefits, by Age Group, 1995-
2003:
Figure 5: Under the MMA Subsidy Option, the Portion of Retired Medicare
Beneficiaries' Prescription Drug Expenditures Paid by Employment-Based
Coverage and Paid Out-of-Pocket Eligible for Subsidy, Estimate for
2006:
Abbreviations:
CMS: Centers for Medicare & Medicaid Services:
CPS: Current Population Survey:
EEOC: Equal Employment Opportunity Commission:
FAS: Financial Accounting Standards:
FASB: Financial Accounting Standards Board:
FEHBP: Federal Employees Health Benefits Program:
GASB: Governmental Accounting Standards Board:
HMO: health maintenance organization:
HRET: Health Research and Educational Trust:
HAS: health savings account:
MEPS: Medical Expenditure Panel Survey:
MCBS: Medicare Current Beneficiary Survey:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
OPM: Office of Personnel Management:
PPO: preferred provider organization:
SEC: Securities and Exchange Commission:
United States Government Accountability Office:
Washington, DC 20548:
February 14, 2005:
Congressional Committees:
As prescription drug costs have continued to increase, many retired
senior citizens face significant out-of-pocket costs for prescription
drugs. Because the Medicare program as originally designed did not
cover outpatient prescription drugs, many beneficiaries relied on other
sources to cover the costs of drugs. About a third of all retired
Medicare beneficiaries obtained supplementary health benefits through
plans sponsored by former employers or other employment-based groups,
and most of these plans covered prescription drugs. However, most
retired Medicare beneficiaries, including those with employment-based
health plans, still relied to varying degrees on their own financial
resources to pay for prescription drugs. More broadly, there has been
concern in recent years about a long-term decline in the availability
of employment-based retiree health coverage.[Footnote 1] To help senior
citizens with increasing prescription drug costs and encourage
employment-based retiree health coverage, especially for prescription
drugs, Congress passed the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) in December 2003 that among other
things, created a new prescription drug benefit as part D of the
Medicare program.[Footnote 2] The Medicare part D benefit begins in
January 2006. The MMA also established various options and incentives
to encourage sponsors of employment-based retiree health plans to offer
prescription drug benefits to retired Medicare beneficiaries.
Once the Medicare drug benefit is available in 2006, employers and
other sponsors of health coverage will have several options to provide
prescription drug benefits to Medicare-eligible retirees. To encourage
plan sponsors to offer prescription drug coverage to retired Medicare
beneficiaries--which they generally do on a voluntary basis--the MMA
established a federal subsidy payment for plan sponsors that offer
comprehensive drug benefits meeting certain MMA requirements.[Footnote
3],[Footnote 4] Subsidy payments will be available for each retiree who
chooses to enroll in the sponsor's plan in lieu of enrolling in part D.
Alternatively, plan sponsors can provide coverage that supplements
(wraps around) the retiree's Medicare part D prescription drug benefit
and forgo eligibility for the subsidy. Plan sponsors also have several
other options for providing prescription drug coverage to retired
Medicare beneficiaries under the MMA, such as contracting with private
plans that provide standard or enhanced Medicare part D prescription
drug benefits.
The MMA required that we conduct a study documenting trends in
employment-based retiree health coverage prior to the enactment of the
MMA, including coverage provided under the Federal Employees Health
Benefits Program (FEHBP),[Footnote 5] and the options and incentives
available through the MMA that could affect the voluntary provision of
employment-based retiree health benefits.[Footnote 6] As discussed with
the committees of jurisdiction, this report addresses the following
questions:
* What were the trends in employment-based retiree health coverage,
particularly for Medicare-eligible retirees, prior to the MMA?
* Which MMA prescription drug coverage options do plan sponsors say
they are likely to pursue and what effect will these options likely
have on health benefits for Medicare-eligible retirees?
To identify trends in employment-based retiree health coverage and
expenditures, we reviewed data from several sources, including (1)
three private sector surveys of employers' health benefit plans
nationwide, two of which covered both private and public sector
employers and have been conducted annually for more than a decade; (2)
three large federal surveys, which contained information on public
sector employers' retiree health benefit offer rates, retired Medicare
beneficiaries covered by employment-based health coverage from 1995
through 2003, and retired Medicare beneficiaries' prescription drug
expenditures, respectively; (3) financial statements that 50 randomly
selected Fortune 500 employers filed with the Securities and Exchange
Commission (SEC) reporting their anticipated obligations for retiree
health benefits;[Footnote 7] and (4) studies, reports, and analyses
from the literature on retirees' health benefits. To supplement these
sources and to obtain more in-depth information, we interviewed
officials at (1) 6 firms providing benefit consulting services
primarily for large public and private sector employers; (2) 12 Fortune
500 employers that sponsored retiree health benefit plans;[Footnote 8]
(3) 3 public sector sponsors of retiree health benefits, including the
Office of Personnel Management (OPM), which administers FEHBP; (4) 1
association representing unions and 1 representing multiemployer plans
that sponsor retiree health benefit plans for unionized
workers;[Footnote 9] (5) 2 associations representing small to midsized
employers; (6) 4 trade organizations, including those representing
large employers; and (7) 1 professional organization for actuaries. 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.[Footnote 10] To determine which MMA prescription
drug coverage options plan sponsors said they would likely pursue and
what effect these options might have on retiree health benefits, we
relied primarily on our review of the annual and quarterly financial
statements that 50 Fortune 500 employers filed with the SEC and on our
interviews with benefit consultants, private and public sector sponsors
of employment-based retiree health benefit plans, and other experts. We
also interviewed officials at the Centers for Medicare & Medicaid
Services (CMS), the federal agency that administers Medicare, to obtain
information on MMA prescription drug options for plan sponsors. We
assessed the reliability of the data from the three employer benefit
nationwide surveys and three large federal surveys and determined that
the data were sufficiently reliable for the purposes of our study.
(App. I provides more detailed information on our methodology.) We
performed our work from April 2004 through February 2005 in accordance
with generally accepted government auditing standards.
Results in Brief:
A long-term decline in the percentage of employers offering retiree
health coverage has leveled off in recent years, with retirees
shouldering a steadily increasing share of costs and facing additional
constraints on eligibility and benefits. Although the percentages and
time frames differed, two employer benefit surveys showed that the
percentage of employers that offer health coverage to retirees has
declined since the early 1990s, but this trend has leveled off in
recent years. For example, one survey found that the percentage of
employers with at least 500 employees offering coverage to Medicare-
eligible retirees declined from about 44 percent in 1993 to 27 percent
in 2001, then remained relatively stable through 2004. Meanwhile, the
cost for employers and other plan sponsors to provide health coverage
to retirees, including Medicare-eligible retirees, has increased
significantly, with one employer benefit survey reporting double-digit
increases each year from 2000 through 2003. Prescription drugs
represent a large share of these increases and a large share of plan
sponsors' overall health coverage costs for Medicare-eligible retirees.
Employers and other plan sponsors have used various strategies to limit
overall benefit cost growth, usually requiring retirees to pay more for
coverage and thus contributing to an overall erosion in the value and
availability of coverage. Cost-cutting strategies have included
increasing retiree cost sharing; restricting eligibility for benefits,
including eliminating coverage for future retirees; and redesigning
prescription drug benefits to encourage the use of lower-cost drugs.
Public sector sponsors' measures to cut costs have mirrored those in
the private sector, with one major difference: they generally have not
eliminated coverage for future retirees.
Many employers and other plan sponsors had not made final decisions
about which MMA drug coverage options they would choose for their
Medicare-eligible retirees at the time of our review. Although they
were in various stages of decision making, 13 of the 15 plan sponsors
we interviewed were undecided with respect to some or all of their
retirees. However, most plan sponsors we interviewed were considering
the federal subsidy as the primary option in their deliberations--2 had
chosen the subsidy option for all of their retirees; 10 had chosen the
subsidy option for some of their retirees or were considering it as one
of their options; and 3, including OPM for FEHBP, said that they would
not or did not expect to choose the subsidy option. Where plan sponsors
had set financial caps on their retiree health benefit obligations,
they often were considering offering benefits that would wrap around
Medicare's drug benefit for all of their retirees or for those retirees
whose benefits would not qualify for the subsidy. Plan sponsors would
offer coverage wrapping around Medicare part D rather than providing
their own comprehensive prescription drug coverage in lieu of the
Medicare drug benefit. Also, some plan sponsors and benefit consultants
said they were waiting to see how the market for other MMA options,
such as private health plans offered through the Medicare Advantage
program, developed before they made final decisions. About two-thirds
of the financial statements we reviewed from a sample of Fortune 500
employers reporting obligations for retiree health benefits had begun
to reflect reduced obligations for retiree health benefits from the
federal subsidy or other options, whereas the remainder had not
reflected any changes as a result of the MMA. Generally, in response to
our questions about the effects of the MMA on their retiree drug
coverage, plan sponsors said that they did not anticipate immediately
reducing the current drug coverage they provided for Medicare-eligible
retirees but that increasing health care costs might cause them to
reduce coverage in the future. Benefit consultants and other experts we
interviewed said that the MMA was not likely to induce employers that
did not already offer prescription drug coverage to retirees to begin
to provide such coverage or to supplement the Medicare drug benefit but
that each employer would have to make this decision while considering
its own financial and business strategy.
In commenting on a draft of this report, CMS and four experts generally
agreed with the report's findings. In its written comments, CMS
confirmed that many plan sponsors are still considering their options
under the MMA. Having just released its final rule, CMS stated that it
intends to provide additional guidance and continue conducting outreach
and education efforts on the options for retirees' prescription drug
coverage available to plan sponsors. While at the time of our
interviews OPM officials indicated that the agency was considering the
federal subsidy for FEHBP, OPM indicated in its written comments on a
draft of this report that it does not expect to choose the federal
subsidy option, and we revised the report accordingly.
Background:
For retirees aged 65 or older, Medicare is typically the primary source
of health insurance coverage. Medicare covered about 41 million
beneficiaries as of July 2003. The program covers hospital care as well
as doctor visits and outpatient services but has never covered most
outpatient prescription drugs.
Medicare and Supplemental Coverage before Implementation of Medicare
Drug Benefit:
Under traditional Medicare, eligible individuals may apply for part A,
which helps pay for care in hospitals and some limited skilled nursing
facility, hospice, and home health care, and may purchase part B, which
helps pay for doctors, outpatient hospital care, and other similar
services. Depending on where they live, individuals may have the option
of obtaining traditional Medicare coverage (on a fee-for-service basis)
or coverage from a managed care or other private plan offered through
the Medicare Advantage program.[Footnote 11] Many beneficiaries have
been attracted to these plans because they typically have lower out-of-
pocket costs than fee-for-service plans and offer services not covered
by traditional Medicare prior to the MMA, such as routine physical
examinations and most outpatient prescription drugs.[Footnote 12]
Nearly 4.7 million Medicare beneficiaries were enrolled in a local
Medicare Advantage plan as of July 2004.
To cover some or all of the costs Medicare does not cover, such as
deductibles, copayments, and coinsurance, Medicare beneficiaries may
rely on private retiree health coverage through former employment or
through individually purchased Medicare supplemental insurance (known
as Medigap).[Footnote 13],[Footnote 14] For example, for 2001, the
Medicare Current Beneficiary Survey (MCBS) found that about three-
fourths of Medicare-eligible beneficiaries obtained supplemental
coverage from the following sources: a former employer or union (29
percent); individually purchased coverage, including Medigap policies
(27 percent); both employment-based and individually purchased coverage
(7 percent); or Medicaid (13 percent).[Footnote 15] About 24 percent
had Medicare-only coverage.
Employers generally offer health benefits to retirees on a voluntary
basis.[Footnote 16] While these benefits vary by employer, they almost
always include prescription drugs and often cover both retirees under
age 65 as well as those eligible for Medicare. However, coverage can
vary between these groups of retirees. For example, premiums are often
lower for those aged 65 and over because Medicare pays for certain
costs, and cost sharing requirements, which can make retirees more
sensitive to the costs of care, may differ.[Footnote 17] Plan types may
also differ based on Medicare eligibility. For example, some employers
offer retirees under age 65 a preferred provider organization (PPO)
plan but offer a fee-for-service plan for retirees eligible for
Medicare. Regardless of the type of plan offered, retirees who have
employment-based coverage generally have a choice of more than one
plan.
Plan sponsors typically coordinate their retiree health benefits with
Medicare once retirees reach age 65, with Medicare as the primary payer
and the plan sponsor as the secondary payer. Several types of
coordination occur between plan sponsors and Medicare. For example,
some plan sponsors coordinate through a carveout approach, in which the
plan 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 plan 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.[Footnote 18] According to one employer benefit survey, carveout
is the most common type of coordination used by employers that sponsor
retiree health plans.[Footnote 19]
The MMA Established a New Prescription Drug Benefit for Medicare
Beneficiaries:
In January 2006, Medicare will begin offering beneficiaries outpatient
prescription drug coverage through a new Medicare part D. Medicare
beneficiaries who choose to enroll for this voluntary benefit will have
some of their prescription drug expenditures covered by prescription
drug plans authorized by the MMA.[Footnote 20] In addition to paying a
premium--estimated initially to be about $35 per month ($420 per year)-
-beneficiaries must meet other out-of-pocket expense requirements:
* a $250 deductible;
* 25 percent of their next $2,000 in prescription drug expenditures;
and:
* 100 percent of the next $2,850 in prescription drug expenditures, a
coverage gap often referred to as the Medicare part D benefit "doughnut
hole."
Medicare beneficiaries must therefore pay $3,600 out-of-pocket for
prescription drugs in 2006 before part D catastrophic coverage begins.
Part D catastrophic coverage pays most drug costs once total costs
exceed $5,100, with beneficiaries paying either the greater of a $2
copayment for each generic drug and $5 copayment for other drugs, or 5
percent coinsurance. Only prescription drug costs paid by the part D
enrollee or by another person or certain charitable organizations or
state pharmaceutical assistance programs on behalf of the enrollee,
rather than by a plan sponsor, are considered in determining a
beneficiary's true out-of-pocket costs. (See fig. 1.)
Figure 1: Medicare Part D Standard Prescription Drug Benefit:
[See PDF for image]
[A] If a $2 copayment for generic drugs and a $5 copayment for other
drugs is greater than the 5 percent coinsurance, the beneficiary is
required to pay the copayment.
[End of figure]
After the part D benefit becomes effective in January 2006, Medicare
beneficiaries will be able to receive prescription drug coverage in
several ways, such as the following:
* Beneficiaries covered through the traditional fee-for-service
Medicare program will be able to enroll in privately sponsored
prescription drug plans that contract with CMS to receive their drug
benefits.
* Beneficiaries enrolled in Medicare Advantage plans providing part D
prescription drug benefits will receive all of their health care
services, including part D benefits, through their Medicare Advantage
plan.[Footnote 21]
* Beneficiaries will be able to continue to receive prescription drug
benefits from other sources, such as an employment-based plan, if the
plan sponsor chooses to provide prescription drug coverage to Medicare-
eligible retirees.
The MMA Provides Plan Sponsors Options and Incentives for Providing
Prescription Drug Coverage:
The MMA creates options and incentives for a current or a potential
sponsor of an employment-based retiree health plan to provide
prescription drug coverage to Medicare-eligible retirees. Options for
plan sponsors under the MMA include the following:
* Offer retirees comprehensive prescription drug coverage through an
employment-based plan in lieu of Medicare part D prescription drug
coverage. Under this option, a sponsor of a plan with prescription drug
coverage actuarially equivalent[Footnote 22] to that under part D will
receive an incentive to maintain coverage through a federal tax-free
subsidy equal to 28 percent of the allowable gross retiree prescription
drug costs over $250 through $5,000 (maximum $1,330 per beneficiary)
for each individual eligible for part D who is enrolled in the
employment-based plan. For 2006, CMS estimated that the average annual
subsidy would be $668 per beneficiary.[Footnote 23] In order to qualify
for this subsidy, however, a plan sponsor must attest that the
actuarial value of prescription drug coverage under the plan is at
least equal to the actuarial value of standard Medicare part D
prescription drug coverage.[Footnote 24] Furthermore, a plan sponsor
will receive a subsidy only for those Medicare beneficiaries who do not
enroll in the Medicare part D benefit.
* Offer prescription drug coverage that supplements ("wraps around")
the part D benefit, as health plans commonly do for hospital and
physician services under Medicare parts A and B.
* Pay all or part of the monthly premium for any of the prescription
drug plans or Medicare Advantage plans in which Medicare-eligible
retirees (and dependents) choose to enroll.
* Contract with a prescription drug plan or Medicare Advantage plan to
provide the standard part D prescription drug benefit or enhanced
benefits to the plan sponsor's retirees who are Medicare-eligible
(equivalent to offering a fully insured benefit) or become a
prescription drug plan or Medicare Advantage plan (equivalent to
offering a self-insured benefit).[Footnote 25]
Plan sponsors also have other options. As has always been the case,
plan sponsors could stop providing any type of subsidized health care
coverage, including prescription drugs, to Medicare-eligible retirees
and their dependents. While they are not available for current Medicare
beneficiaries, the MMA also authorized the use of health savings
accounts (HSA) to which employers and active workers and retirees not
eligible for Medicare can contribute to cover future health care
costs.[Footnote 26] This option could provide a means for employees who
are not offered employment-based retiree health coverage to save money
for health coverage when they retire.
On August 3, 2004, CMS published a proposed rule for implementing the
Medicare part D prescription drug provisions of the MMA, and the
comment period closed October 4, 2004.[Footnote 27] The proposed rule
provided a preliminary overview of how CMS intended to implement the
MMA, including the subsidy and other options. On January 28, 2005, CMS
published a final rule implementing the MMA.[Footnote 28] CMS also
indicated that it will provide further guidance relating to the subsidy
for plan sponsors providing retiree drug coverage.
Long-term Decline in Employment-Based Retiree Health Coverage Has
Leveled Off, with Retirees Paying an Increasing Share of the Costs:
The percentage of employers offering health benefits to retirees,
including those who are Medicare-eligible, has decreased since the
early 1990s, according to employer benefit surveys, but offer rates
have leveled off in recent years. At about the same time, the
percentage of Medicare-eligible retirees aged 65 and older with
employment-based coverage has remained relatively consistent.
Meanwhile, employment-based retiree health plans experienced increased
costs to provide coverage, with one employer benefit survey citing
double-digit annual average increases from 2000 through 2003. Financial
statements we reviewed for a random sample of 50 Fortune 500 employers
showed that over 90 percent of the employers that offered retiree
health coverage had increased postretirement benefit obligations from
2001 through 2003. Private and public plan sponsors, including those
that provide coverage for Medicare-eligible retirees, have responded to
increasing costs by implementing strategies that require these retirees
to pay more for coverage and thus contribute to a gradual erosion of
the value and availability of benefits.
Employer Benefit Surveys Show Decrease in Share of Employers Offering
Health Benefits to Retirees, but Trend Has Leveled Off in Recent Years:
Employer benefit surveys reported that the percentage of employers
offering health benefits to retirees has decreased since the early
1990s; however, these offer rates have remained relatively stable in
recent years. A series of surveys conducted by Mercer Human Resource
Consulting indicated that the portion of employers with 500 or more
employees offering health insurance to Medicare-eligible retirees
declined from 44 percent in 1993 to 27 percent in 2001, and leveled off
from 2001 through 2004, with approximately 28 percent offering the
benefits to Medicare-eligible retirees in 2004 (see fig. 2).[Footnote
29] A second series of surveys conducted by the Kaiser Family
Foundation and Health Research and Educational Trust (Kaiser/HRET)
estimated that the percentage of employers with 200 or more employees
offering retiree health coverage--for those Medicare-eligible or those
under age 65 or both[Footnote 30]--decreased from 46 percent in 1991 to
36 percent in 1993 and then leveled off from 1993 through 2004, with
approximately 36 percent of employers with 200 or more employees
offering retiree health benefits to these groups in 2004 (see fig.
3).[Footnote 31] For Medicare-eligible retirees specifically, the
percentage of employers in the Kaiser/HRET survey offering coverage
fluctuated from 1995 to 2004, but differed by only 1 percentage point
in 1995 (the earliest data available) and 2004, with 28 and 27 percent
of employers, respectively, offering coverage in these 2 years.
Coverage for early retirees, those under age 65, has also been
significantly affected since the early 1990s. For example, the Mercer
surveys showed a steady decline in employers with 500 or more employees
offering coverage to this population from 50 percent in 1993 to 34
percent in 2001, although this percentage has generally leveled off
since 2001.
Figure 2: Mercer Survey Results--Percentage of Employers with 500 or
More Employees Offering Health Benefits to Medicare-Eligible Retirees,
1993-2004:
[See PDF for image]
Notes: Based on employer benefit surveys from 1993 through 2004. 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.
Although Mercer provided us with the 2004 data, the comprehensive 2004
annual report will not be available until March 2005.
[End of figure]
Figure 3: Kaiser/HRET Survey Results--Percentage of Employers with 200
or More Employees Offering Health Benefits to All Retirees and to
Medicare-Eligible Retirees, 1991-2004:
[See PDF for image]
Notes: Based on KPMG Peat Marwick surveys from 1991 through 1998 and
Kaiser/HRET surveys from 1999 through 2004. 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.
[End of figure]
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.
Employer benefit consultants and the 15 private and public sector plan
sponsors that we interviewed consistently cited a general erosion in
health benefits for all retirees, including those who are Medicare-
eligible, but some officials we interviewed also told us that plan
sponsors that could eliminate benefits had already done so, which is
consistent with the period of leveling off shown in the Mercer and
Kaiser/HRET surveys. For example, although the provision of health
benefits for all retirees by employers is generally voluntary,
officials we interviewed noted that employers that continue to offer
retiree health benefits may be limited in their ability to decrease
benefits further because of existing contracts with unions, which are
generally negotiated every 3 to 5 years. According to the 15 private
and public sector plan sponsors and employer benefit consultants that
we interviewed, many plan sponsors have restricted coverage for future
retirees--including those who are Medicare-eligible--but have
continued to offer benefits to existing retirees, which would also
contribute to a leveling off of these rates.
Large employers are more likely than small employers to offer retiree
health coverage, including coverage for Medicare-eligible retirees. For
example, Kaiser/HRET data for 2004 showed that 36 percent of employers
with 200 or more employees offered health benefits to retirees compared
to approximately 5 percent of employers with 3 to 199 employees. Within
the Mercer and Kaiser/HRET definitions of large employers (at least 500
and at least 200 employees, respectively), those with the greatest
numbers of employees were the most likely to sponsor health benefits
for retirees. For example, Kaiser/HRET reported that approximately 60
percent of employers with 5,000 or more employees offered health
benefits in 2004 to retirees compared to about 31 percent of employers
with 200 to 999 employees. Based on the 2003 Mercer survey, 63 percent
of employers with 20,000 or more employees offered coverage
specifically to Medicare-eligible retirees compared to 23 percent of
employers with 500 to 999 employees.[Footnote 32]
In addition, employers with a union presence were more likely to offer
retiree health coverage than those employers without a union presence.
According to the 2004 Kaiser/HRET survey, among employers with 200 or
more employees, 60 percent of these employers with union employees
offered health coverage to retirees compared to 22 percent of these
employers without union employees.
The provision of retiree health coverage also varies between the
private and public sector and by industry type. For example, employers
in the public sector were more likely than employers in the private
sector to offer coverage to retirees, including those who are Medicare-
eligible. All federal government retirees--Medicare-eligible and those
under age 65--are generally eligible for FEHBP health benefits and pay
the same premiums as active federal workers for the same benefits,
including prescription drugs.[Footnote 33] State plan sponsors also
typically have higher offer rates than private sector employers for
retirees. For example, the 2004 Kaiser/HRET study showed that 77
percent of state and local government employers with 200 or more
employees offered coverage to retirees compared with the average offer
rate of 36 percent across all employer industries. For retirees aged 65
and older, Medical Expenditure Panel Survey (MEPS) data for 2002
indicated that approximately 86 percent of state entities offered
health insurance to this group of retirees.[Footnote 34] After
government employers, according to the 2004 Kaiser/HRET study, the
industry sector with the next highest percentage offering retiree
coverage was transportation/communication/utility, with 53 percent of
all employers in this industry sector (200 or more employees) offering
health benefits to their retirees in 2004. The industry sectors in this
survey least likely to offer coverage were health care and retail, with
22 percent and 10 percent, respectively, of employers (200 or more
employees) in these industry sectors offering retiree health benefits.
Percentage of Medicare-Eligible Retirees with Employment-Based Health
Coverage Remained Consistent:
The overall percentage of Medicare-eligible retirees and their insured
dependents aged 65 and older obtaining employment-based health benefits
through a former employer has remained relatively consistent from 1995
through 2003, based on data from the U.S. Census Bureau's Current
Population Survey (CPS). According to our analysis of CPS data, the
percentage of Medicare-eligible retirees aged 65 and older with
employment-based health coverage and their insured dependents was
approximately 32 percent in 1995 and 31 percent in 2003.[Footnote 35]
Among Medicare-eligible retirees and their insured dependents aged 65
through 69 and aged 70 through 79, there was a modest decline in the
percentage with employment-based health coverage from 1995 through
2003, but a modest increase among Medicare-eligible retirees and their
insured dependents aged 80 and over (see fig. 4). The modest decline
among those aged 65 through 69 and aged 70 through 79 relative to all
Medicare-eligible retirees aged 65 and over may be because plan
sponsors are more likely to reduce benefits for future or recent
retirees than for all retirees. Thus, the effect of changes that plan
sponsors have made to their retiree health benefits may take additional
time to be evident in the percentage of current retirees receiving
employment-based health benefits.
Figure 4: Percentage of Medicare-Eligible Retirees and Their Insured
Dependents with Employment-Based Health Benefits, by Age Group, 1995-
2003:
[See PDF for image]
Notes: Based on the March CPS Supplement from 1996 through 2002 and the
Annual Social and Economic Supplement to the CPS from 2003 through
2004. 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. All differences by age group
comparing 1995 to 2003 CPS data are statistically significant.
[End of figure]
Faced with Increasing Costs, Plan Sponsors Have Implemented Various
Cost-Cutting Strategies, Which Often Require Retirees to Pay More for
Coverage:
Retiree health costs continue to increase for many plan sponsors of
retiree health coverage, including those that provide coverage to
Medicare-eligible retirees. Our analysis of financial statements filed
with the SEC by a sample of 50 Fortune 500 employers pointed to
increases--some 50 percent or higher--in employers' obligations for
postretirement benefit obligations from 2001 through 2003. Employer
benefit surveys and our interviews with officials from 15 private and
public plan sponsors have also cited increased retiree health costs.
These increases often have prompted plan sponsors to attempt to contain
cost growth to provide coverage in a variety of ways, including
requiring greater cost sharing from retirees.
Increasing Cost of Providing Retiree Health and Prescription Drug
Coverage:
The cost of providing retiree health coverage--and prescription drug
costs in particular--is increasing for many plan sponsors. Financial
statements filed with the SEC by 50 randomly selected Fortune 500
employers showed that over 90 percent of the 38 employers that reported
postretirement benefit obligations from 2001 through 2003 had an
increase in these obligations during this period.[Footnote 36] About 20
percent of these 38--8 employers--had an increase in their obligations
above 50 percent, while one-third of these 38--13 employers--had an
increase of between 25 and 50 percent from 2001 through 2003. During
this same period, the Bureau of Labor Statistics estimated that the
Consumer Price Index, which reports prices for all consumer items,
increased 5.3 percent, a 1.8 percent average annual rate of increase.
Over 80 percent of the 38 employers that reported postretirement
benefit obligations from 2001 through 2003 had a change in their
postretirement benefit obligations that exceeded the Consumer Price
Index increase of 5.3 percent for all consumer items from 2001 through
2003.[Footnote 37]
Data from employer benefit surveys also showed increased costs for plan
sponsors for roughly the same period. For example, a survey conducted
in 2004 by the Kaiser Family Foundation and Hewitt Associates reported
that the total cost of providing health benefits to all retirees for
employers surveyed (1,000 or more employees) rose rapidly between 2003
and 2004, with an estimated average annual increase of nearly 13
percent.[Footnote 38] Mercer data projections by employers for 2003
also showed an average annual cost increase of approximately 11 percent
from 2002 for Medicare-eligible retirees from--$2,702 to $3,003--the
fourth straight year of double digit increases. (For active employees,
employers in the Mercer survey reported a 10 percent increase in 2003
in the average total health benefit cost from 2002.[Footnote 39]):
The cost for public sector plan sponsors to provide retiree health
coverage, both for Medicare-eligible retirees and those under age 65,
is also increasing. For example, one public sector plan sponsor we
interviewed reported that retiree health care costs had doubled in a 6-
year period, from $440 million in 1998 to over $900 million in 2003,
with an average annual cost in 2004 of $3,542 per Medicare-eligible
retiree, compared to $1,822 per Medicare-eligible retiree in 1998. For
FEHBP, as set in statute, the federal government pays 72 percent of the
weighted average premium of all health benefit plans participating in
FEHBP but no more than 75 percent of any health benefit plan's
premium.[Footnote 40] Thus, retirees and active workers pay
approximately 28 percent of their plan premiums--a share that has not
changed since it became effective in January 1999.[Footnote 41] While
the percentage of plan premiums contributed by the government has
remained constant in recent years, the actual rates have increased over
time. In December 2002, we reported that health insurance premiums for
FEHBP plans had increased on average about 6 percent per year from 1991
through 2002.[Footnote 42] According to OPM, average FEHBP premiums
increased by 11 percent in 2003, about 11 percent in 2004, and about 8
percent for 2005.
Prescription drug benefits represent a large share of plan sponsors'
retiree health costs, particularly for Medicare-eligible retirees. In
2002, prescription drug costs were cited as a key driver of increases
in employment-based retiree health costs and were estimated to be
typically 50 to 80 percent of an employer's total health care costs for
Medicare-eligible retirees.[Footnote 43] According to 2001 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. Three Fortune 500
employers we interviewed reported that prescription drug costs for
Medicare-eligible retirees and their dependents ranged from
approximately 56 to 64 percent of their total estimated annual cost of
providing health benefits for this same population.
Private Sector Plan Sponsors' Cost-Cutting Strategies:
Faced with increasing costs, private sector plan sponsors have
implemented certain strategies to reduce these obligations that often
require retirees to pay more for coverage and contribute to a general
erosion in the value and availability of health coverage for retirees.
For example, many plan sponsors have increased cost sharing through
increased copayments, coinsurance, and premium shares; restricted
eligibility for benefits based on retirement or hiring date;
implemented financial caps or other limits on plan sponsors'
contributions to coverage; and made changes to prescription drug
benefits, such as creating tiered benefit structures and increasing
retiree out-of-pocket contributions. These cost-cutting strategies are
not new--in 2001 we reported that employers had implemented similar
mechanisms designed to control retiree health care
expenditures.[Footnote 44] However, according to private plan sponsors
we interviewed, the share of costs paid by retirees is increasingly
affected as the plan sponsors reach and enforce financial caps and
other limits they had set. While these strategies are intended to limit
the increase in plan sponsor obligations, the information provided by
employer benefit surveys and the plan sponsors and consultants we
interviewed did not specify the magnitude of any decrease in plan
sponsors' costs for retiree health benefits that could be attributed to
these changes.
Increasing Retirees' Cost Sharing. One strategy that plan sponsors have
adopted to limit their obligations for retiree health costs is
increasing the share of costs for which the retiree is responsible. For
example, employers have increased retiree copayments and coinsurance.
When asked about changes made "in the past year," Kaiser/Hewitt
reported that nearly half of its surveyed private employers (1,000
employees or more) had increased cost sharing.[Footnote 45] The
majority of employers in the Kaiser/Hewitt study reported that they
expected to make similar increases "for the 2005 plan year," with 51
percent indicating they were very or somewhat likely to increase
retiree coinsurance or copayments. These increases are consistent with
the changes cited in our interviews with private employers and with
officials we interviewed at other organizations, including benefit
consulting firms and an organization representing unions. For example,
* one employer we interviewed reported cost sharing increases for all
retirees every year since 1993;
* another employer we interviewed introduced a mix of coinsurance and
copayment requirements in January 2004 to address rising health care
costs and make retirees more aware of the cost of the benefits they
received; and:
* a third employer we interviewed that had historically paid
approximately 90 percent of total retiree health care costs was
planning to increase the share of costs borne by retirees who had
retired prior to 1994 from approximately 10 percent to 20 percent of
health care costs by January 1, 2006.
Increasing Premiums. Increased contributions by retirees to health care
premiums is another area where plan sponsors have continued to make
changes to control their health care expenditures. Kaiser/Hewitt data
showed that 79 percent of surveyed employers had increased retiree
contributions to premiums in the past year, and 85 percent reported
that they were very or somewhat likely to increase these contributions
for the 2005 plan year. Retiree contributions for new retirees aged 65
and over increased, on average, 24 percent from 2003 to 2004, according
to the Kaiser/Hewitt study. The Mercer 2003 study reported that
employers varied retiree premium contributions, with Medicare-eligible
retirees paying on average about 38 percent of plan premiums when the
cost was shared between the employer and the retiree, an increase of
approximately 4 percentage points since 1999.[Footnote 46] Four of the
12 Fortune 500 plan sponsors we interviewed also reported changes to
premiums. For example, one plan sponsor made a change in 2004 to
increase premiums for all individuals retiring after January 1, 2004,
consistent with increases in premiums for active workers, whereas
previously retirees kept the same premiums for life. Officials we
interviewed representing unions and their members also cited increased
premiums for many retired union workers.
Some employers are also beginning to offer access-only coverage to some
or all retirees, in which employers allow retirees to buy into a health
plan at the group rate, but without any financial assistance from the
employer. For example, according to 2003 Mercer data, about 37 percent
of retiree health plans for employers with 500 or more employees
required Medicare-eligible retirees to pay the full cost of the
employment-based plan. Thirteen percent of the Kaiser/Hewitt employers
reported making a change in the past year to provide access-only
coverage to retirees, with retirees paying 100 percent of the costs. A
supplement to the 2004 Kaiser/HRET survey examined the percentage of
Medicare-eligible retirees with access-only coverage and found that 5
percent of Medicare-eligible individuals who are retired from employers
with 200 or more employees that offer retiree health benefits had such
coverage.[Footnote 47] While 5 of the 12 Fortune 500 plan sponsors we
interviewed had implemented access-only coverage, 1 of these plan
sponsors had implemented this level of coverage for all of its retirees
in the early 1990s in response to health care costs. The other 4 plan
sponsors had implemented the access-only change at a later date,
implementing it for some or all employees ranging from those hired
after January 1, 1995, to those retiring on or after January 1, 2007.
Reducing Benefits for Future Retirees. Implementing access-only
coverage is often part of a broader movement by plan sponsors to
restrict eligibility or offer reduced benefits for employees who are
hired or retire after a certain date. In December 2004, Kaiser/Hewitt
reported that 8 percent of surveyed employers (with 1,000 or more
employees) said they had made a change "in the past year" to eliminate
their subsidized health benefits for future retirees, typically for
those hired after a specific date. Of the 12 Fortune 500 plan sponsors
we interviewed, 5 plan sponsors had eliminated retiree health coverage
for some or all individuals hired after a certain date, ranging from
January 1, 1993, to January 1, 2003, while 4 of the 5 plan sponsors
that had switched to providing access-only coverage did so for some or
all of their future retirees. Some plan sponsors said that they
generally avoided making changes for current retirees rather than for
future retirees, who may be in a position to make other arrangements.
In addition, plan sponsors generally tried to minimize the disruption
when making changes for those already in retirement. For example, one
Fortune 500 plan sponsor we interviewed carried 15 separate health
plans for several years that had accumulated as the result of
grandfathering in current coverage levels for existing retirees. It was
only in 2003 that the company consolidated the 15 plans into 3 plans
and instituted changes affecting both existing and some future
retirees. Plan sponsors that have either eliminated coverage or created
access-only plans for some or all retirees generally reported that
recruitment had not been affected. One plan sponsor we interviewed,
however, noted that current employees' retirement planning could be
affected, as some employees might stay longer with the company because
they could not afford to retire. This sentiment is consistent with data
reported in Mercer's 2003 annual survey of employer-sponsored health
plans showing that retirees tended to delay retirement when their
employers did not sponsor retiree medical plans.
Introducing and Enforcing Financial Caps. In 2001, we reported that
some employers had established caps and other limits on expenditures
for retiree health benefits, but it was not clear at that time how
employers would ensure that spending did not exceed the caps and how
coverage would be affected.[Footnote 48] Employers began to implement
caps in response to rising retiree health costs and to accounting
changes introduced in the early 1990s when the Financial Accounting
Standards Board (FASB) adopted Financial Accounting Standards (FAS)
106, requiring employers to report annually on the obligation
represented by the promise to provide retiree health benefits to
current and future retirees.[Footnote 49] The 2003 annual survey of
employer-sponsored health plans conducted by Mercer shows that 18
percent of employers with 500 or more employees have implemented caps,
while an additional 10 percent of such employers were considering them.
Caps were most common among the employers with the largest number of
employees in the Mercer study (20,000 or more employees); 33 percent of
such employers had implemented these limits on overall spending and 9
percent were considering them. Similarly, 54 percent of employers with
1,000 or more employees offering retiree coverage in the 2004 Kaiser/
Hewitt employer survey reported having capped contributions. Ninety
percent of employers in the Kaiser/Hewitt study that have hit caps or
anticipated hitting caps in the next year reported that they intended
to enforce them or already had.
Of the 12 Fortune 500 plan sponsors we interviewed, 8 had implemented
capped contributions or other limits on retiree health spending. For
example, 1 plan sponsor reported monthly caps of $217 per person for
nonunionized retirees under age 65 and $51 per person for nonunionized
Medicare-eligible retirees. Another plan sponsor provided fixed company
health care credits for its retirees under age 65 (unionized and
nonunionized) in which an individual could receive up to $3,750 to
apply to the plan sponsor's estimate for health care costs for a
retiree under age 65. While many plan sponsors had implemented these
types of limits, they varied as to whether all groups of retirees were
affected and whether the caps had been reached and thus enforced. For
example, 2 of the 12 Fortune 500 plan sponsors we interviewed had
capped benefits for some individuals depending on the individual's date
of retirement (typically more recent retirees were affected), and in
some cases the caps varied by whether retirees were part of a union or
former employees of an acquired company. The plan sponsors we
interviewed whose retiree health benefit costs had reached the caps
generally were enforcing them. For example, one plan sponsor required
some retirees--both Medicare-eligible and those under age 65--to pay a
portion of premiums for the first time after the plan's costs reached
the cap in 2002. However, implementing and enforcing caps can be an
issue in union negotiations. One plan sponsor we interviewed had opted
in the past to negotiate benefit changes with unions to delay hitting
the caps, but now expects to hit and enforce the caps by 2007. Another
plan sponsor, while enforcing the financial caps for retiree health
benefits, has agreed in some union negotiations to give retirees an
additional contribution toward health care expenses that effectively
offsets the premium increases triggered by reaching the caps. A few
plan sponsors and benefit consultants we interviewed noted that
employers are more likely today to enforce caps than to raise them. For
example, the 2003 Kaiser/Hewitt study stated that there is some concern
that auditors will question the effectiveness of a cap if there is a
pattern of continually raising it once costs approach the set limit.
Implementing Changes to Prescription Drug Benefit Design. Given the
sensitivity of retiree health benefits to prescription drug costs, many
plan sponsors have made changes to prescription drug benefits. The
primary mechanisms cited by the 2004 Kaiser/Hewitt employer benefit
survey and benefit consultants and the 12 Fortune 500 plan sponsors we
interviewed included increasing copayments; switching from copayments
to coinsurance; and implementing tiered benefit structures in which
generic drugs, formulary/preferred drugs, and nonformulary/
nonpreferred drugs are subject to different retiree copayment and
coinsurance rates. Over half of the employers in the 2004 Kaiser/Hewitt
study reported having increased copayments or coinsurance for
prescription drugs in the past year, and 15 percent had replaced fixed-
dollar copayments with coinsurance in the past year. Over half of the
plan sponsors offered a three-tiered benefit structure, and among plans
with this design, about two-thirds require copayments and nearly one-
fourth required coinsurance for retail pharmacy purchases. In addition,
about one-fourth of the Kaiser/Hewitt-surveyed employers had instituted
a three-tiered drug plan in the past year to save money.
The 12 Fortune 500 plan sponsors we interviewed echoed these types of
changes in their prescription drug benefit for retirees within the last
5 years. For example, 3 plan sponsors had instituted retiree
coinsurance requirements, which can make retirees more price conscious
because the retiree out-of-pocket cost is higher for more expensive
drugs than for less expensive drugs. One plan sponsor reported it had
increased drug copayments for retirees. Several of the 12 Fortune 500
plan sponsors we interviewed already had tiered benefits in place. One
plan sponsor had implemented a three-tiered structure as well as
mandatory use of a mail-order pharmacy for some prescription drugs.
Another plan sponsor reported it planned to implement "step-therapy" in
January 2005, in which retirees would have to demonstrate the
ineffectiveness of a lower-cost generic drug before receiving coverage
for a higher cost brand-name drug. Officials we interviewed
representing unions and their members noted similar prescription drug
trends for many former union workers.
Public Sector Plan Sponsors' Cost-Cutting Strategies:
While public sector plan sponsors generally offer more coverage than
those in the private sector, these plan sponsors are also starting to
implement cost-cutting mechanisms similar to those implemented in the
private sector, with one major exception--they generally are not
eliminating retiree health benefits for future retirees. For example,
in December 2002, we reported that FEHBP plans had implemented some
benefit reductions for all enrollees--mostly by increasing enrollee
cost sharing.[Footnote 50] We reported that three large fee-for-service
plans had increased or introduced cost sharing features such as
copayments or coinsurance for prescription drugs and deductibles for
other services.[Footnote 51] OPM officials informed us that FEHBP plans
have implemented cost-containment strategies relating to prescription
drugs, such as three-tiered cost sharing, comparable to private sector
employers. However, OPM does not implement cost-containment strategies
for retirees that do not also affect active workers.
Similarly, other public sector plan sponsors, such as state
governments, are starting to reduce benefit levels and implement cost-
cutting mechanisms, including changes to prescription drug benefits.
However, eliminating retiree health benefits entirely for current or
future retirees does not appear to be as prevalent in the public sector
as the private sector. For example, a 2003 survey conducted by the
Segal Company, a benefit consulting firm specializing in the public
sector, reported that no state plan sponsor in its survey was
considering eliminating retiree health coverage as a cost-containment
strategy.[Footnote 52] A 2003 study prepared by Georgetown University
for the Kaiser Family Foundation that collected survey data from 43
states and the District of Columbia also found that no state government
had terminated subsidized health benefits for current or future
retirees and no state government was planning to do so.[Footnote 53]
However, the Georgetown study found that 24 of these states reported
increased cost sharing in the past 2 years, while 13 had increased
retiree premium shares in the past 2 years. A study released by AARP in
July 2004 on state government retiree health benefits found that 11
states required Medicare-eligible retirees to pay the full amount of
the premium.[Footnote 54] Almost all of the states in the Georgetown
study cited prescription drugs as the most important driver behind the
growth in state retiree health spending and, as a result, have taken
specific steps to manage these costs, such as increasing cost sharing
and implementing tiered benefit structures. The majority of states in
the AARP study had three-tiered copayment benefits. One public sector
plan sponsor we interviewed is proposing significant changes to keep
its retiree health benefits fund solvent that would vary the employer's
contribution toward retiree health care costs on the basis of the
retiree's age and years of service, rather than paying the full cost of
coverage for those meeting the minimum age and service requirements.
Benefit consultants and officials from other organizations we
interviewed noted new pressures on public sector funding of retiree
health care benefits as a result of standards adopted in 2004 by the
Governmental Accounting Standards Board (GASB) that affect the
reporting of postretirement benefit obligations for many public sector
sponsors of employment-based retiree health coverage.[Footnote 55]
Similar to FAS 106 for private sector employers, the new standards
require public sector plan sponsors, including state governments, to
accrue the costs of postretirement health care benefits during the
years of service as opposed to reporting these costs on a pay-as-you-go
basis. However, the GASB standards are not identical to those in the
private sector, and the July 2004 AARP study noted that it is unclear
whether the experience of FAS 106--and its frequently cited impact on
the decrease in employment-based retiree health coverage--would
directly translate to the public sector. While the study stated that
the new GASB standards might encourage state governments to reduce
retiree health benefit programs in order to reduce obligations, it also
noted that these standards alone were not likely to cause major program
changes. Regardless, benefit consultants and other officials we
interviewed cited notable implications for public sector employers. For
example, large unfunded obligations can affect bond ratings in the
public sector, which affect these public sector entities' ability to
borrow money. One benefit consultant told us that its public sector
clients are raising issues such as plan design, cost, financing, and
the possible reduction of retiree health benefits in light of the new
GASB standards. The provision of retiree health benefits in the public
sector may also be affected by other factors, such as state budget
deficits and state political pressures.
Employers and Plan Sponsors Considering MMA Options for Prescription
Drug Coverage, Often Considering Subsidy as Primary Option for Some or
All Medicare-Eligible Retirees:
At the time of our review, many employers and plan sponsors said they
had not decided which MMA options they would implement for their
Medicare-eligible retirees, but the primary option many sponsors were
considering was the subsidy. Ten of the 15 plan sponsors we interviewed
said that while undecided, they were considering the federal subsidy
option for some or all of their Medicare-eligible retirees, while 2
other plan sponsors had chosen the subsidy option for all their
Medicare-eligible retirees. Four plan sponsors we interviewed were
concerned that because their benefits already had reached or soon would
reach the caps they had set on their retiree health benefit
obligations, they would be ineligible for the subsidy and therefore
said that redesigning their benefits to wrap around Medicare would be
prudent. In our random sample of 50 Fortune 500 employers, most that
reported obligations for retiree health benefits indicated that they
would choose the federal subsidy or other options, but others had not
reported their final MMA decisions on their financial statements filed
with the SEC as of November 2004. In addition, 2 plan sponsors we
interviewed were considering Medicare Advantage plans, but these plan
sponsors were waiting to see how the market for these developed. While
plan sponsors generally expected to continue to maintain coverage
levels for their retirees as they considered their MMA options, they
acknowledged that cost pressures could cause them to reevaluate their
benefits. If employers were not already providing prescription drug
benefits to retirees, most benefit consultants and other experts we
interviewed said that the MMA was not likely to prompt employers to
begin providing coverage or supplementing the Medicare benefits.
Plan Sponsors We Interviewed Were Considering MMA Options for
Prescription Drug Coverage, but Few Had Made Final Decisions:
The 15 private and public sector sponsors of retiree health benefit
plans we interviewed were considering their MMA options for
prescription drug coverage, but few had decided which MMA options they
would choose for all their Medicare-eligible retirees. Of the 15 plan
sponsors we interviewed, 12 were Fortune 500 private sector employers.
Two of the 12 had made a decision for all of their Medicare-eligible
retirees, and 10 said they had not yet made their final decisions for
some or all of their retirees and were assessing the implications
associated with the MMA options. Officials from the three public sector
sponsors of health benefit plans we interviewed--the federal government
and two state retirement systems--said they were considering their
options. Both private and public sector plan sponsors told us they
anticipated making their final decisions by early 2005. In addition,
officials we interviewed representing multiemployer plans told us that
most multiemployer plans had not focused on the MMA options to the same
extent as single-employer private sector plan sponsors, and therefore
most were undecided about the options they would implement. As part of
their deliberations, plan sponsors were considering several MMA
options, including the federal subsidy option if they decided to
provide their own prescription drug benefits for Medicare-eligible
retirees; coordinating with part D by wrapping their prescription drug
benefits around the Medicare part D benefit, thus providing secondary
coverage; and several other options. In some cases, plan sponsors were
considering implementing a combination of options for different groups
of Medicare-eligible retirees.
The Federal Subsidy:
Ten of the 15 private and public sector sponsors of employment-based
retiree health benefits that we interviewed were considering the 28
percent federal subsidy for prescription drug costs for some, if not
all, Medicare-eligible retirees, although they were in different stages
of the decision-making process at the time of our interviews. Two
private sector sponsors had chosen the subsidy option for all of their
Medicare-eligible retirees. Three of the private and public sector
sponsors, including OPM for FEHBP, said they would not or did not
expect to choose the subsidy option.[Footnote 56] (See table 1.)
Table 1: Status of Decisions by 15 Private and Public Sector Plan
Sponsors Interviewed regarding the MMA Subsidy Option for Prescription
Drug Coverage:
Subsidy;
MMA subsidy option: Choosing the subsidy option for all Medicare-
eligible retirees;
Number choosing or considering MMA subsidy option: Private sector
Fortune 500 sponsors: 2;
Number choosing or considering MMA subsidy option: Public sector
sponsors: 0.
Subsidy;
MMA subsidy option: Choosing the subsidy option for some Medicare-
eligible retirees and considering other options for other Medicare-
eligible retirees;
Number choosing or considering MMA subsidy option: Private sector
Fortune 500 sponsors: 3;
Number choosing or considering MMA subsidy option: Public sector
sponsors: 0.
Subsidy;
MMA subsidy option: Considering the subsidy option;
Number choosing or considering MMA subsidy option: Private sector
Fortune 500 sponsors: 5;
Number choosing or considering MMA subsidy option: Public sector
sponsors: 2.
No subsidy;
MMA subsidy option: Not choosing the subsidy option for any Medicare-
eligible retirees;
Number choosing or considering MMA subsidy option: Private sector
Fortune 500 sponsors: 2;
Number choosing or considering MMA subsidy option: Public sector
sponsors: 1[A].
MMA subsidy option: Total;
Number choosing or considering MMA subsidy option: Private sector
Fortune 500 sponsors: 12;
Number choosing or considering MMA subsidy option: Public sector
sponsors: 3.
Source: GAO.
Note: Based on information from 15 sponsors of retiree health benefit
plans in the private and public sectors.
[A] OPM said it did not expect to choose the subsidy option for FEHBP.
[End of table]
Retiree health benefit plan designs and other circumstances affected
plan sponsors' decisions regarding the subsidy. In particular, whether
a plan sponsor had implemented financial caps on retiree health benefit
expenditures played a major role in the decision-making
process.[Footnote 57] In addition, plan sponsors that negotiated
retiree health benefits with unions said that they did not have as much
flexibility to change these benefits prior to negotiations. Three of
the private sector plan sponsors we interviewed said they would choose
the subsidy option only for some of their Medicare-eligible retirees
because of capped benefits, the role of unions, or both, as described
in the following:
* One of the three plan sponsors capped health benefits for workers who
retired after a specific date, so it offered richer uncapped benefits
to those who retired before that date. This sponsor determined that the
uncapped benefits would be actuarially equivalent. Therefore, this plan
sponsor said it would choose the subsidy option for the uncapped
benefits but was not certain that the capped benefits would be
actuarially equivalent for purposes of the subsidy.
* Another of these sponsors offered many different prescription drug
plan designs to retirees with collectively bargained benefits (union
retirees) and those without collectively bargained benefits.[Footnote
58] This sponsor chose the subsidy option for all plans that met the
actuarial equivalence test. The sponsor's plans that were not likely to
meet the actuarial equivalence test typically had financial caps.
* The third sponsor said it was fairly certain it would choose the
subsidy option for its collectively bargained retiree prescription drug
benefits. While both the collectively bargained and noncollectively
bargained retiree benefits were capped, the unions had renegotiated
higher capped amounts for the collectively bargained benefits. The next
negotiation session with the primary union was scheduled for July 2006,
thereby making it difficult to make changes to these benefits other
than accepting the subsidy in the interim. The caps for the retirees
with noncollectively bargained benefits would be reached sooner and
were less likely to be actuarially equivalent. Therefore, this sponsor
said it was considering other options for the retirees with
noncollectively bargained benefits.
Although they had not made any final decisions on the MMA options at
the time of our interviews, 5 of the 12 private sector Fortune 500
sponsors of employment-based health benefit plans we interviewed were
considering the subsidy option. Two of these 5 plan sponsors said they
were likely to apply for the subsidy for their Medicare retirees. Of
the 2, 1--whose employees were partially unionized and that had not
capped any of its retiree health benefits--said it did not "strongly
consider" any other options during its deliberations. The other of the
2 sponsors expected to apply for the subsidy for all of the
prescription drug plans for Medicare-eligible retirees that met the
actuarial equivalence test. At the time of our interviews, 3 of these 5
plan sponsors said they either needed additional information from CMS
regarding actuarial equivalence or needed more time before they could
make their final decisions about the subsidy option.
Two large state sponsors of health benefits for Medicare-eligible
retirees were considering the subsidy option along with others. OPM had
not made any decisions at the time of our interview, but in written
comments on a draft of this report it indicated that it did not expect
to choose the federal subsidy for FEHBP.
The subsidy option offers plan sponsors several advantages. Cost
savings associated with the subsidy played a major role in the plan
sponsors' decision-making process. Several benefit consultants and plan
sponsors we interviewed stressed the importance of cost savings when
considering the MMA options. Most of the plan sponsors we interviewed
considered the savings associated with the subsidy to be an advantage.
For example, one plan sponsor estimated that it would reduce its
accumulated postretirement benefit obligations by about $161 million
just by choosing the subsidy option for one group of its Medicare-
eligible retirees.
Some plan sponsors and benefit consultants we interviewed said that
most of the prescription drug expenditures for Medicare-eligible
retirees would be eligible for the subsidy because most retirees
incurred costs from $251 through $5,000, the range eligible for the
subsidy as defined in the MMA. While Medicare-eligible retirees'
prescription drug expenditures could be paid by several different
sources, employment-based coverage accounted for about 27 percent of
total expenditures in 2001, while out-of-pocket payments accounted for
about 37 percent, according to our analysis of MCBS. According to our
projections of the estimated amount of Medicare-eligible retirees'
total prescription drug expenditures that employment-based plans would
pay for and that beneficiaries would pay out-of-pocket in 2006, most of
the expenditures from employment-based coverage and from out-of-pocket-
-about 75 percent--could be eligible for the subsidy (see fig.
5).[Footnote 59]
Figure 5: Under the MMA Subsidy Option, the Portion of Retired Medicare
Beneficiaries' Prescription Drug Expenditures Paid by Employment-Based
Coverage and Paid Out-of-Pocket Eligible for Subsidy, Estimate for
2006:
[See PDF for image]
Note: MCBS data for 2001 inflated to 2006 using CMS's National Health
Care Expenditures Projections.
[End of figure]
Preserving the benefits the plan sponsors currently provide and
retaining the control over and flexibility of the benefits were also
cited as advantages to choosing the subsidy option. Benefit
consultants, plan sponsors, and others we interviewed said that it
would be easier for beneficiaries if the benefits offered did not
change. Choosing the subsidy option also gave plan sponsors the ability
to maintain control over the benefits and their costs. In addition,
preserving their current benefits allowed plan sponsors time to see how
other MMA options would play out in the marketplace. For some plan
sponsors, these advantages made the subsidy the easiest, most seamless,
and least risky option to pursue.
Several benefit consultants we interviewed said that to receive the
subsidy, sponsors of employment-based retiree health plans would have
to fulfill certain administrative reporting and record keeping
requirements, as identified by CMS. For example, sponsors will have to
apply for the subsidy no later than 90 days prior to the start of the
calendar year,[Footnote 60] including providing an attestation
regarding actuarial equivalence. Each application must include the
names of all people enrolled in the sponsor's drug plan to ensure that
a sponsor is not receiving a subsidy for an individual who is enrolled
in a part D prescription drug plan or a Medicare Advantage plan. The
plan sponsor must also notify Medicare-eligible retirees and their
spouses and dependents whether their retiree health plan provides
"creditable coverage"--that is, generally whether the expected amount
of paid claims under the plan sponsor's prescription drug coverage is
at least equal to that of the expected amount of paid claims under the
standard part D coverage. This notice is important because retirees who
do not enroll in part D when first eligible will be charged a penalty
for late enrollment if they enroll after finding that their previous
employment-based coverage did not meet CMS's creditable coverage
criteria.[Footnote 61] A special enrollment period will be provided,
however, without a late enrollment penalty, when there is an
involuntary loss of creditable coverage because, for example, an
employer eliminates or reduces coverage.[Footnote 62] All plan sponsors
choosing the subsidy will have to document prescription drug costs that
fall within the MMA's eligibility criteria.
Although several benefit consultants saw the potential administrative
requirements as a disadvantage of the subsidy, most of the plan
sponsors we interviewed were not concerned about the subsidy's proposed
administrative requirements. For example, one plan sponsor told us it
was less concerned about how it would manage the subsidy's
administrative requirements than about how it would manage relations
with retirees if it changed prescription drug benefits under other MMA
options. At the time of our interviews, however, some plan sponsors
said they were not fully aware of or had not considered all of the
administrative requirements.
Besides cost savings, ease for retirees, and administrative
requirements, plan sponsors we interviewed said they also considered
other factors when making decisions about the subsidy. For example,
plan sponsors considered as part of their decision-making process
possible negative press, potential for lawsuits, relations and
communications with Medicare-eligible retirees, benefit equity between
Medicare-eligible retirees and retirees not yet eligible for Medicare,
future union negotiations, hiring and retention of workers, marketplace
competition, and uncertainty about CMS rules.
Wrapping Retiree Drug Benefits around Medicare Part D:
One alternative to choosing the federal subsidy option for plan
sponsors that provide prescription drug coverage to Medicare-eligible
retirees is the option of coordinating with part D by wrapping their
benefits around the new Medicare part D benefit by covering some drug
costs not paid by Medicare. Plan sponsors would offer coverage wrapping
around Medicare part D rather than providing their own comprehensive
prescription drug coverage. Prescription drug costs not covered by
Medicare part D that plan sponsors could cover might include the $250
deductible or the retirees' costs within the coverage gap (i.e., the
doughnut hole) until the Medicare catastrophic coverage begins paying
for most drug costs. Several plan sponsors we interviewed said they
were considering this option for Medicare-eligible retirees along with
the subsidy and other options as part of their overall MMA
deliberations. For example, one plan sponsor said it was considering
wrapping its drug benefits around the part D benefit as its primary
option for all its Medicare-eligible retirees because it had set
financial caps on its retiree health benefit obligations that would
eventually render it ineligible for the subsidy. Three other plan
sponsors told us they were considering wrapping their prescription drug
benefits around the part D benefit for those Medicare-eligible retirees
for whom they could not qualify to receive the federal subsidy.
Furthermore, OPM officials said that wrapping prescription drug
benefits around the part D benefit could be more complex for the
federal government than for employers in the private sector because, in
contrast to many large private sector employers, FEHBP does not provide
different benefits for active workers and for retirees.
Some plan sponsors and benefit consultants we interviewed expected that
wrapping prescription drug benefits offered to Medicare-eligible
retirees around the new Medicare part D benefit would provide several
advantages. For example, some benefit consultants said that this option
could save more money than the subsidy. However, they said plan
sponsors would have to do a cost/benefit analysis to make this
determination. Also, plan sponsors could continue to provide the same
level of benefits to Medicare-eligible retirees in coordination with
the Medicare part D coverage, thereby maintaining benefit continuity.
Conceptually, sponsors of employment-based health benefit plans and
benefit consultants generally viewed the option to wrap prescription
drug benefits around the part D benefit as being similar to how most
now coordinate other benefits with Medicare parts A and B. Some
sponsors we interviewed planned to rely on their pharmacy benefit
managers, benefit consultants, and others for assistance in
administering the benefit. However, plan sponsors and benefit
consultants we interviewed were waiting to learn more from CMS about
how the benefit coordination would operate. As a result, at the time of
our interviews, employers and others had questions about how
prescription drug benefit designs would wrap around the Medicare part D
benefit.
Wrapping benefits around the Medicare part D benefit also could present
some administrative and other challenges for plan sponsors. Two benefit
consultants we interviewed told us that wrapping benefits around the
different Medicare part D plans, such as Medicare Advantage or a
private prescription drug plan, in which retirees might enroll could
add to the administrative complexity. Also, according to one benefit
consultant and CMS officials, while coordinating with the Medicare
program can be a fairly straightforward task for part A and B services,
part D coordination might be more difficult because each Medicare-
eligible retiree's true out-of-pocket costs must be determined. Part D
requires that Medicare beneficiaries must have $3,600 in out-of-pocket
expenses for covered drugs in 2006 before federal catastrophic coverage
begins.[Footnote 63] Generally, beneficiaries' expenses reimbursed by
other sources such as employment-based plans are not counted. This can
become complicated for plan sponsors that have different copayment and
coinsurance requirements for different groups of retirees.
Another possible challenge for plan sponsors in wrapping around
Medicare part D coverage is financial. Plans sponsors that supplement
the Medicare part D benefit could spend thousands of dollars for each
retiree before the Medicare catastrophic coverage begins. Two plan
sponsors and several benefit consultants were concerned about how
employment-based drug benefits that wrap around the Medicare part D
benefit would affect the out-of-pocket payment requirements for
beneficiaries. For example, if a plan sponsor covered 75 percent of a
Medicare-eligible retiree's expenditures within the coverage gap (i.e.,
the doughnut hole) the plan sponsor would have to spend $8,550 before
the retiree reached $3,600 in out-of-pocket expenditures as required by
the MMA. Specifically, under this wraparound scenario,
* the Medicare-eligible retiree would spend $3,600 out-of-pocket--$250
for the part D deductible, $500 in coinsurance for the next $2,000 in
expenditures, and $2,850 for the expenses not covered by Medicare;
* Medicare would spend $1,500--75 percent of the next $2,000 in
expenditures after the deductible is met; and:
* the plan sponsor would spend $8,550.
This would require a total of $13,650 in expenditures from all sources
before the retiree would reach the amount--that is, combined Medicare
and beneficiary expenditures equal to $5,100--at which Medicare part D
catastrophic coverage would begin.
Other Options:
Under the MMA, sponsors of employment-based health benefit plans for
Medicare-eligible retirees have several other options. For example,
plan sponsors could contract with privately marketed prescription drug
plans and Medicare Advantage plans to cover the part D benefit, or they
could become prescription drug plans or Medicare Advantage
plans.[Footnote 64] In addition, while not allowed for current
Medicare-eligible retirees, plan sponsors could establish HSAs for
their active workers, who could use these benefits when they retire.
Several benefit consultants told us their clients might consider these
other MMA options, and some plan sponsors we interviewed were doing so.
For example, four benefit consultants we interviewed said that Medicare
Advantage plans could offer advantages to plan sponsors. Two of these
benefit consultants said that having Medicare-eligible retirees enroll
in Medicare Advantage plans would shift the financial risk away from
the plan sponsor to the Medicare Advantage plan. The other two said
that Medicare Advantage plans could help to reduce costs, and they also
believed that having Medicare-eligible retirees enroll in these plans
could help reduce administrative burdens associated with the Medicare
part D benefit. Two benefit consultants noted that these plans might
not be available in all parts of the country, but others said that
increased federal reimbursement rates established as part of the MMA
might cause more private plans to enter this market in the future. In
addition, two benefit consultants commented that their clients might be
more interested in Medicare Advantage once the market for these plans
is established. During our interviews, some Fortune 500 plan sponsors
generally discussed Medicare Advantage plans as an option they might
consider. While several plan sponsors said that none of their Medicare
retirees were enrolled in a health maintenance organization (HMO), two
said that HMOs might be a viable option in the future as long as
managed care plans continued to participate in the Medicare program.
One plan sponsor considered Medicare Advantage plans as an option
during its deliberations but determined that based on its past
experience with Medicare+Choice, it did not provide many savings.
One benefit consultant we interviewed said that plan sponsors might be
reluctant to form their own Medicare Advantage plans because many HMOs
left the Medicare+Choice program in the past. However, new options that
had not yet been offered under the Medicare Advantage program might
also be attractive to employers with retirees living all across the
country. CMS officials said that they are currently developing the
waivers that plan sponsors would need to form their own Medicare
Advantage plans.
The MMA also established HSAs, which receive preferential tax
treatment, that are used in conjunction with high deductible health
insurance plans.[Footnote 65] The HSA can be used to pay for qualified
medical expenses not covered by insurance or other reimbursements.
Although HSAs cannot be set up to fund health benefits for current
Medicare-eligible retirees, they can be a savings vehicle for workers
to pay the cost of their health care coverage when they retire.
However, some benefit experts said it is unlikely that enough money
would accumulate in these accounts for retirees, especially for older
workers, to benefit substantially from them.[Footnote 66] Six of the 15
plan sponsors we interviewed said they were exploring how HSAs would
integrate into their overall benefit programs or were considering them
for the future.
Most Plan Sponsors in Our Sample Reported MMA-Related Changes on Recent
Financial Statements, While a Third Were Considering MMA Options:
According to financial statements filed with the SEC as of November
2004, most of the Fortune 500 employers we reviewed that reported
postretirement benefit obligations[Footnote 67] (27 of 39) reflected
the effect of the MMA options on these obligations.[Footnote 68] For
example, 3 of these plan sponsors each reported reductions in
accumulated obligations of over $100 million. The other 12 employers
did not report on their MMA decisions in these financial statements.
(See table 2.)
Table 2: Actions Taken in Response to the MMA by 50 Randomly Selected
Fortune 500 Employers, Most as of the Quarter Ending September 30,
2004:
Employers reporting postretirement benefits;
Action: Addressed impact of the MMA on postretirement benefit
obligations;
Number of employers: 27.
Employers reporting postretirement benefits;
Action: Did not address impact of the MMA on postretirement benefit
obligations;
Number of employers: 12[A].
Employers reporting postretirement benefits;
Action: Subtotal;
Number of employers: 39.
Employers not reporting postretirement benefits or not filing
statements;
Action: Did not report postretirement benefits on annual or quarterly
financial statements;
Number of employers: 8.
Employers not reporting postretirement benefits or not filing
statements;
Action: Did not file annual or quarterly financial statements with the
SEC;
Number of employers: 3[B].
Employers not reporting postretirement benefits or not filing
statements;
Action: Subtotal;
Number of employers: 11.
Action: Total;
Number of employers: 50.
Source: GAO.
Notes: Based on analysis of annual (10-K) and quarterly (10-Q)
financial statements Fortune 500 employers filed with the SEC. The 50
employers represent a randomly selected group of employers from the
Fortune 500 list for 2003. Most of these employers' fiscal years ended
in December 2003, so their most recent quarterly financial statement
covered the period ending September 30, 2004.
[A] One of the 39 employers that sponsored retiree health benefit plans
addressed the MMA but did not provide complete information on
postretirement benefit obligation amounts.
[B] Three of the 50 randomly selected employers were private, not
publicly traded, employers and were not required to file annual 10-K or
quarterly 10-Q financial statements with the SEC.
[End of table]
Thirteen of the 27 plan sponsors that reflected the effect of the MMA
options reported they would be choosing the subsidy option, which
reduces their postretirement benefit obligations and other
expenditures. However, even among these 13 plan sponsors, 3 reported
that they would be choosing the subsidy option for some but not all of
their retirees. They had not reported what options they would pursue
for the remaining retirees. While the remaining 14 plan sponsors
addressed the MMA options in their financial statements, their MMA
decisions for Medicare-eligible retirees were not as clear. These plan
sponsors generally reported that the MMA options either reduced their
postretirement benefit obligations or that the changes they made
because of the MMA were not expected to have a material impact on their
postretirement benefit obligations.[Footnote 69]
Twelve of the 39 employers that reported sponsoring retiree health
benefit plans and having postretirement benefit obligations did not
report on their MMA decisions in financial statements filed as of
November 2004. One of these 12 plan sponsors reported that it had
determined that its prescription drug benefits were not actuarially
equivalent to the Medicare part D benefit and could not take advantage
of the subsidy option. This plan sponsor reported that it was
evaluating the impact of other MMA options. The remaining 11 plan
sponsors did not report on the impact of the MMA on their
postretirement obligations; 4 of these 11 plan sponsors did not expect
any changes they made to be material.
Sponsors of Retiree Health Benefit Plans We Interviewed Unlikely to
Reduce Current Drug Benefits for Medicare Retirees in Response to the
MMA:
In interviews, sponsors of health plans that included prescription drug
benefits for Medicare-eligible retirees told us they did not expect to
reduce these benefits in response to the new Medicare part D benefit
and the MMA options. Although one benefit consultant said that some of
his clients might consider reducing benefits in response to the MMA,
plan sponsors we interviewed that were considering choosing the subsidy
option said they did not expect to reduce their benefits in response to
the MMA, even though some could do so and still qualify for the
subsidy.[Footnote 70] Plan sponsors considering wrapping their benefits
around the Medicare part D benefit were focused on wrapping benefits in
a way that would maintain, not restrict, the current level of benefits.
According to a benefit consultant, many employers who sponsored retiree
health benefit plans supplemented Medicare parts A and B with
additional benefits and might also do so for Medicare part D. However,
plan sponsors change benefits for different reasons. Even though they
said they were not considering a reduction in prescription drug
benefits in response to the MMA, some plan sponsors and benefit
consultants said that ongoing cost pressures prompt plan sponsors to
constantly review and, if necessary, adjust their benefits for future
retirees.
Two of the 12 private sector employers that sponsored retiree health
benefits told us that during their deliberations on the MMA options
they had considered, but dismissed, elimination of some or all retiree
prescription drug benefits as one of several options. One of these plan
sponsors said eliminating prescription drug coverage would not be
realistic, especially with collectively bargained benefits. The other
plan sponsor said it was easier to continue to provide the benefits to
this declining population--it no longer offered retiree health benefits
to new hires--than to contend with the negative press and relations
with current retirees and active workers.
None of the three public sector sponsors of health benefits for
Medicare-eligible retirees we interviewed expected to reduce or
eliminate prescription drug benefits in response to the MMA options.
OPM officials said that they did not plan to decrease or eliminate any
prescription drug coverage for Medicare-eligible retirees in response
to the MMA. These officials, who administer health benefits for federal
employees and retirees, noted that eliminating prescription drug
benefits would not be a politically realistic option. An official at a
public sector plan that provides health benefits to Medicare-eligible
retirees in one state said that the state also was not planning to
reduce its benefits in response to the MMA. However, the state had
already planned to make extensive changes to its benefits in response
to rising health care costs about a year before Congress passed the
MMA, and eliminating or further reducing benefits for public sector
retirees was not an option currently being considered.
The MMA Is Not Likely to Induce Employers Not Already Offering Retiree
Health Coverage to Begin Doing So:
Few employers, if any, that were not sponsoring retiree prescription
drug benefits were expected to begin sponsoring them in response to the
MMA. Benefit consultants and experts we interviewed consistently agreed
that it was doubtful that an employer would want to assume new benefit
obligations for retiree health or prescription drugs if it did not
already do so, regardless of the MMA options. Furthermore, the
availability of Medicare's prescription drug benefits in 2006 might
give employers more of an incentive not to start to provide these
benefits because prescription drug benefits would be available without
the employer's participation. Ultimately, benefit consultants and
experts told us this decision would vary by employer. An employer's
particular financial, business, and competitive situation could affect
the employer's decision to provide any new benefits or to provide
supplemental coverage--pay the part D premium, cover out-of-pocket
expenses, or consider a Medicare Advantage plan as an option--to
Medicare-eligible retirees in response to the MMA.
According to officials at organizations representing small and midsized
employers and other experts, the MMA is not likely to encourage such
employers to add to their operating costs by beginning to offer retiree
health benefits or supplementing the prescription drug benefits
available through Medicare part D. These employers are more concerned
about providing health benefits to active workers rather than to
retirees. However, as with large employers, employers' specific
circumstances drive their business and benefit decisions. Therefore,
according to these officials, while there may be isolated individual
employers that might begin to provide retiree health benefits or
prescription drug coverage supplementing the benefits established by
the MMA, they would likely be the exception rather than the rule.
Concluding Observations:
The provision of employment-based retiree health benefits for Medicare
beneficiaries continues to be an issue for evaluation and change with
employers and other plan sponsors even as they begin to choose options
available as a result of the Medicare drug benefit enacted as part of
the MMA. The long-term decline in the percentage of employers offering
retiree health benefits to Medicare-eligible individuals has leveled
off in recent years. Plan sponsors have continued to modify their
requirements for eligibility, benefits, and cost sharing in an effort
to contain cost growth. As employers and other plan sponsors choose
options as provided under the MMA, they likely will continue to face
rising health care costs, particularly for prescription drugs, that
will increase their obligations for retiree health benefits. The
Medicare drug benefit is expected to provide some insulation from these
cost increases for plans that qualify and employers that receive a
subsidy for a portion of their drug expenditures or that choose to
allow Medicare to bear primary responsibility for these costs for
Medicare-eligible retirees. Nonetheless, even after employers select a
particular option in response to the Medicare drug benefit, it is
likely that they will continue to reshape their retiree health benefits
in response to cost pressures, as they have for the last decade.
However, few employers not already offering retiree health or
prescription drug coverage are likely to begin doing so as a result of
the options available under the MMA.
Agency and Other External Comments:
We provided a draft of this report to CMS, OPM, and experts on retiree
health benefits at the Employee Benefits Research Institute, Health
Research and Educational Trust, Hewitt Associates, and Mercer Human
Resource Consulting.
In its written comments, CMS generally agreed with our findings. CMS
stated that the new Medicare drug benefit and the subsidy can help plan
sponsors continue to provide drug coverage to Medicare-eligible
retirees. Consistent with our finding that plan sponsors intend to
continue offering prescription drug benefits, CMS cited a survey
released in January 2005 that indicated that most plan sponsors
intended to continue offering prescription drug coverage after the
Medicare part D benefit begins. CMS confirmed that many plan sponsors
are still considering their options under the MMA. CMS also indicated
that some employers may reevaluate their retiree benefits and that some
plan sponsors may begin to offer prescription drug benefits. In its
comments, CMS noted that it had recently released its final rule
implementing the Medicare part D benefit and plan sponsor options. CMS
also noted that it plans to provide additional guidance to respond to
issues raised by comments on the proposed rule, including guidance on
actuarial equivalence. CMS acknowledged that plan sponsors need to have
timely guidance because of the complexity of the process, and CMS
intends to continue to conduct outreach and education efforts on the
options for retirees' prescription drug coverage available to plan
sponsors. (CMS's comments are reprinted in app. II.)
In its written comments, OPM highlighted its role in limiting premium
increases while continuing to provide the same level of health
insurance coverage at the same premium rates for retirees that it
provides to active federal employees. While at the time of our
interviews OPM officials indicated that OPM was considering the federal
subsidy for FEHBP, in its written comments the agency said that it does
not expect to choose the federal subsidy option. We revised the report
to reflect that OPM does not expect to choose the subsidy option.
(OPM's comments are reprinted in app. III.)
The experts who reviewed the draft report generally indicated that the
report provided a comprehensive and accurate portrayal of employment-
based retiree health benefits and prescription drug benefits under the
MMA. Two of the experts noted that while they concurred that the
percentage of employers offering retiree health benefits has leveled
off in recent years, this finding may understate the impact of other
changes that reduce the extent of retiree health benefits. They
highlighted other changes, as we cited in the draft report, such as
reduced eligibility for future retirees, increased cost sharing and
premium contributions, and financial caps. We agree that as noted in
the report, these changes contribute to an overall erosion in the value
and availability of retiree health benefits.
CMS and several of these experts also provided technical comments,
which we incorporated as appropriate.
We are sending copies of this report to the Administrator of CMS, the
Director of OPM, and interested congressional committees. We will also
provide copies to others on request. In addition, this report is
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please
contact me at (202) 512-7118. Another contact and staff acknowledgments
are listed in appendix IV.
Signed by:
Kathryn G. Allen:
Director, Health Care--Medicaid and Private Health Insurance Issues:
List of Committees:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable Michael B. Enzi:
Chairman:
The Honorable Edward M. Kennedy:
Ranking Minority Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
The Honorable John A. Boehner:
Chairman:
The Honorable George Miller:
Ranking Minority Member:
Committee on Education and The Workforce:
House of Representatives:
The Honorable Joe Barton
Chairman:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable William M. Thomas
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To identify trends in employment-based retiree health benefits, we
analyzed data from (1) two annual private sector surveys of employer
health benefits conducted since the early 1990s through 2004, (2) one
private sector survey on retiree health benefits conducted in 2004, and
(3) three surveys conducted by the federal government that included
information on Medicare beneficiaries and employment-based health
benefits. We also reviewed financial data for fiscal years 2001 through
2003 that a sample of Fortune 500 employers submitted to the Securities
and Exchange Commission (SEC) to identify changes in large employers'
retiree health benefit obligations. To supplement the trend and
financial data and to identify which options for prescription drug
coverage provided under the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) sponsors of employment-based
retiree health benefits said they planned to implement, we interviewed
benefit consultants, private and public sector sponsors of employment-
based retiree health benefits, officials at associations and groups
representing large and small employers and others. In addition, we
reviewed studies and literature addressing retiree health benefits. We
conducted our work from April 2004 through February 2005 in accordance
with generally accepted government auditing standards.
Surveys of Employment-Based Health Benefits:
We relied on data from two annual surveys of employment-based health
benefit plans. The Kaiser Family Foundation and the Health Research and
Educational Trust (Kaiser/HRET) and Mercer Human Resource Consulting
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 2004.[Footnote 71] We
also used data from a survey focused solely on 2004 retiree health
benefits that the Kaiser Family Foundation and Hewitt Associates
(Kaiser/Hewitt) conducted in 2004. 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.
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 72] 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 2004, 1,925 employers completed the full survey,
giving the survey a 50 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 1,092 employers, or
cumulatively about 78 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 73] 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. Mercer
conducts the survey by telephone for employers with from 10 to 499
employees and mails questionnaires to employers with 500 or more
employees. Mercer's database contains information from 2,981 employers
who sponsor health plans. By using statistical weights, Mercer projects
its results nationwide and for four geographic regions.[Footnote 74]
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 Kaiser/Hewitt study--Current Trends and Future Outlook for Retiree
Health Benefits: Findings from the Kaiser/Hewitt 2004 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 database--a list of private sector employers
potentially offering retiree health benefits. Kaiser/Hewitt conducted
the survey online from May 2004 through September 2004 and obtained
data from 333 large (1,000 or more employees) employers. According to
information provided by Hewitt, these employers included about one-
third of the 100 Fortune 500 companies with the largest retiree health
obligations in 2003. Because the sample is nonrandom and does not
include the same sample of companies and plans each year, survey
results for 2004 cannot be compared to results from prior years.
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 Current Population Survey (CPS),
conducted by the U.S. Census Bureau. 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 the Centers for
Medicare & Medicaid Services (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 75] The survey is based on a sample
designed to represent a cross section of the nation's civilian
noninstitutionalized population. In 2004, about 84,500 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 2004 CPS Annual Supplement was about 84 percent. Because
the CPS is based on a sample, any estimates derived from the survey are
subject to sampling errors. A sampling error indicates how closely the
results from a particular sample would be reproduced if a complete
count of the population were taken with the same measurement methods.
To minimize the chances of citing differences that could be
attributable to sampling errors, 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
sponsored by CMS.[Footnote 76] The survey 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. The survey also relates coverage to
payment sources. The sample represents 16,315 Medicare beneficiaries
from CMS's enrollment files who are interviewed three times a year at
4-month intervals. The complete interview cycle for a respondent
consists of 12 interviews over 4 years. Response rates for initial
interviews ranged from about 85 to 89 percent. After completing a first
interview, individuals had a response rate of 95 percent or more in
subsequent interviews. Interview data are linked to Medicare claims and
other administrative data, and sample data are weighted so that results
can be projected to the entire Medicare population.
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. Therefore, this
file contains data on Medicare beneficiaries' expenditures and sources
of coverage for prescription drugs. Among other items, the prescription
drug data include the following payment source categories: Medicare,
Medicaid, health maintenance organizations (HMO), Medicare HMO,
employment-based insurance, individually purchased insurance, unknown,
out-of-pocket, discounts, and other.
We analyzed prescription drug expenditure data for retired Medicare
beneficiaries aged 65 and older who had employment-based health
coverage in 2001, the most current data available at the time we did
our analysis. We extrapolated these data to 2006--when the Medicare
part D benefit begins--using projections based on National Health Care
Expenditures per capita data developed by CMS to provide estimates of
prescription drug expenditures paid by employment-based insurance or
paid out-of-pocket for retired Medicare beneficiaries with employment-
based insurance. We did not make adjustments to reflect significant
changes in payment sources for prescription drug coverage once the
Medicare part D benefit begins in 2006. For employers that elect to
continue covering prescription drugs, these projections provide an
estimate of the share of these prescription drug expenditures covered
that could be eligible for the MMA subsidy.
Medical Expenditure Panel Survey:
MEPS, sponsored by the Agency for Healthcare Research and Quality,
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 77] We used data
from the MEPS Insurance Component, one of the four surveys, to identify
the percentage of state entities that offered retiree health benefits
in 1998 and 2002. 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 surveys
provide a nationally representative sample of employers. The target
size of the list sample is approximately 40,000 employers each year.
The response rate for the public sector MEPS Insurance Component was
about 88 percent in 2002.
Financial Data from Fortune 500 Employers:
We reviewed selected financial data for a stratified random sample of
2003 Fortune 500 employers, which is a list of the U.S. corporations
with the highest annual revenues. First, we stratified the Fortune 500
list into five groups of 100 in descending order of revenues.[Footnote
78] We then randomly selected 10 Fortune 500 employers from each of the
five groups, for a total of 50 employers. To identify the 50 employers'
postretirement benefit obligations,[Footnote 79] we reviewed the annual
financial statements (Form 10-K) that these employers submitted to the
SEC.[Footnote 80] We reviewed the Form 10-K that each employer
submitted for its most recent fiscal year, ending in 2003 or early in
2004.[Footnote 81] Then, to identify each employer's postretirement
benefit obligations for the two previous fiscal years, we reviewed the
Form 10-K filed in either 2002 or 2003. To identify the types of
changes these employers planned to make to their postretirement
benefits in light of the MMA, we reviewed the latest quarterly
financial statements (Form 10-Q) that employers submitted to the SEC,
most as of November 2004.[Footnote 82]
Interviews with Benefit Consultants, Plan Sponsors, and Others:
We interviewed representatives of six 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 human resources services to
multiemployer plans.
To learn more about retiree health benefit trends and MMA options from
large private sector plan sponsors, we interviewed 12 Fortune 500
employers that provided retiree health benefits. From the stratified
random sample of 50 Fortune 500 employers selected for a financial data
review, we judgmentally selected 10 employers for interviews. 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 Form 10-K, and union presence when making our
selection. We also interviewed officials at two additional Fortune 500
employers at the recommendation of a benefit consultant.
While small and midsized employers are less likely than large employers
to offer retiree health benefits, we also assessed small and midsized
employers' preliminary reactions to the MMA options. We relied
primarily on discussions with officials at two organizations
representing the interests of small and midsized employers--the
National Federation of Independent Business and the United States
Chamber of Commerce--and benefit consultants.
To learn more about retiree health benefit trends and MMA options at
public sector plan sponsors, we interviewed officials at the Office of
Personnel Management (OPM), two state retirement systems, and one
association. OPM administers the Federal Employees Health Benefits
Program--the country's largest employment-based health plan. 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. We also
interviewed officials at the National Conference on Public Employee
Retirement Systems and reviewed available studies on retiree health
benefits in the public sector. [Footnote 83]
To obtain broader-based information about retiree health benefit trends
and MMA options, we interviewed officials at several other groups and
associations. Specifically, we interviewed the President of the
National Business Group on Health and the Director of the Health
Research and Education Program of the Employee Benefit Research
Institute to obtain more information about large private sector
employers. We also interviewed officials from the American Academy of
Actuaries, the Kaiser Family Foundation, the American Federation of
Labor and Congress of Industrial Organizations, and the National
Coordinating Committee for Multiemployer Plans. Finally, we reviewed
other available literature on retiree health benefit trends, cost-
containment strategies, and plan sponsors' likely responses to MMA
options.
[End of section]
Appendix II: Comments from the Centers for Medicare & Medicaid
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
DATE: JAN 28 2005:
TO: Kathryn G. Allen:
Director, Health Care-Medicaid and Private Health Insurance Issues:
Government Accountability Office:
Signed by:
FROM: Mark B. McClellan, M.D., Ph.D., Administrator:
SUBJECT: Government Accountability Office's (GAO) Draft Report: RETIREE
HEALTH BENEFITS: Options for Employment-Based Prescription Drug
Benefits Under the Medicare Modernization Act (GAO-05-205):
Thank you for the opportunity to review and comment on the GAO's draft
report entitled, RETIREE HEAL T II BENEFITS: Options for Employment-
Bused Prescription Drug Benefits Under the Medicare Modernization Act
(GAO-05-205). The report examines the trends in employment-based
retiree health coverage prior to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA); which MMA
prescription drug options plan sponsors say they will likely use; and
what effect these options will likely have on health benefits for
Medicare-eligible retirees.
The Centers for Medicare & Medicaid Services (CMS) agrees with the
report findings that the recent trend in employment-based prescription
drug benefits shows those benefits to be declining in the value and
availability of coverage. As the report indicates, employment-based
retiree health insurance has been an important source of drug coverage
for many Medicare beneficiaries. However, for well over a decade, the
availability and generosity of employment-based retiree health coverage
has been eroding, particularly for future retirees. As prescription
drug costs have risen, employers have been shifting more of those costs
to their retirees, and many employers have ceased offering retiree
health coverage altogether.
the Medicare prescription drug benefit and the retiree drug subsidy
represent additional funding sources that can help employers and unions
continue to provide high quality drug coverage for their retirees.
Employer and union plan sponsors and beneficiaries will have multiple
options for enhancing retiree coverage through new resources available
through Medicare. We anticipate that this new funding will generally
improve support for retiree drug coverage, enhancing both its quality
and security. We are pleased that the GAO report confirms that the
retiree drug subsidy provisions of the MMA will directly assist
employers in retaining retiree health benefits. We also would like to
bring to your attention a recent survey by Deloitte Consulting LLP,
released after your study was concluded, that shows 90 percent of
employers offering their retirees prescription drug coverage intend to
continue offering drug coverage after the new Medicare Part D drug
coverage is available in 2006, which is consistent with your findings.
The report states that it is unlikely that the MMA will induce
employers to begin to provide prescription drug coverage or to
supplement the Medicare drug benefit if they had not previously offered
retiree health coverage. However, the report also indicates (and our
own discussions with stakeholders confirm) that many plan sponsors are
still considering the potential impact of the various MMA prescription
drug options. Employers are often encouraged to review and consider
total retirement costs for their retirees, and we believe some may re-
think certain aspects of their overall retirement benefit package-and
even begin offering prescription drug coverage to retirees --once
Federal subsidy dollars become available under these various options
beginning in January 2006.
On January 21, 2005, we released a final regulation that implements the
Part D prescription drug benefit and the retiree drug subsidy. Based on
the valuable comments and input we received on the proposed policies,
this final rule reflects our four objectives: maximizing the number of
retirees benefiting from the retiree drug subsidy; avoiding windfalls;
minimizing administrative burden; and not exceeding budget estimates.
In addition to the policies set forth in the final rule, CMS is
planning to issue guidance on a range of issues for which commenters
indicated additional direction would be helpful. For example, we plan
to provide guidance on the actuarial equivalence standard and the
process of attesting to actuarial equivalence, the application process.
and the streamlined approach CMS plans to use in implementing the
employer waivers.
We respect plan sponsors' need to have guidance on the retiree drug
subsidy and other employer and union options as soon as possible due to
the complexity and timing of the process. In addition to issuing this
final rule and other guidance as quickly as possible, CMS will continue
to conduct outreach to various groups to educate the stakeholders on
the requirements for applying for the retiree drug subsidy and taking
advantage of the other options that are available to employers and
unions for continuing to provide assistance with their Medicare-
eligible retirees' drug costs.
Thank you again for the opportunity to review and comment on the draft
report.
[End of section]
Appendix III: Comments from the Office of Personnel Management:
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT:
WASHINGTON, DC 20415-1000:
OFFICE OF THE DIRECTOR:
January 28, 2005:
Ms. Kathyrn G. Allen:
Director, Health Care-Medicaid and Private Health Insurance Issues:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Allen:
Thank you for the opportunity to respond to the proposed report
entitled RETIREE HEALTH BENEFITS: Options for Employment-Based
Prescription drug Benefits Under the Medicare Modernization Act (GAO-
05-205).
The Office of Personnel Management (OPM) is justifiably proud of its
stewardship for the Federal Employees Health Benefits Program (FEHBP).
As your report points out, through tough negotiations with the
participating health plans, OPM was successful in holding down premium
increases this year to only 7.9 percent. This accomplishment was
achieved, as your report also acknowledges, while continuing to provide
the same level of health insurance coverage at the same premium rates
for retirees and their families as available to Federal employees.
The Medicare Modernization Act (MMA) will make available to all
Medicare beneficiaries a benefit that FEHBP members, including
Medicare-eligible members, have enjoyed for years: a comprehensive
prescription drug benefit. The MMA, in fact, requires health plan
sponsors, including the Federal Government, and its agent for the
FEHBP, OPM, to decide how to coordinate existing prescription drug
benefits with the drug benefits that will be available beginning in
2006 under Medicare Part D. The proposed GAO report incorrectly
indicates that the FEHBP would most likely receive the Federal subsidy
payment provided for by the MMA. At this time, we do not expect to
participate in the employer subsidy.
I appreciate the opportunity to provide this response. If you have any
questions, please contact Richard B. Lowe, 202-606-1000.
Sincerely,
Signed by:
Kay Coles James:
Director:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
John E. Dicken, (202) 512-7043:
Acknowledgments:
Laura Sutton Elsberg, Joseph A. Petko, Kevin Dietz, Elizabeth T.
Morrison, and Suzanne Worth made key contributions to this report.
FOOTNOTES
[1] See, for example, Frank McArdle, Amy Atchison, and Dale Yamamoto,
Hewitt Associates; and Michelle Kitchman and Tricia Neuman, The Kaiser
Family Foundation, Current Trends and Future Outlook for Retiree Health
Benefits: Findings from the Kaiser/Hewitt 2004 Survey on Retiree Health
Benefits (Menlo Park, Calif., and Lincolnshire, Ill.: The Henry J.
Kaiser Family Foundation, December 2004), and GAO, Retiree Health
Benefits: Employer-Sponsored Benefits May Be Vulnerable to Further
Erosion, GAO-01-374 (Washington, D.C.: May 1, 2001).
[2] Pub. L. No. 108-173, sec. 101, §§ 1860D-1-1860D-42, 117 Stat. 2066,
2071-2152 (to be codified at 42 U.S.C. §§ 1395w-101-1395w-152).
[3] "Plan sponsor" refers to a sponsor of employment-based retiree
group health coverage, including private sector employers and public
sector employers, including federal, state, or local governments;
sponsors of church plans; and sponsors of plans offered under
collectively bargained agreements.
[4] MMA sec. 101, § 1860D-22, 117 Stat. 2125-28. The subsidy will be
available to employment-based group health plans regulated under the
Employee Retirement Income Security Act of 1974 (29 U.S.C. §§ 1001 et
seq. (2000)) as well as to federal government and other public sector
plans and church plans.
[5] The federal government, through FEHBP, is the nation's largest
purchaser of employment-based health benefits. All active and retired
federal workers and their dependents are eligible to enroll in health
plans offered through FEHBP. For 2005, 11 nationwide fee-for-service
plans, some of which are available only to certain federal retirees and
most of which offer a preferred provider organization (PPO), will be
participating in FEHBP. While federal retirees also have more than 260
health maintenance organization (HMO), point-of-service, consumer-
driven, and high-deductible health plan options, the number available
varies by state.
[6] MMA § 111, 117 Stat 2175-76. The MMA also required that we conduct
a second study after the implementation of the Medicare drug benefit,
following up on trends and the options selected.
[7] "Obligations" are incurred during employees' active service and
refer to projected costs that employers will likely pay in the future
for retirees.
[8] Ten of the 12 Fortune 500 employers we interviewed were selected
from the 50 randomly selected Fortune 500 employers whose financial
statements we reviewed; the other 2 Fortune 500 employers we
interviewed were selected prior to our review of financial statements
on the basis of recommendations by a benefit consultant.
[9] 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 as the
Secretary of Labor may prescribe by regulation. 29 U.S.C. § 1002(37)
(2000). They are common in industries that typically include smaller
employers and have a mobile workforce, such as construction, trucking,
and communications. A multiemployer plan's board of trustees, which has
equal representation from labor and management, as opposed to an
individual employer or union, controls the design and financing of the
plan.
[10] For this report, we specify when information is for Medicare-
eligible retirees (primarily those aged 65 years 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.
[11] 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 HMOs and other types of
health plans, such as PPOs, 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 PPOs. MMA § 221,
117 Stat. 2180-93.
[12] For Medicare beneficiaries who purchase part B coverage on or
after January 1, 2005, Medicare will cover a one-time preventive
physical exam within the first 6 months that the beneficiary is
enrolled in part B. MMA sec. 601, § 1861 (s)(2) and (ww), 117 Stat.
2303-24 (to be codified at 42 U.S.C. § 1395x(s)(2) and (ww)).
[13] Medigap is a privately purchased health insurance policy that
supplements Medicare by paying for some of the health care costs not
covered by Medicare. 42 U.S.C. 1395ss (2000). Medicare beneficiaries
can purchase 1 of 10 standardized Medigap benefit packages. Three of
the 10 standardized Medigap benefit packages offer limited prescription
drug benefits, paying 50 percent of drug charges up to either $1,250
per year or $3,000 per year after the beneficiary pays a $250
deductible. New Medigap plans sold after January 1, 2006, will no
longer include prescription drug benefits. MMA sec. 104(a)(1), §
1882(v)(1), 117 Stat. 2161 (to be codified at 42 U.S.C. §
1395ss(v)(1)).
[14] Health plans typically require enrollees to pay a portion of the
cost of their medical care. These cost sharing arrangements include
deductibles, which are fixed payments enrollees are required to make
before coverage applies; copayments, which are fixed payments enrollees
are required to make at the time benefits or services are received; and
coinsurance, which is a percentage of the cost of benefits or services
that the enrollee is responsible for paying directly to the provider.
[15] Low-income Medicare beneficiaries may qualify for assistance from
Medicaid, a joint federal-state program that covers health care
services for certain individuals with low incomes and resources. 42
U.S.C. § 1396 et seq. (2000). For Medicare beneficiaries qualifying for
full Medicaid benefits, known as "dual eligible" individuals, state
Medicaid programs pay for Medicare's part A and part B cost sharing
requirements up to the Medicaid payment rate as well as for services
that are not generally covered by Medicare, including prescription
drugs.
[16] Since World War II, many employers have voluntarily sponsored
health insurance as a benefit to employees for purposes of recruitment
and retention and some have also offered these benefits to their
retirees. The federal tax code provides incentives for employers to
offer health benefits because qualified employer contributions do not
count as taxable income to employees and may be deducted from the
employer's income for tax purposes. 26 U.S.C. §§ 106(a) and 419(a),
respectively (2000). Requirements for most employment-based health
plans for workers or retirees are prescribed by the Employee Retirement
Income Security Act of 1974, which gives employers considerable
flexibility to manage the cost, design, and extent of health care
benefits they provide. 29 U.S.C. §§ 1001 et seq. (2000).
[17] In 2000, a federal court held that an employer providing Medicare-
eligible retirees a health benefit that is different from that offered
to other retirees constitutes age discrimination unless, under an
exception established by regulation, the health benefits provided by
both the employer and Medicare are equal to, or cost the employer as
much as, the health benefit provided to other retirees. Erie County
Retirees Ass'n v. County of Erie, 220 F.3d 193 (3d Cir. 2000), cert.
denied, 532 U.S. 913 (2001). The Equal Employment Opportunity
Commission (EEOC) published a proposed rule on July 14, 2003, that
would establish an additional exception under which altering, reducing,
or eliminating health benefits when retirees are eligible for Medicare
would not constitute age discrimination. 68 Fed. Reg. 41,542. During a
public meeting on April 22, 2004, EEOC voted to approve the final rule,
but before it becomes final, it must be published in the Federal
Register.
[18] Different coordination approaches can result in different costs
for plan sponsors and retirees. For example, consider an individual
with total health care costs of $10,000 and retiree health benefits
paying (without Medicare) $8,500 of these costs. Under full
coordination of benefits, if Medicare paid $8,000, the plan payment
would be $2,000, and the retiree would have no out-of-pocket costs. In
a carveout, if Medicare paid $8,000, the plan payment would be $500,
and the retiree would pay $1,500 out-of-pocket. See Frank B. McArdle
and Dale H. Yamamoto, Hewitt Associates LLC, for the Kaiser Medicare
Policy Project, Retiree Health Trends and Implications of Possible
Medicare Reforms (Washington, D.C.: The Henry J. Kaiser Family
Foundation, September 1997).
[19] Kaiser/Hewitt 2004 Survey on Retiree Health Benefits.
[20] The initial enrollment period for Medicare part D will run from
November 15, 2005, to May 15, 2006. MMA secs. 101 and 102, §§ 1860D-
1(b)(2)(A) and 1851(e)(3)(B)(iii), 117 Stat. 2073 and 2152 (to be
codified at 42 U.S.C. §§ 1395w-101(b)(2)(A) and 1395w-
21(e)(3)(B)(iii)).
[21] MMA sec. 101, § 1860D-21, 117 Stat. 2122 (to be codified at 42
U.S.C. § 1395w-131). Medicare Advantage plans will be required to offer
basic drug coverage starting in 2006. They may also offer additional
drug benefits for an increased cost. A beneficiary enrolled in a
Medicare Advantage plan generally will receive prescription drug
coverage through that plan and may not enroll in a part D prescription
drug plan.
[22] Specifically, when applying for the subsidy, the plan sponsor will
have to provide an attestation that the actuarial value of its
prescription drug benefits available to Medicare-eligible retirees is
at least equivalent to the actuarial value of the standard part D
benefit. MMA sec. 101, § 1822D-12(a)(2)(A), 117 Stat. 2125, (to be
codified at 42 U.S.C. § 1395w-132(a)(2)(A)).
[23] 70 Fed. Reg. 4,194, 4,462 (Jan. 28, 2005). For a plan sponsor in
the 35 percent tax bracket, this would be the equivalent of receiving
taxable income of $1,028. In the case of a private employer, this
amount would be in addition to the employer's savings resulting from
the deductibility of qualified plan contributions from taxable income.
26 U.S.C. § 419 (2000). However, CMS estimated that at least 60 percent
of retirees receiving employment-based prescription drug coverage do so
through plan sponsors that are exempt from federal income taxes--for
example, state and local governments or not-for-profit corporations.
[24] 70 Fed. Reg. 4,407.
[25] MMA sec. 101, § 1822D-22(b), 117 Stat. 2127 (to be codified at 42
U.S.C. § 1395w-132(b)).
[26] MMA sec. 1201, § 223, 117 Stat. 2469-79 (to be codified at 26
U.S.C. § 223). Amounts contributed to HSAs will receive preferential
income tax treatment.
[27] 69 Fed. Reg. 46,632.
[28] 70 Fed. Reg. 4,194. In its written comments, CMS indicted that it
released this final rule on January 21, 2005.
[29] See, for example, Mercer Human Resource Consulting, National
Survey of Employer-Sponsored Health Plans 2004 (forthcoming).
[30] Unless otherwise specified, the percentage of employers in the
Kaiser/HRET study that offer retiree health benefits may include
employers that offer health benefits to Medicare-eligible retirees,
retirees under age 65, or both.
[31] Gary Claxton and others, The Kaiser Family Foundation; and Jon
Gabel and others, Health Research and Educational Trust, Employer
Health Benefits 2004 Annual Survey (Menlo Park, Calif., and Chicago,
Ill.: The Henry J. Kaiser Family Foundation, 2004), http://www.kff.org/
insurance/7148/index.cfm (downloaded Dec. 8, 2004).
[32] Mercer Human Resource Consulting, National Survey of Employer-
Sponsored Health Plans: 2003 Survey Report (New York, N.Y.: Mercer
Human Resource Consulting, Inc., 2004).
[33] To qualify, a federal retiree must have been continuously enrolled
(or covered as a family member) in any FEHBP plan(s) for the 5 years of
service immediately before retirement begins, or for the full period(s)
of service since the first opportunity to enroll (if less than 5
years). 5 U.S.C. § 8905(b) (2000). When a federal retiree covered by
Medicare uses health care, the bill for the care is sent first to
Medicare, which pays for covered care according to its payment rules
and then the bill is sent to the FEHBP plan, as secondary payer, which
pays for care covered under its policy that is not covered by Medicare.
In 2003, OPM reported that about 2.6 million people (including spouses,
dependents, and survivors) received benefits through retirees who were
enrolled in FEHBP. Of this group, approximately 1.7 million were
Medicare beneficiaries.
[34] This percentage had increased from about 69 percent in 1998. MEPS
also reported for both 1998 and 2000 that about 80 percent of full-time
employees at large public sector employers (1,000 or more employees)
worked where health insurance was offered to retirees aged 65 and
older.
[35] These percentages include retirees aged 65 or over with
employment-based health coverage from a former employer or union as
well as the insured dependents of these individuals who are also
Medicare-eligible retirees aged 65 or over and who have employment-
based health coverage, such as spouses.
[36] The postretirement benefit obligations included retiree health
benefits and other postretirement benefits, but not pensions. One
employer in our sample of 50 Fortune 500 employers that sponsor health
coverage for retirees is not included in this analysis because it did
not report postretirement benefit obligations for 2001 and 2003.
[37] The Consumer Price Index for medical care increased by 13.1
percent from 2001 through 2003, an average annual increase of 4.3
percent.
[38] Kaiser/Hewitt 2004 Survey on Retiree Health Benefits. The data in
this report reflect the responses of 333 private sector employers with
1,000 or more employees that offered health benefits to retirees at the
time of the survey. Because the sample in this study is nonrandom, its
results cannot be compared to data from prior Kaiser/Hewitt surveys.
[39] Mercer noted that the 10 percent increase in the average total
health benefit cost for active employees was less than the previous
annual increase of 14.7 percent that occurred between 2001 and 2002 and
likely reflected steps taken by employers to cut costs, such as
changing plan design to increase employee out-of-pocket costs, reducing
covered services, and dropping costly plans. Costs reported for active
employees and retirees include both employer and employee/retiree
shares.
[40] 5 U.S.C. § 8906(b)(1) and (2) (2000).
[41] The Balanced Budget Act of 1997 authorized the current formula for
calculating the federal government's share of FEHBP premiums, effective
January 1999. Pub. L. No. 105-33, § 7002, 111 Stat. 251, 662.
[42] See GAO, Federal Employees' Health Plans: Premium Growth and OPM's
Role in Negotiating Benefits, GAO-03-236 (Washington, D.C.: Dec. 31,
2002).
[43] Anna Rappaport and Derek Guyton, Mercer Human Resource Consulting,
Retirees and Focused Prescription Drug Programs (New York, N.Y.: Apr.
18, 2002), http://www.mercerhr.com/knowledgecenter/
reportsummary.jhtml?idContent=1011310 (downloaded Dec. 29, 2004).
[44] GAO-01-374.
[45] The survey was conducted from May through September 2004. Unless
specifically noted, the data reported by Kaiser/Hewitt regarding the
changes made by employers "in the past year" and the changes that
employers expect to make "for the 2005 plan year" were not specific to
Medicare-eligible retirees or retirees under age 65.
[46] Data reported for retiree-only coverage. The Mercer survey sample
also included some government agencies.
[47] "Retiree Health Benefits, 2004: The Medicare Payment Advisory
Commission's Supplement to the Kaiser/HRET Survey of Employer-Sponsored
Health Benefits" (public meeting sponsored by the Medicare Payment
Advisory Commission, Ronald Reagan Building, Washington, D.C., Nov. 16,
2004).
[48] GAO-01-374.
[49] FAS 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, required employers to report accrued retiree medical
obligations beginning with plan years starting after December 15, 1992
(implementation for some employers began after December 15, 1994). By
capping employer premium contributions above the then-current levels,
employers could substantially reduce their obligations and still shield
retirees from large premium increases. Some employers have said that
FAS 106 requirements were a reason for reducing retiree health
benefits. While FAS 106 did not affect an employer's cash flow, there
was concern that listing this future obligation could affect companies'
stock prices because the reporting of projected retiree health care
costs affects the overall statement of financial profitability.
[50] GAO-03-236.
[51] In 1990, OPM required all FEHBP plans to provide prescription drug
coverage.
[52] The Segal Company, 2003 Segal State Health Benefits Survey:
Medical Benefits for Employees and Retirees (n.p.: The Segal Group,
Inc., 2003), http://www.segalco.com/government/pub-govt.cfm?ID=458
(downloaded Dec. 2, 2004). Segal surveyed all 50 states after
collecting information available on state Web sites and requesting
enrollment packages from each state. Thirty-nine states provided their
enrollment packages and 34 states completed all or portions of the
survey questionnaire. According to the report, the survey covers more
than 80 percent of total state health plan enrollment, representing
more than 3 million employees and retirees.
[53] Jack Hoadley, Health Policy Institute, Georgetown University, How
States Are Responding to the Challenge of Financing Health Care for
Retirees (Menlo Park, Calif.: The Henry J. Kaiser Family Foundation,
September 2003).
[54] Stan Wisniewski and Lorel Wisniewski, State Government Retiree
Health Benefits: Current Status and Potential Impact of New Accounting
Standards (Workplace Economics, Inc., commissioned by the AARP Public
Policy Institute) (Washington D.C.: AARP, July 2004), http://
research.aarp.org/health/2004_08_benefits.html (downloaded July 29,
2004).
[55] Statement No. 43, Financial Reporting for Postemployment Benefit
Plans Other Than Pension Plans, and Statement No. 45, Accounting and
Financial Reporting by Employers for Postemployment Benefits Other Than
Pensions. The requirements apply to all public sector plans that cover
postemployment benefits (other than pensions) and the sponsoring
entities, such as public employee retirement systems, public colleges,
and hospitals. The standards are effective in three phases based on a
public sector entity's total annual revenues. For Statement No. 43, the
largest employers begin in the first period after December 15, 2005,
and the smallest employers begin 2 years later. For Statement No. 45,
the largest employers begin in the first period after December 15,
2006, and the smallest employers begin 2 years later.
[56] Several recent surveys have also found that the subsidy is the
primary option employers are considering. Kaiser/Hewitt reported that
58 percent of employers said they expected to choose the subsidy option
for prescription drug benefits in their largest plans; Kaiser/HRET
reported that about half of employers surveyed in early 2004 were
likely to choose the subsidy option; and Mercer reported that about 40
percent of plan sponsors would apply for the subsidy. Each of the
surveys also found that some employers remained undecided about which
MMA option they would select for prescription drug coverage.
[57] Caps on benefits could cause an employer's prescription drug plan
to have less value on an actuarial basis than the standard part D
benefit and not qualify for the subsidy option.
[58] This plan sponsor obtained different plans through acquisitions.
Also, the plan sponsor negotiated about 80 to 90 contracts with about
20 different unions. However, not all the plans provide retiree health
benefits. In most cases, the plan sponsor could not change the retiree
health benefits without renegotiating with the unions. Taking
collectively bargained and noncollectively bargained retiree health
benefits together, the plan sponsor had about 100 different
prescription drug plans. Some of the retiree prescription drug plans
had capped benefits amounts.
[59] Also, when only considering Medicare-eligible retirees'
prescription drug costs covered by employment-based plans, our analysis
showed that about 76 percent of these expenditures are projected to be
$251 through $5,000, the range eligible for the subsidy in 2006.
[60] 70 Fed. Reg. 4,410. A plan sponsor would have to apply by
September 30, 2005, to receive the subsidy for 2006.
[61] MMA sec. 101, §1860D-13(b), 117 Stat. 2104-06 (to be codified at
42 U.S.C. § 1395w-113(b)).
[62] MMA sec. 101, § 1860D-1(b)(3) and (6), 117 Stat. 2073-74 and 2374-
75 (to be codified at 42 U.S.C. §§ 1395w-101(b)(3) and (6)).
[63] MMA sec. 101, § 1860D-2(b)(4)(B), 117 Stat. 2077-78 (to be
codified at 42 U.S.C. § 1394w-102(b)(4)(B)).
[64] MMA sec. 101, § 1860D-22(b), 117 Stat. 2125 (to be codified at 42.
U.S.C. § 1395w-132(b)).
[65] MMA § 1201, § 223, 117 Stat. 2469-79 (to be codified at 26 U.S.C.
§ 223). While employers, employees, or both can set up and contribute
to these accounts, employees own the accounts. In general, individuals
making contributions can deduct the lesser of the deductible or up to
$2,650 for self-only coverage or $5,250 for family coverage from
federal taxes in 2005. Any funds remaining in an HSA at the end of the
year can be carried over to the next year.
[66] According to the Employee Benefit Research Institute, HSAs will be
of limited benefit to people who are already 55 years of age or older
because they would not produce enough savings to substantially offset
retiree health expenses. See Paul Fronstin and Dallas Salisbury, Health
Care Expenses in Retirement and the Use of Health Savings Accounts,
Issue Brief No. 271 (Washington, D.C.: Employee Benefit Research
Institute, July 2004).
[67] Publicly traded companies account for their postretirement benefit
obligations in their financial statements. The postretirement benefit
obligations we refer to here include obligations for retiree health
benefits and other retiree benefits, such as life insurance, but not
for pensions (which are separately reported). This information is
included in the annual (10-K) and quarterly (10-Q) financial statements
they file with the SEC.
[68] At the time of our analysis, most of these employers' fiscal years
ended in December 2003, so their most recent quarterly financial
statement covered the period ending in September 2004, which most filed
in November 2004. A few employers had already reflected changes in
obligations as a result of the MMA in prior annual or quarterly filings
with the SEC.
[69] In May 2004, FASB issued guidance regarding how employers that
sponsor postretirement health benefit plans were to account for the
effects of the MMA--FASB Staff Position FAS 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. Under this guidance,
employers were required to report the effect of the MMA on their
retiree health benefit obligations for the first interim or annual
period that began after June 15, 2004. However, if employers could not
determine the effect of the MMA, they could reconsider the impact
periodically.
[70] In the Kaiser/Hewitt 2004 Survey on Retiree Health Benefits, 85
percent of the employers who planned to choose the subsidy said they
would likely retain current benefit levels, 7 percent would modify
benefits to match the standard part D benefit, and 8 percent did not
know about possible changes in their benefits.
[71] Year-to-year fluctuations or gradual changes 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.
[72] Kaiser/HRET has been conducting the survey of small and large
employers since 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 only sampled large employers in 1991, 1992, 1994, and 1997
and sampled both large and small employers in 1993, 1995, 1996, and
1998.
[73] Foster Higgins, which later merged with Mercer Human Resource
Consulting, began conducting the survey in 1986.
[74] However, the 2003 Mercer report states that the average annual
cost increase data cited for Medicare-eligible retirees are not
projectable beyond a group of 158 total employers that were able to
provide cost information for both 2002 and 2003.
[75] See http://www.census.gov/hhes/www/hlthins/hlthin03.html
(downloaded Dec. 22, 2004) 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 2004.
[76] See http://www.cms.hhs.gov/MCBS/Overview.asp (downloaded Dec. 22,
2004) for additional information.
[77] See http://www.meps.ahrq.gov/default.htm (downloaded Dec. 22,
2004) for additional information.
[78] See "The 500 Largest U.S. Corporations," Fortune, vol. 149, no. 7
(2004).
[79] Postretirement benefit obligations included retiree health and
other postretirement benefits, but not pensions.
[80] See http://www.sec.gov/edgar.shtml (downloaded Dec. 22, 2004) for
additional information. Information, including revenues and
obligations, reported to the SEC reflect employers' worldwide
operations.
[81] Forty-seven of the 50 employers we reviewed submitted Forms 10-K
to the SEC. Thirty-eight of these employers had fiscal years that ended
in December 2003. Of the remaining employers, 5 employers had fiscal
years that ended earlier in 2003 and 4 had fiscal years that ended in
either January or February 2004.
[82] Generally, companies had to file their Forms 10-Q 45 days after
the end of each quarter for fiscal years that ended on or after
December 15, 2002, and before December 15, 2004. Most of the quarterly
statements we reviewed covered the quarter ending in September 2004.
[83] See Jack Hoadley, Health Policy Institute, Georgetown University,
How States Are Responding to the Challenge of Financing Health Care for
Retirees (Menlo Park, Calif.: The Henry J. Kaiser Family Foundation,
September 2003). Responses to this study were provided by 43 states and
the District of Columbia. These state retirement systems had about 1.8
million retirees and dependents, approximately three-fourths of whom
were Medicare-eligible. See also Stan Wisniewski and Lorel Wisniewski,
State Government Retiree Health Benefits: Current Status and Potential
Impact of New Accounting Standards (Workplace Economics, Inc.,
commissioned by the AARP Public Policy Institute) (Washington, D.C.:
AARP, July 2004). The AARP Public Policy Institute commissioned
Workplace Economics to conduct research on retiree health benefits in
state governments. Workplace Economics analyzed information in its
proprietary database on benefits provided to state government employees
in all 50 states (excluding the District of Columbia, which is not part
of the state government database). Workplace Economics also analyzed
state governments' annual financial reports as part of this study.
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