GAO/AIMD-00-308R United Mine Workers of America

United States General Accounting Office

Washington, DC 20548

Accounting and Information

Management Division

B-286176

August 31, 2000

The Honorable William V. Roth, Jr.

Chairman

Committee on Finance

United States Senate

Subject: Additional Information Related to Analysis of the Administration’s Proposal

to Ensure Solvency of the United Mine Workers of America Combined

Benefit Fund

Dear Mr. Chairman:

On June 28, 2000, we briefed your staff on the results of our work related to your

March 9, 2000, request that we review the administration’s proposal to ensure the

solvency of the United Mine Workers of America (UMWA) Combined Benefit Fund.

Specifically, you asked that we analyze the impact of the administration’s proposal to

(1) extend the Abandoned Mine Land Reclamation (AML) fees, (2) reverse the effects

of National Coal v. Chater, (3) reverse the effects of Dixie Fuel Company v. the Social

Security Administration, and (4) appropriate federal funds. In addition, you asked

that we provide some general background information on the operations, governance

structure, benefit structure, and historical and projected financial position of the

fund.

On August 15, 2000, we delivered a letter to you summarizing the information

provided at the briefing. 1 The detailed briefing slides were attached to the letter. Our

analysis of the administration’s proposal indicated that while the administration’s

proposal improves the projected financial position of the fund, reducing the fiscal

year 2008 anticipated cumulative deficit, not including borrowing costs,2 from

$513 million to $83 million, it does not ensure the solvency of the fund. Additional

funds will be needed to ensure its solvency.

1

Analysis of the Administration’s Proposal to Ensure Solvency of the United Mine Workers of America

Combined Benefit Fund (GAO/AIMD-00-267R, August 15, 2000).

2

The actuarial projection estimates the year 2008 accumulated deficit to be $614 million, which

includes $101 million in borrowing costs.
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Page 2 GAO/AIMD-00-308R United Mine Workers of America

Subsequently, in a letter dated August 16, 2000, you requested that we provide

additional information related to the UMWA Combined Benefit Fund. Specifically,

using readily available information, you asked us to

• compute the average cost per beneficiary of providing benefits under the fund for

at least the past 4 fiscal years as compared to the per beneficiary premium

charged to contributing companies for those years,

• compute the annual percentage increase in the average cost per beneficiary of

providing benefits under the fund for at least the past 4 fiscal years as compared

to the increase in the medical component of the Consumer Price Index (CPI) for

those years, and

• break out the income to the fund for at least the past 4 fiscal years in the following

manner:

• coal company premiums (medical and death),

• Health Care Financing Administration (HCFA) payments (Medicare Capitation

and Part A Risk Contract Settlements),

• AML fees, and

• other income.

We used data from the fund’s actuarial projections, UMWA officials, the Bureau of

Labor Statistics (BLS), and the Social Security Administration to perform the

requested calculations and to break out the income to the fund for fiscal years 1996

through 2000. We did not independently verify underlying data or compute actuarial

projections. As part of our prior work, we contacted independent actuaries to review

the actuarial projections and assumptions for reasonableness. We obtained

comments on a draft of this letter from UMWA’s Comptroller and Assistant Director

of Managed Care Program Development and Research. Their comments have been

incorporated where appropriate.

We conducted our work in August 2000 in accordance with generally accepted

government auditing standards. The purpose of this letter is to convey the requested

information to you.

According to our calculations, both the net average cost per beneficiary of providing

benefits under the fund and per beneficiary premium increased each fiscal year for

the past 5 years. During these 5 years, the average cost increased from $2,478 to

$3,766, while the per beneficiary premium charged to contributing companies for

those years increased from $2,201 to $2,503.
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Page 3 GAO/AIMD-00-308R United Mine Workers of America

Table 1: Average Annual Net Cost of Benefits Per Beneficiary and Per Beneficiary Premium for Fiscal

Years 1996-2000

1996 1997 1998 1999 2000

Average net cost of benefits per

beneficiary

$2,478 $2,762 $3,144 $3,321 $3,766

(estimate)

Per beneficiary premium 2,201 2,279 2,343 2,420 2,503

Excess of average per beneficiary

net cost over premium

$277 $483 $801 $901 $1,263

(estimate)

Sources: GAO analysis based on UMWA actuarial projections, other unaudited UMWA data, and Social Security

Administration data.

The percentage increase in the average net cost per beneficiary of providing benefits

under the fund for the past 5 fiscal years fluctuated from 1 to 14 percent, while the

percentage increase in the medical component of the CPI for those years was

relatively stable, fluctuating from 3 to 4 percent.

According to Fund officials, while the increase in the medical component of the CPI

is driven primarily by price increases, the increase in the fund’s average net cost of

providing benefits per beneficiary is driven by the increased use of medical care (due

to the aging of its already elderly population and the introduction of new prescription

drugs), in addition to price increases.

Table 2: Annual Percentage Increase in the Average Net Cost Per Beneficiary of Providing Benefits as

Compared to the Increase in the Medical Component of the CPI

for Fiscal Years 1996-2000

1996 1997 1998 1999 2000

Percentage increase in the

average net cost of benefits per

beneficiary

1a11 14 6 13

Percentage increase in the

medical component of the CPI

43334

a

According to fund officials, in 1996, reimbursement for pharmaceutical services was based on a negotiated set payment rather

than actual cost. Beginning in the second quarter of fiscal year 1997, reimbursement reverted to an actual cost basis.

Source: GAO computed based on UMWA and BLS data, rounded to the nearest whole percentage point. Percentage increase

for medical component of the CPI for fiscal year 2000 was based on BLS data available for the first 10 months of the fiscal

year.

Income during fiscal years 1996 through 2000 was derived from three primary

sources: (1) coal company premiums (medical and death), (2) HCFA (Medicare

capitation payments3

and Part A Risk Contract Settlements4), and (3) transfers of

interest from the AML trust fund. Combined, these three sources provided over 85

3

Rather than reimbursing the fund as it incurs expenses for Medicare-eligible beneficiaries, Medicare

pays the fund a fixed amount per eligible beneficiary annually for estimated expenses for Medicarecovered services provided to eligible beneficiaries. This flat payment amount per beneficiary is known

as a capitation payment.

4

The fund entered into a risk-sharing arrangement for Medicare Part A service with HCFA. The

effective period for the arrangement was January 1997 through June 2001. According to the

arrangement, the fund paid deductibles, coinsurance, and other covered expenses that exceeded

Medicare’s limits.
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Page 4 GAO/AIMD-00-308R United Mine Workers of America

percent of the fund’s total income for each of the past 5 years. The remaining 15

percent of the fund’s income consisted of Black Lung Disability Trust Fund

reimbursements and investment income.

Table 3: Income to the Fund for Fiscal Years 1996 through 2000 (Dollars in Thousands)

Source of income 1996 1997 1998 1999 2000

(estimate)

Medical premiums $135,014 $151,499 $77,458a$150,252 $116,681

Death premiums 10,968 10,896 15,789 (5,216)b9,364

Medicare capitation 134,450 130,997 126,049 123,943 117,263

Part A risk 0 0 0 2,933 697

AML fund transfers 32,733 42,138 70,427 46,066 127,291c

Other 54,955 14,715 11,578 11,437 10,101

Total income $368,120 $350,245 $301,301 $329,415 $381,397

a

The decline in income from medical premiums is primarily due to recording the effect of a court decision on the annual medical

premium calculation. This decision reduced premiums about 10 percent per year since inception of the fund.

b

Prior year funds that were originally recorded as unassigned premiums were reallocated to death benefit premiums in 1999,

resulting in a debit balance in the death premium account.

c

In November 1999, the Congress appropriated an additional $68 million in interest from the AML fund to allow the fund to meet

its fiscal year 2000 commitments.

Source: UMWA actuarial projection reports.

-----

We are sending copies of this letter to the Honorable Daniel Patrick Moynihan,

Ranking Minority Member, Senate Committee on Finance. We will make copies

available to others upon request. We appreciate the opportunity to be of assistance. If

you or your staff have any questions regarding this letter, or if we can be of further

assistance, please contact me at (202) 512-4476 or Alana Stanfield, Assistant Director,

at (202) 512-3197. I may also be reached by e-mail at jarmong.aimd@gao.gov. Key

contributors to this assignment were Bonnie Derby and Ogbeide Oniha.

Sincerely yours,

Gloria L. Jarmon

Director, Health, Education, and

Human Services Accounting and

Financial Management Issues

(916375)