United States Government Accountability Office

GAO Report to Congressional Committees

RETIREE HEALTH 

BENEFITS 

Majority of Sponsors 

Continued to Offer 

Prescription Drug 

Coverage and Chose 

the Retiree Drug 

Subsidy 

May 2007 

 

GAO-07-572 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 2007

RETIREE HEALTH BENEFITS 

Majority of Sponsors Continued to Offer 

Prescription Drug Coverage and Chose 

the Retiree Drug Subsidy 

Highlights of GAO-07-572, a report to 

congressional committees 

The Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003 (MMA) created a 

prescription drug benefit for 

beneficiaries, called Medicare Part

D, beginning in January 2006. The 

MMA resulted in options for

sponsors of employment-based 

prescription drug benefits, such as

a federal subsidy payment—the 

retiree drug subsidy (RDS)—when 

sponsors provide benefits meeting 

certain MMA requirements to 

Medicare-eligible retirees. The 

MMA required GAO to conduct two

studies on trends in employmentbased retiree health coverage and 

the MMA options available to 

sponsors. The first study, Retiree 

Health Benefits: Options for 

Employment-Based Prescription 

Drug Benefits under the Medicare 

Modernization Act (GAO-05-205), 

was published February 14, 2005. 

In this second study, GAO 

determined which MMA 

prescription drug coverage options 

sponsors selected, the factors they 

considered in selecting these

options, and the effect these 

decisions may have on the 

provision of employment-based 

health benefits for retirees.

GAO identified options that

sponsors selected using data from

employer benefit surveys and the

Centers for Medicare & Medicaid

Services (CMS), the federal agency

that administers Medicare. To 

obtain sponsors’ views about the 

factors they considered and the 

effects of their decisions, GAO also 

interviewed private and public

sector sponsors and experts. 

According to survey data GAO reviewed, a majority of retiree health benefit 

sponsors reported that for 2006 they continued to offer prescription drug 

coverage and accepted the RDS. However, the size of the reported majority

differed across the surveys. For example, one survey of private sector 

sponsors with 1,000 or more employees found that 82 percent of these 

sponsors accepted the RDS for 2006. Another survey of private and public 

sponsors found that 51 percent of surveyed sponsors with 500 or more 

employees accepted the RDS for 2006. Data from CMS showed that more 

than 3,900 sponsors, representing about 7 million retirees, were approved for 

the RDS for 2006. According to the surveys GAO reviewed, much smaller 

percentages of sponsors reported selecting other MMA options for 2006. For 

2007, according to one survey, 78 percent of surveyed employers reported 

that they planned to apply for the RDS for that year. CMS data showed that 

about 3,600 sponsors were approved for the RDS for 2007. 

Public and private sponsors GAO interviewed reported considering a variety 

of factors when selecting MMA prescription drug coverage options, 

including whether they could offer the same retiree health benefits they 

offered prior to the MMA and their ability to save on costs. In general, in 

order to implement most MMA options, sponsors would likely have to 

change the prescription drug benefits they offer. For example, sponsors that 

offer their own Medicare Part D plan must generally meet all CMS 

requirements for Part D plans, such as providing coverage for specific 

categories of prescription drugs. In contrast, sponsors that select the RDS 

option can offer the same retiree health benefits they offered prior to the 

MMA, as long as a sponsor’s coverage remains at least actuarially equivalent 

to the standard Part D benefit. When deciding which, if any, options to 

pursue, public sponsors were affected by some factors that did not affect 

private sponsors. 

In the short term, sponsors’ decisions regarding the MMA options appear to 

have resulted in benefits remaining relatively unchanged, in part because a

majority of surveyed sponsors reported that they continued to offer 

prescription drug benefits and accepted the RDS the first 2 years the RDS 

was offered. Over the longer term, the effect of sponsors’ decisions about 

the MMA options is unclear. For example, some experts GAO interviewed 

indicated that the MMA may extend the amount of time that sponsors offer 

benefits without reducing coverage, while other experts said the availability 

of the Medicare Part D benefit may make it more likely that sponsors will 

stop offering prescription drug benefits for retirees. In addition, it is unclear 

to what extent sponsors will continue to select the same MMA option in the 

future. To the extent that sponsors that have accepted the RDS select other 

MMA options, sponsors’ provision of retiree health benefits may change. 

In commenting on a draft of this report, CMS and four experts agreed with 

the report’s findings. 

www.gao.gov/cgi-bin/getrpt?GAO-07-572.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact John E. Dicken 

at (202) 512-7119 or dickenj@gao.gov. 
Contents 

Letter 1

Results in Brief 5 

Background 6

Majority of Sponsors Reported Continuing to Offer Prescription 

Drug Coverage and Accepting the RDS 12 

Sponsors Considered a Variety of Factors When Selecting MMA 

Prescription Drug Coverage Options 16 

In the Short Term, Sponsors’ Decisions Regarding MMA Options 

Resulted in Benefits Remaining Relatively Unchanged, but over 

the Longer Term the Effect Is Unclear 23 

Agency and Other External Comments 25 

Appendix I Information on Employment-Based Retiree Health 

Coverage, Updated since GAO’s 2005 Report 29 

Appendix II Alternative Approaches to Providing Retiree Health 

Coverage Suggested by Sponsors and Experts 39 

Appendix III Scope and Methodology 44 

 

Appendix IV Comments from the Centers for Medicare & 

Medicaid Services 53 

Appendix V GAO Contact and Staff Acknowledgments 57 

Tables 

Table 1: Number and Percentage of Sponsors Approved for the 

RDS, and Percentage of Retirees Affected, by Sponsor 

Type, for 2006 and 2007 15 

Table 2: Alternative Approaches to Providing Employment-Based 

Retiree Health Coverage Described by Sponsors and 

Experts 40

Page i GAO-07-572 Retiree Health Benefits
Figures 

Figure 1: Mercer Survey Results—Percentage of Employers with 

500 or More Employees Offering Health Benefits to 

Medicare-Eligible Retirees, 1993–2006 30 

Figure 2: Kaiser/HRET Survey Results—Percentage of Employers 

with 200 or More Employees Offering Health Benefits to 

All Retirees and to Medicare-Eligible Retirees, 1991–2006 32 

Figure 3: Percentage of Medicare-Eligible Retirees and Their 

Insured Dependents with Employment-Based Health 

Benefits, by Age Group, 1995–2005 35 

Abbreviations 

CMS Centers for Medicare & Medicaid Services 

CPS Current Population Survey 

FEHBP Federal Employees Health Benefits Program 

GASB Governmental Accounting Standards Board 

HRA health reimbursement arrangement 

HRET Health Research and Educational Trust 

HSA health savings account 

MA-PD Medicare Advantage prescription drug 

MCBS Medicare Current Beneficiary Survey

MEPS Medical Expenditure Panel Survey 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

MSA medical savings account

OPM Office of Personnel Management 

PDP prescription drug plan 

RDS retiree drug subsidy 

VEBA voluntary employees’ beneficiary association 

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Page ii GAO-07-572 Retiree Health Benefits
United States Government Accountability Office

Washington, DC 20548 

May 31, 2007

Congressional Committees 

Before 2006, Medicare, the federal program that finances health care 

benefits for nearly 43 million elderly and disabled beneficiaries, did not 

generally provide coverage for outpatient prescription drugs. If Medicare 

beneficiaries had such coverage at all, it was typically obtained outside of

the program—for example, through policies with drug coverage that 

supplemented Medicare or through Medicaid. In particular, Medicare 

beneficiaries who were retired could enroll in health plans with 

prescription drug coverage offered through former employers or other 

employment-based groups, such as unions. To help Medicare beneficiaries 

with increasing prescription drug costs and encourage employment-based 

health care coverage, especially for prescription drug coverage for 

retirees, Congress passed the Medicare Prescription Drug, Improvement, 

and Modernization Act of 2003 (MMA). Among its provisions, the MMA 

established an outpatient prescription drug benefit, known as Medicare 

Part D, beginning January 1, 2006.1

 The MMA also resulted in various 

options to encourage retiree health benefit sponsors2

 to offer prescription 

drug benefits to retired Medicare beneficiaries. 

Specifically, among the options resulting from the MMA, which in this 

report we refer to as MMA options, sponsors can 

• offer health plans for retirees that provide comprehensive prescription 

drug coverage, which retirees can use in lieu of Medicare Part D; sponsors 

with plans that offer prescription drug benefits meeting certain MMA 

requirements will receive a federal subsidy payment, known as the retiree 

drug subsidy (RDS); 

 1

Pub. L. No. 108-173, §101, 117 Stat. 2066, 2071-2152. 

2

In this report, we use the term sponsor to refer to a sponsor of employment-based retiree 

group health coverage, including private sector employers; public sector employers 

(federal, state, or local governments); sponsors of church plans; and sponsors of plans 

(including multiemployer plans) offered under collectively bargained agreements. In some

instances, when reporting data from surveys of various sponsors, we use the term 

employer instead of sponsor to describe a specific subset of sponsors.

Page 1 GAO-07-572 Retiree Health Benefits
• offer health plans for retirees that supplement—or “wrap around”—

retirees’ Part D prescription drug benefit; 

• offer their own Medicare Part D plan; 

• contract with private plans that provide Medicare Part D benefits; or 

• pay for some or all of the Part D premiums for their eligible retirees. 

The MMA required that we conduct two studies on trends in employmentbased retiree health coverage and the MMA options sponsors selected for 

providing employment-based prescription drug coverage for retirees.3

 In 

our first study, published in 2005, we reported that the percentage of 

employers offering retiree health coverage had declined beginning in the 

early 1990s but had leveled off by the early 2000s.

4

 We also reported that 

many sponsors had not made final decisions about which MMA 

prescription drug options they would choose for their Medicare-eligible

retirees,5

 although many sponsors were considering accepting the RDS as 

a primary option. In this study, we are reporting on (1) which MMA 

prescription drug coverage options sponsors selected, (2) the factors they 

considered in selecting these options, and (3) the effect these decisions 

may have on sponsors’ provision of employment-based health benefits for 

retirees. The MMA also required us to report information on employmentbased retiree health coverage, including information updated since our 

first study. We are including this information in appendix I. In addition, the 

MMA required us to describe alternative approaches for the provision of 

employment-based retiree health coverage that sponsors and others say 

may help maintain, expand, or improve upon retiree health coverage. We 

are including this information in appendix II. 

To determine which MMA prescription drug coverage options sponsors 

selected, we reviewed survey data collected by benefit consulting firms on 

the options that sponsors reported selecting for 2006 and the options that

 3

MMA, §111, 117 Stat. 2174-2176. 

4

See GAO, Retiree Health Benefits: Options for Employment-Based Prescription Drug 

Benefits under the Medicare Modernization Act, GAO-05-205 (Washington, D.C.: Feb. 14, 

2005). 

5

For this report, we specify when information is for Medicare-eligible retirees (primarily 

those aged 65 or older) and when it is for retirees under the age of 65. If information is not 

specific to Medicare-eligible retirees or to those under the age of 65, we use the term

retirees to refer to those that may be Medicare-eligible, under 65, or both.

Page 2 GAO-07-572 Retiree Health Benefits
sponsors reported that they planned to select for 2007. The surveys we 

reviewed included a survey conducted by Mercer Health & Benefits of 

employers—including large employers, defined as those with at least 500 

employees—that offered employment-based health benefits. The Mercer 

survey, which was based on a random sample of private and public 

employers, can be projected nationwide.6

 We also reviewed data from a 

survey conducted by the Kaiser Family Foundation and Hewitt Associates 

for a nonrandom sample of large private sector employers—those with 

1,000 or more employees.

7

 We also reviewed one survey of multiemployer 

plans8

 and one survey of state and local public sector sponsors conducted

by The Segal Company.9

 The data from the surveys provided us with 

information on sponsors’ reported selections for 2006 and their plans 

pertaining to the MMA options for 2007. In addition, we obtained and 

analyzed data on the number and characteristics of sponsors that were 

approved for the RDS for these 2 years. We obtained these data from the 

Centers for Medicare & Medicaid Services (CMS), the federal agency that

administers Medicare and that is responsible for implementing and 

administering the RDS program. 

To describe both the factors that sponsors considered in selecting the 

MMA options and the effect that sponsors’ decisions about the MMA 

options may have on the provision of health benefits for retirees, we relied

on the Mercer and Kaiser/Hewitt surveys of private and public sector 

 6

Mercer Health & Benefits, National Survey of Employer-Sponsored Health Plans: 2006 

Survey Report (New York, N.Y.: Mercer Health & Benefits, LLC, 2007). 

7

Frank McArdle, Amy Atchison, and Dale Yamamoto, Hewitt Associates; and Michelle 

Kitchman Strollo and Tricia Neuman, The Kaiser Family Foundation, Retiree Health

Benefits Examined: Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health 

Benefits (Menlo Park, Calif.: The Henry J. Kaiser Family Foundation; Lincolnshire, Ill.: 

Hewitt Associates, December 2006). 

8

A multiemployer plan is a pension, health, or other employee benefit plan to which more 

than one employer is required to contribute; that is maintained under one or more 

collective bargaining agreements between one or more employee organizations, such as a

union, and more than one employer; and that satisfies such other requirements the 

Secretary of Labor may prescribe by regulation. 29 U.S.C. § 1002(37) (2000). 

9

The Segal Company, Results of the Segal Survey of Multiemployer Health Funds’

Response to the Initial Availability of Medicare Part D Coverage (New York, N.Y.: Spring

2006), and Results of the Segal Medicare Part D Survey of Public Sector Plans (New York, 

N.Y.: Summer 2006). 

Page 3 GAO-07-572 Retiree Health Benefits
employers.10 We reviewed documents from the literature, including CMS 

documents, on the factors that sponsors may consider in selecting the 

MMA options. We also interviewed officials from 13 of the 15 private and

public sponsors of retiree health benefits that we reported on in 2005, 

including the Office of Personnel Management (OPM), which administers 

the Federal Employees Health Benefits Program (FEHBP).11 We also 

interviewed 2 sponsors that chose to offer their own Medicare Part D plan 

in 2006 instead of implementing the RDS or another MMA option. We did 

not interview these sponsors for our 2005 report. In addition, we 

interviewed several experts on sponsors’ decisions regarding the MMA 

options, including experts from five firms providing benefit consulting 

services primarily for large public and private sector sponsors; six 

organizations, including one representing unions, one representing 

multiemployer plans, two representing large employers, and two 

representing health plans; one professional organization for actuaries; and 

other research organizations. In our interviews with sponsor officials and

experts, we asked open-ended questions about the factors sponsors 

considered in making decisions about the MMA options for 2006 and 

future years, as well as the effect of these decisions on the provision of 

health benefits for retirees. Because we asked the officials and experts we 

interviewed open-ended questions, the frequency of our interviewees’ 

responses is not comparable. Therefore, we report interviewees’ responses

without reporting the total number of officials or experts associated with 

each response. 

We assessed the reliability of the data from the employer benefit surveys, 

CMS, and three large federal surveys and determined that the data were 

sufficiently reliable for the purposes of our study. (App. III provides more 

detailed information on our methodology.) We performed our work from

April 2006 through May 2007 in accordance with generally accepted 

government auditing standards. 

 10Mercer Health & Benefits, National Survey of Employer-Sponsored Health Plans: 2005 

Survey Report (New York, N.Y.: Mercer Health & Benefits, LLC, 2006), and Kaiser/Hewitt, 

Retiree Health Benefits Examined: Findings from the Kaiser/Hewitt 2006 Survey on 

Retiree Health Benefits. 

11In addition to OPM, the 13 sponsors included 10 Fortune 500 employers and two state 

retirement systems. 

Page 4 GAO-07-572 Retiree Health Benefits
According to survey data we reviewed, a majority of retiree health benefit 

sponsors reported that for 2006 they continued to offer prescription drug 

coverage and accepted the RDS. However, the size of the reported 

majority differed across the surveys. For example, the 2006 Kaiser/Hewitt 

survey of private sector employers with 1,000 or more employees found 

that 82 percent of these employers continued to offer prescription drug 

coverage and accepted the RDS for 2006. Another survey, the 2006 Mercer 

survey of private and public employers, found that 51 percent of surveyed 

employers with 500 or more employees continued to offer prescription 

drug coverage and accepted the RDS for 2006. Data from CMS showed that 

more than 3,900 sponsors, representing about 7 million retirees, were 

approved for the RDS for 2006. According to the surveys we reviewed, 

much smaller percentages of sponsors reported selecting other MMA 

options. For example, the percentage of sponsors that reported offering 

supplemental, or “wrap-around,” coverage ranged from 0 to 13 percent 

across the surveys. For 2007, according to the Kaiser/Hewitt survey, 

78 percent of surveyed employers reported that they planned to apply for 

the RDS for that year. CMS data showed that about 3,600 sponsors were

approved for the RDS for 2007. 

Public and private sponsors we interviewed reported considering a variety

of factors when selecting MMA prescription drug coverage options, 

including whether they could offer the same retiree health benefits they 

offered prior to the MMA and their ability to save on costs. In general, in 

order to implement most MMA options other than the RDS, sponsors 

would likely have to change the prescription drug benefits they offer. For

example, sponsors that offer their own Medicare Part D plan must 

generally meet all CMS requirements for Part D plans, such as providing

coverage for specific categories of prescription drugs. In contrast, 

sponsors that select the RDS option are able to offer the same retiree 

health benefits they offered prior to the MMA, as long as a sponsor’s 

coverage remains at least actuarially equivalent to the standard Part D 

benefit. Most sponsors we interviewed told us that the ability to offer the 

same retiree health benefits they offered prior to the MMA was an 

advantage of the RDS. Sponsors also reported that when selecting an MMA 

option, they considered how the RDS and the other MMA options would 

affect their ability to save on costs. 

While, in the short term, sponsors’ decisions regarding the various MMA 

options appear to have resulted in the provision of retiree health benefits

remaining relatively unchanged, the effect over the longer term is unclear. 

The short-term effect of sponsors’ decisions appears to have resulted in 

benefits remaining relatively unchanged, in part because a majority of 

Results in Brief 

Page 5 GAO-07-572 Retiree Health Benefits
surveyed sponsors reported that they continued to offer prescription drug 

benefits and accepted the RDS for the first 2 years the RDS was offered. In

addition, according to the 2005 Mercer survey, 72 percent of respondents 

reported that their decisions about the MMA options would have no effect 

on their ability to provide retiree health coverage. Similarly, many 

sponsors we interviewed told us that they did not make changes to their 

retiree health benefits—including decreasing coverage—in direct response 

to their decisions in selecting MMA options. Over the longer term, some 

experts we interviewed indicated that the MMA may extend the amount of 

time that sponsors offer benefits without reducing coverage. Other experts 

said that it was possible the availability of the Medicare Part D benefit may 

make it more likely that sponsors will stop offering prescription drug 

benefits for retirees. In addition, it is unclear to what extent sponsors will 

continue to select the same MMA option in the future. If sponsors that 

have accepted the RDS thus far select other MMA options in subsequent 

years, their future provision of retiree health benefits may change. 

In commenting on a draft of this report, CMS and four experts agreed with

the report’s findings. 

For retirees aged 65 and older, Medicare is typically the primary source of 

health insurance coverage. Medicare covers nearly 43 million 

beneficiaries. The program covers hospital care as well as physician office 

visits and outpatient services and, effective January 1, 2006, prescription 

drugs. 

Medicare beneficiaries may rely on private retiree health coverage through 

former employment or through individually purchased Medicare 

supplemental insurance (known as Medigap) to cover some or all of the 

costs Medicare does not cover, such as deductibles, copayments, and 

coinsurance. For 2004, the most recent data available, the Medicare 

Current Beneficiary Survey (MCBS) found that about one-third of 

Medicare-eligible beneficiaries obtained supplemental coverage from a 

former employer or union.

12 Employment-based retiree health benefits are 

typically offered as a voluntary benefit to retirees, thereby giving sponsors 

Background 

Private Supplemental 

Insurance for Medicare 

Beneficiaries 

 12Other sources of supplemental coverage for Medicare-eligible beneficiaries may include 

individually purchased coverage or Medicaid. Some Medicare-eligible beneficiaries have a 

combination of employment-based and individually purchased coverage. 

Page 6 GAO-07-572 Retiree Health Benefits
of these benefits the option of decreasing or eliminating benefits. 

However, some sponsors may be prevented from making immediate 

changes to coverage because of union contracts, for example. Benefit 

surveys have found that the percentage of employers offering retiree 

health benefits has decreased, beginning in the early 1990s. For example, 

according to a series of surveys conducted by Mercer, the percentage of 

employers with 500 or more employees offering health insurance to 

Medicare-eligible retirees declined from 44 percent in 1993 to 29 percent in

2006, although this trend had leveled off from 2001 through 2006.13 (See 

app. I for more information on employment-based retiree health 

coverage.) 

Sponsors typically integrate their retiree health benefits with Medicare 

once retirees reach age 65, with Medicare as the primary payer and the 

sponsor as the secondary payer. Several types of integration occur 

between sponsors and Medicare. For example, some sponsors coordinate 

through a carve out approach, in which the sponsor calculates its normal 

benefit and then subtracts (or carves out) the Medicare benefit, generally 

leaving the retiree with out-of-pocket costs comparable to having the 

employment-based plan without Medicare. Another approach used by 

sponsors is full coordination of benefits, in which the plan pays the 

difference between the total health care charges and the Medicare 

reimbursement amount, often providing retirees complete coverage and 

protection from out-of-pocket costs.

The provision of employment-based retiree health benefits may vary 

depending on a variety of factors, including whether the sponsor is in the 

private or public sector, and by industry type. The 2006 Kaiser Family 

Foundation and Health Research and Educational Trust (HRET) survey, 

for example, showed that 82 percent of state and local government 

employers with 200 or more employees offered coverage to retirees, 

compared with 35 percent of employers with 200 or more employees 

across all employer industries that offered coverage to retirees.14 Coverage 

can also differ between retirees under age 65 and those eligible for 

 13See, for example, Mercer Health & Benefits, National Survey of Employer-Sponsored

Health Plans: 2006 Survey Report. 

14Gary Claxton and others, Kaiser Family Foundation; Samantha Hawkins, HRET; and 

Jeremy Pickreign, Heidi Whitmore, and Jon Gabel, Center for Studying Health System 

Change, Employer Health Benefits: 2006 Annual Survey (Menlo Park, Calif.: The Henry J.

Kaiser Family Foundation; Chicago, Ill.: HRET, 2006). 

Page 7 GAO-07-572 Retiree Health Benefits
Medicare, although sponsors often cover both groups of retirees. For 

example, some sponsors offer retirees under age 65 a preferred provider 

organization plan but offer a fee-for-service plan for retirees eligible for 

Medicare. While the provision of employment-based retiree health benefits

varies by employer size, plan type, industry, and whether retirees are 

Medicare-eligible, these benefits almost always include coverage of 

prescription drugs. 

MMA created a prescription drug benefit for beneficiaries, called Medicare

Part D, which became effective January 1, 2006. This voluntary benefit is 

available to all Medicare beneficiaries and is the first comprehensive 

prescription drug benefit ever offered under the Medicare program.15 In 

January 2007 (the most recent data available) CMS reported that 

approximately 39 million beneficiaries were receiving prescription drug 

coverage from a combination of Medicare Part D, employment-based 

coverage, and other sources, such as the Department of Veterans Affairs.16

The drug benefit is offered primarily through two types of private plans 

created as a result of the MMA: stand-alone prescription drug plans (PDP) 

that supplement fee-for-service Medicare, and Medicare Advantage 

prescription drug (MA-PD) plans, such as coordinated care plans, that 

The MMA Prescription 

Drug Benefit 

 15Enrollment in the program is voluntary for most beneficiaries, except dual eligibles—lowincome Medicare beneficiaries who also qualify for full Medicaid benefits. All dual eligibles 

were automatically enrolled in a Medicare Part D plan by December 31, 2005, to ensure that 

these beneficiaries continued to have prescription drug coverage when their Medicaid 

coverage ended on December 31, 2005. However, these individuals had the option to opt

out of the Medicare Part D benefit. 

16Specifically, a January 30, 2007, CMS press release reported that these Medicare 

beneficiaries, totaling approximately 39 million, received prescription drug coverage

through the following sources: Medicare prescription drug plans or Medicare Advantage 

prescription drug plans (nearly 24 million); sponsors approved for the RDS (7 million); 

federal retiree programs, such as FEHBP or TRICARE, the Department of Defense’s health 

system (3 million); and other sources, such as the Department of Veterans Affairs 

(5 million). 

Page 8 GAO-07-572 Retiree Health Benefits
cover drugs and other Medicare benefits.17 To be in operation for 2006,

prospective PDPs and MA-PD plans had to apply by March 2005 and were 

approved in September 2005. At a minimum, these plans were required to 

offer the standard Medicare Part D benefit or alternative coverage that 

was at least equal in value.

18 According to the Kaiser Family Foundation, 

plans approved for 2006 often varied from the standard Part D benefit in 

benefit design and covered drugs. For example, although the standard 

Part D benefit had a $250 deductible for 2006, Kaiser reported that 

58 percent of PDPs and 79 percent of MA-PD plans approved for 2006 had 

no deductible requirement. In 2007, a total of 1,875 PDPs are offered 

nationally across 34 PDP regions. 

The standard Medicare Part D benefit in 2007 has a $265 deductible (up 

from $250 in 2006) and 25 percent coinsurance up to an initial coverage 

limit of $2,400 in total drug costs ($2,250 in 2006), followed by a coverage

gap in which enrollees pay 100 percent of their drug costs until they have 

spent $3,850 out of pocket ($3,600 in 2006). Thereafter, the plan pays 

approximately 95 percent of total drug costs. The standard benefit 

amounts are set to increase annually by the rate of per capita Part D 

spending growth. Assistance with drug benefit premiums and cost-sharing 

is available for certain low-income beneficiaries. 

The MMA resulted in several options for sponsors of employment-based 

retiree health plans to provide prescription drug coverage to Medicareeligible retirees. These options are as follows: 

Retiree Drug Subsidy (RDS). Sponsors with plans ending in 2007 that 

offer prescription drug coverage that is actuarially equivalent to that under 

Part D can receive a federal tax-free subsidy equal to 28 percent of the 

Options Available to 

Sponsors under Medicare 

Part D 

 17The MMA created the Medicare Advantage program to replace the Medicare+Choice 

program (MMA § 201, 117 Stat. 2176). Medicare+Choice was established in the Balanced

Budget Act of 1997 (Pub. L. No. 105-33, sec. 4001, §§ 1851–1859, 111 Stat. 251, 275–327 

(codified at 42 U.S.C. §§ 1395w-21–1395w-28)) to expand Medicare beneficiaries’ health 

plan options and encourage wider availability of health maintenance organizations and 

other types of health plans, such as preferred provider organizations, as an alternative to 

traditional fee-for-service. H.R. Conf. Rep. No. 108-391, at 524 (2003). While retaining many 

of the same provisions in Medicare+Choice, including the eligibility, enrollment, grievance, 

and appeals provisions, Medicare Advantage provides additional features, such as

increased payment rates and a new option for Medicare beneficiaries—regional preferred 

provider organizations. MMA § 221, 117 Stat. 2180-93. 

18Plans could also offer enhanced benefits. 

Page 9 GAO-07-572 Retiree Health Benefits
allowable gross retiree prescription drug costs19 over $265 (up from $250 

for plans ending in 2006) through $5,350 (up from $5,000 for plans ending

in 2006), with a maximum subsidy of $1,423 per beneficiary for each 

individual eligible for Part D who is enrolled in the employment-based plan 

instead of Part D. Actuarial equivalence, which is attested to by a qualified 

actuary, is intended to certify that a retiree health benefit sponsor’s 

coverage is at least as generous as the standard Part D coverage.20

Sponsors must demonstrate actuarial equivalence to qualify for the RDS, 

and sponsors will only receive the RDS for those Medicare beneficiaries 

who do not enroll in the Part D benefit. Sponsors may opt to receive RDS 

payments on a monthly, quarterly, or annual basis. 

In order to receive the RDS, sponsors must apply to and receive approval 

from CMS. For 2007 and subsequent years, sponsors are required to apply 

for the RDS no later than 90 days prior to the beginning of the plan year.21

For example, sponsors that applied for a calendar year 2007 plan would 

have had to apply no later than midnight on October 2, 2006. Additional 

steps involved in applying for and receiving the RDS include

• submitting a qualified actuary’s attestation that the plan meets the RDS 

actuarial equivalence standard; 

 19Allowable costs are nonadministrative costs actually paid for any prescription drugs that 

would be covered under the Part D benefit, net of any discounts, rebates, and similar price 

concessions. 

20To demonstrate actuarial equivalence sponsors must satisfy a two-prong test. The first

prong is a gross value test, in which the expected amount of paid claims for Medicare 

beneficiaries in the sponsor’s plan must be at least equal to the expected amount of paid 

claims for the same beneficiaries under Part D standard coverage. The second prong is a 

net value test, which takes into account the impact of retiree contributions to the plan, as

well as the impact that sponsors’ supplemental coverage, if provided, has on the value of 

the standard Part D benefit. 

21Sponsors can also request an automatic 30-day extension of this deadline. 

Page 10 GAO-07-572 Retiree Health Benefits
• certifying that the creditable coverage status of the plan has been or will 

be disclosed to plan participants and CMS;22

• electronically submitting and periodically updating enrollment information 

about retirees and dependents; and

• electronically submitting aggregate data about drug costs incurred and 

reconciling costs at year-end. 

Provide Supplemental Coverage. Sponsors can set up their own separate 

plans that supplement, or wrap around, Part D coverage. 

Apply to Offer Own PDP or MA-PD Plan. Sponsors can apply to CMS to 

offer their own PDP or MA-PD plan for retirees.23 CMS has waived or 

modified Part D requirements added by the MMA that hinder the design of, 

the offering of, or the enrollment in a Part D plan offered by a sponsor. For 

example, CMS has issued guidance that allows sponsors to limit coverage 

to retirees only, whereas other Part D plans must offer coverage to all 

eligible individuals residing within a certain location. 

Contract with a PDP or MA-PD Plan. Sponsors can contract with a PDP 

or MA-PD plan to offer the standard Part D prescription drug benefits or 

enhanced benefits to the sponsors’ retirees who are eligible for Medicare. 

For example, an enhanced benefit could allow retirees to pay a lower 

deductible or lower copayment than the standard Part D benefit requires. 

As with the previous MMA option, CMS has waived or modified Part D 

requirements that hinder the design of, the offering of, or the enrollment in 

these types of arrangements. 

Payment of Part D Premiums. Sponsors can pay for some or all of the 

Part D premiums for their eligible retirees. 

 22With certain exceptions, sponsors must disclose to all of their Medicare-eligible retirees 

whether their prescription drug coverage is considered “creditable” as compared to the 

Part D benefit. To be creditable, the expected amount of paid claims under the sponsor’s

drug coverage generally must be at least equal to the expected amount of paid claims under

the standard Part D benefit. A Part D eligible individual must pay a late enrollment penalty 

if there is a continuous period of 63 days or longer during which the individual was not 

covered under any creditable prescription drug coverage. This disclosure can be

incorporated into other plan communications and is required to be sent to retirees prior to 

certain events, such as the first day of the Part D annual enrollment period. 

23Others have referred to this option as “becoming a PDP or MA-PD plan.” 

Page 11 GAO-07-572 Retiree Health Benefits
According to survey data we reviewed, the majority of surveyed retiree 

health benefit sponsors reported that they continued to offer prescription 

drug coverage and accepted the RDS for 2006. Survey data also indicated

that much smaller percentages of sponsors took other MMA options—

such as offering supplemental, or wrap-around, prescription drug coverage 

or contracting with a PDP or MA-PD plan. 

According to survey data we reviewed, the majority of surveyed sponsors 

reported that they continued to offer prescription drug coverage and 

accepted the RDS for plans ending in 2006. However, the size of the 

reported majority differed across the surveys. For example, the 2006 

Kaiser/Hewitt survey, which surveyed private sector employers that 

offered retiree health benefits and had 1,000 or more employees, found 

that 82 percent of these employers accepted the RDS for 2006.24 In 

contrast, the 2006 Mercer survey found that 51 percent of surveyed private 

and public employers that offered retiree health benefits and had 500 or 

more employees continued to offer prescription drug coverage and 

accepted the RDS for 2006.25 Another survey of state and local public 

sector sponsors that offered retiree health benefits found that 79 percent 

reported accepting the RDS for 2006.26 Similarly, a survey of multiemployer 

plan sponsors that offered retiree health benefits found that 71 percent 

reported accepting the RDS for 2006.27

According to representatives from both Kaiser/Hewitt and Mercer, the 

percentages of surveyed employers that reported accepting the RDS— 

82 percent and 51 percent, respectively—may be different because the 

employers surveyed differed in size between the two surveys. According to 

the 2005 Mercer survey, smaller employers may have such a limited 

number of Medicare-eligible retirees that they do not believe the RDS 

would be worth the cost and administrative burden associated with 

Majority of Sponsors 

Reported Continuing 

to Offer Prescription 

Drug Coverage and 

Accepting the RDS 

Majority of Sponsors 

Reported Accepting the 

RDS 

 24Kaiser/Hewitt, Retiree Health Benefits Examined: Findings from the Kaiser/Hewitt 

2006 Survey on Retiree Health Benefits. 

25Mercer Health & Benefits, National Survey of Employer-Sponsored Health Plans: 2006 

Survey Report. 

26Segal, Results of the Segal Medicare Part D Survey of Public Sector Plans. 

27Segal, Results of the Segal Survey of Multiemployer Health Funds’ Response to the 

Initial Availability of Medicare Part D Coverage. 

Page 12 GAO-07-572 Retiree Health Benefits
applying for the RDS.28 Furthermore, experts we interviewed told us that a 

minimum of 50 to 100 retirees is needed to make it worthwhile for 

employers to apply for the RDS.29

Data from CMS show that more than 3,900 sponsors, representing 

approximately 7 million retirees, were approved for the RDS for 2006.30

The number of retirees represented by sponsors that year ranged widely, 

from 1 to 444,818, with a median of 174 retirees. According to CMS data, 

commercial and government sponsors31 made up approximately 70 percent 

of sponsors approved for the RDS and represented approximately 

90 percent of retirees covered by the RDS for 2006. Nonprofit, religious, 

and union sponsors made up the remaining approximately 30 percent of 

sponsors and approximately 10 percent of retirees covered by the RDS for 

2006. 

For 2007, the Kaiser/Hewitt survey reported that the majority of surveyed

employers planned to take the RDS. Specifically, 78 percent of surveyed 

private sector employers that offered retiree health benefits and had 1,000 

or more employees planned to take the RDS for 2007—compared with 

82 percent that took the RDS for 2006. CMS preliminary data for 2007 

showed that the number of sponsors approved for the RDS decreased 

 28Mercer Health & Benefits, National Survey of Employer-Sponsored Health Plans: 2005 

Survey Report. In its survey results, Mercer reported that larger employers were more 

likely than smaller employers offering retiree health benefits to take the RDS for 2006. For 

example, 30 percent of employers with 500 to 999 employees planned to take the RDS for 

2006, while 61 percent of employers with 5,000 to 9,999 employees planned to take the RDS 

for 2006. 

29According to CMS data, about 78 percent of sponsors that were approved for the RDS for 

2007 represented more than 50 retirees and about 63 percent of sponsors that were 

approved for the RDS for 2007 represented more than 100 retirees. 

30According to CMS officials, these approximately 7 million retirees represent the number 

of retirees covered by the RDS as of June 11, 2006, and may include retirees enrolled in

plans approved for the RDS for 2007. As a result, these 7 million retirees are not necessarily 

linked to the 3,900 sponsors approved for the RDS for 2006. According to CMS officials, the 

RDS program has no current business or operational need to calculate the unique number

of retirees linked to the number of sponsors that were approved for the RDS for plans

ending in 2006, and therefore CMS has not expended the RDS system development

resources it has to code its system to allow for this calculation. 

31The sponsor categories “commercial” and “government” are used by CMS on the RDS

application and are self-reported by applicants. 

Page 13 GAO-07-572 Retiree Health Benefits
somewhat from 2006, to about 3,600 sponsors.32 CMS officials indicated 

that the decrease in the number of sponsors between 2006 and 2007 could

be explained by a combination of several factors, including mergers by 

sponsors offering retiree health benefits, differences in the time of year 

when data were extracted,

33 and the movement of some sponsors from the

RDS to other MMA options. According to CMS data, in 2007 the number of 

retirees represented by sponsors approved for the RDS continued to show

a wide range as in 2006, from 1 to 196,840, with a median of 169 retirees. 

The percentage of sponsors approved for the RDS by sponsor type, such 

as commercial or government, remained relatively consistent from 2006 to

2007. (See table 1.) 

 32As was the case with 2006 data, CMS did not provide a unique number of retirees linked 

to the number of sponsors that were approved for the RDS for plans ending in 2007. 

However, in January 2007, CMS published a press release that again reported that

approximately 7 million Medicare-eligible retirees received coverage through sponsors 

approved for the RDS. 

33CMS officials told us that because the 2006 data were compiled late in the year 

(September), most of the technical difficulties sponsors experienced had been resolved by 

that time and their applications had been approved, and therefore the approved application 

total by that time of the year was close to the final total for the year. In contrast, the

preliminary 2007 approved application data were compiled early in the year (February) 

when some sponsors, especially those participating in the RDS program for the first time, 

were still experiencing technical difficulties, and therefore their applications had not yet 

been approved. 

Page 14 GAO-07-572 Retiree Health Benefits
Table 1: Number and Percentage of Sponsors Approved for the RDS, and Percentage of Retirees Affected, by Sponsor Type, 

for 2006 and 2007 

2006a

2007b

Sponsor typec

Number of sponsors

(percentage)

d

Percentage of retireese

Number of sponsors

(percentage)

d

Percentage of

retireese

Commercial 1,433 (36) 58 1,287 (36) 53

Government 1,307 (33) 30 1,220 (34) 33

Nonprofit 566 (14) 5 515 (14) 5

Religious 107 (3) 1 93 (3) 1

Union 526 (13) 6 492 (14) 8

Total (100%) 3,939 3,607 

Source: GAO analysis of CMS data. 

a

Data on the characteristics of sponsors that were approved for the RDS for 2006 are based on all 

complete applications that were accepted by CMS for the RDS as of September 11, 2006. 

b

Preliminary data on the characteristics of sponsors that were approved for the RDS for 2007 are 

based on all complete applications that were accepted by CMS for the RDS as of February 16, 2007.

c

Sponsor types are self-reported on the RDS application using the categories listed in the table. 

d

Percentages do not add to 100 because of rounding. 

e

This percentage is based on the number of retirees covered by plans whose sponsors were 

approved for the RDS. We only report percentages of retirees because CMS data by sponsor type 

double counts certain types of retirees, such as those who have duplicate coverage and those who 

switch plans midyear. CMS did not provide a unique number of retirees linked to the number of 

sponsors that were approved for the RDS for plans ending in 2006 and 2007. According to CMS 

officials, the RDS program has no current business or operational need to calculate the unique 

number of retirees linked to the number of sponsors that were approved for the RDS for plans ending 

in 2006 and 2007 and therefore CMS has not expended the RDS system development resources it 

has to code its system to allow for this calculation.

Smaller Percentages of 

Sponsors Reported 

Selecting MMA Options 

Other than the RDS 

All of the surveys we reviewed reported much smaller percentages of 

sponsors taking MMA options other than the RDS for 2006. In these 

surveys, the percentage of sponsors that reported offering supplemental, 

or “wrap-around,” prescription drug coverage in 2006 ranged from 0 to 

13 percent. For example, the Mercer survey of private and public 

employers that offered retiree health benefits and had 500 or more 

employees reported that 13 percent offered supplemental coverage in 

2006. Similarly, among the surveys we reviewed, the percentage of 

sponsors that reported contracting with a PDP or MA-PD plan ranged from 

3 percent to 7 percent. For example, the Kaiser/Hewitt survey reported 

that 3 percent of surveyed private sector employers that offered retiree 

health benefits and had 1,000 or more employees contracted with a PDP or 

MA-PD plan in 2006. In addition, CMS reported that few sponsors applied 

to offer their own PDP or MA-PD plan for 2006 and 2007. Specifically, CMS

Page 15 GAO-07-572 Retiree Health Benefits
reported that for the 2006 and 2007 contract years, there were 10 approved

sponsors that offered their own PDP and none that offered their own MAPD plan. 

Public and private sponsors we interviewed reported considering a variety

of factors when selecting MMA prescription drug coverage options. 

Sponsors cited factors such as whether they could offer the same retiree 

health benefits they offered prior to the MMA, their ability to save on 

costs, the ease of explaining the option to retirees, the administrative 

requirements associated with each option, and the extent of information 

available on the options. When making decisions about which, if any, MMA 

option to pursue, public sponsors we interviewed were affected by some 

factors that private sponsors did not face. 

Sponsors we interviewed told us that when selecting an MMA prescription 

drug coverage option, they considered the extent to which they would be 

able to continue to offer the same retiree health benefits they had offered 

before implementing the MMA option. In general, in order to implement 

most MMA options other than the RDS, sponsors would likely have to

change the prescription drug benefits they offer. For example, sponsors 

that offer their own PDP or MA-PD plan must generally meet all CMS 

requirements for Part D plans,34 such as including specific categories of 

prescription drugs on their formularies.35 One sponsor we interviewed also 

told us that it did not consider the option of paying Part D premiums 

because that option alone would result in a reduction in the level of 

prescription drug coverage offered to retirees, compared with coverage 

Sponsors Considered 

a Variety of Factors 

When Selecting MMA 

Prescription Drug 

Coverage Options 

Sponsors Considered 

Ability to Offer the Same 

Retiree Health Benefits 

 34CMS has issued guidance for multiple MMA options to waive or modify Part D 

requirements added by the MMA that hinder the design of, the offering of, or the enrollment 

in an employer- or union-sponsored Part D retiree plan (including a PDP or MA-PD plan).

For example, sponsors that contract with CMS to offer their own PDP or MA-PD plan can 

limit coverage to retirees only, while other Part D plans must offer coverage to all 

individuals who reside in one or more specified regions. According to CMS, the guidance 

was needed to ensure that certain MMA options, such as a sponsor’s option to contract 

with or offer its own PDP, are viable options for sponsors seeking to retain high-quality 

retiree coverage. 

35A formulary is a preferred list of drug products that typically limits the number of drugs

available within a therapeutic class for purposes of drug purchasing, dispensing, 

reimbursement, or for all three purposes. According to CMS, the Part D formulary must

include at least two drugs in each approved drug category and class (unless only one drug

is available for a particular category or class), regardless of the classification system used. 

Page 16 GAO-07-572 Retiree Health Benefits
offered through the sponsor. In contrast, sponsors that select the RDS 

option are able to offer the same retiree health benefits they offered prior 

to the MMA, as long as a sponsor’s coverage remains at least as generous 

as the standard Part D benefit, thus meeting the actuarial equivalence 

standard to qualify for the RDS.36 In addition, the final rule implementing 

the MMA prescription drug benefit that was published in January 2005 

gave sponsors flexibility in terms of how they could meet the actuarial 

equivalence standard.37 Some of the sponsors and experts we interviewed 

credited this flexibility with allowing sponsors to meet actuarial 

equivalence without having to change the retiree health benefits they 

offered. For example, one sponsor told us that it was able to combine 

multiple benefit options to meet actuarial equivalence, which allowed the 

sponsor to collect the RDS for most retirees—including those paying the 

full cost of their coverage—without making changes to the benefits 

offered. Prior to the final rule, this sponsor did not plan on collecting the 

RDS for the group of retirees paying the full cost of coverage because the 

coverage would not have met the actuarial equivalence standard on its 

own. Most sponsors we interviewed told us that the ability to offer the 

same retiree health benefits they offered prior to the MMA was an 

advantage of the RDS. In addition, experts we interviewed reported that 

some sponsors are unable to change the benefits they offer in the short 

 36According to a 2005 Kaiser/Hewitt survey on retiree health benefits, 94 percent of

surveyed employers indicated that their 2005 benefits had an actuarial value that was equal

to or greater than the standard Medicare prescription drug benefit for 2006. See Frank 

McArdle, Amy Atchison, and Dale Yamamoto, Hewitt Associates; and Michelle Kitchman 

Strollo and Tricia Neuman, The Kaiser Family Foundation, Prospects for Retiree Health

Benefits as Medicare Prescription Drug Coverage Begins: Findings from the 

Kaiser/Hewitt 2005 Survey on Retiree Health Benefits (Menlo Park, Calif.: The Henry J.

Kaiser Family Foundation; Lincolnshire, Ill.: Hewitt Associates, December 2005). 

37As we stated earlier, each health benefit option offered by sponsors has to pass both a

gross and a net value test to meet actuarial equivalence. The final rule gave sponsors with 

multiple benefit options the ability to aggregate benefit options to pass the net test or to 

pass the net test separately for each benefit option. 70 Fed. Reg. 4194, 4579 (Jan. 28, 2005) 

(codified at 42 C.F.R. §884 (d)(5)(iv)). As a result, sponsors that have benefit options that

would not be able to meet the actuarial equivalence standard on their own can aggregate

these options with other benefit options that are more generous than the standard Part D 

benefit, which may allow sponsors to collect the RDS for all of the options. In addition, 

sponsors that include both medical and drug coverage and have a single premium for this

coverage have the discretion and flexibility to allocate a portion of the premium to the drug 

coverage for the purpose of the net value test of actuarial attestation. 70 Fed. Reg. 4579

(codified at 42 C.F.R. §884 (d)(ii)(B)). For example, a sponsor of an integrated medical and 

drug plan that has a premium of $30 can attribute a small portion of that amount to drug 

coverage when it does the calculations for the net value test. Experts we interviewed told 

us that this flexibility was helpful to sponsors in meeting the actuarial equivalence 

standard. 

Page 17 GAO-07-572 Retiree Health Benefits
term because union contracts prevent them from doing so, thus making 

the RDS the only MMA option for which they likely would qualify. 

Sponsors reported that when selecting an MMA option, they considered 

how the various options would affect their ability to save on costs. While 

all of the MMA prescription drug coverage options may provide sponsors 

with an opportunity for cost savings, the amount of savings may vary 

based on a sponsor’s tax status. For example, in guidance to employers, 

CMS estimated that the average cost savings to a sponsor that offers its 

own PDP or MA-PD plan for 2006 would be close to $900 per participating

retiree, and the average tax-free payment for sponsors that took the RDS 

would be $668 per participating retiree. Because RDS payments are taxexempt, CMS estimates indicate that the relative value of savings from the 

RDS as compared with savings from offering a PDP or MA-PD plan would 

be greater for private, tax-paying sponsors than it would be for public, 

non-tax-paying sponsors. 

In addition, some sponsors said they considered the trade-off between the 

cost savings associated with the different MMA options and the effect the 

options would have on the prescription drug benefits sponsors would be 

able to offer. For example, depending on their tax status, some sponsors 

might save more money by taking the RDS, while others might save more 

by offering or contracting with a PDP or MA-PD plan. However, as 

previously discussed, while most MMA options likely require a change of 

benefits, the RDS allows sponsors to continue offering the benefits they 

offered prior to the implementation of the MMA as long as the benefit is at 

least actuarially equivalent to the Part D benefit. In one case, a sponsor we 

interviewed reported that it chose the RDS, even though the sponsor could 

have reduced costs by choosing one of the other MMA options. As one 

expert explained, the RDS allows sponsors to save money without 

significantly changing their retiree health plans.

Sponsors also reported considering how easy it would be to explain an 

option to retirees. In particular, sponsors we interviewed told us that they 

considered how benefit changes made as a result of implementing the 

various MMA options would complicate communications with retirees. 

For example, one sponsor we interviewed indicated that a disadvantage of

some MMA options was that they would require a great effort to 

communicate changes to retirees, who range in age from 50 to 105 and 

who might find benefit changes difficult to understand. Conversely, 

sponsors that take the RDS are able to preserve their benefit structure and 

Sponsors Considered Their 

Ability to Save on Costs 

Sponsors Considered the 

Ease of Explaining MMA 

Options to Retirees 

Page 18 GAO-07-572 Retiree Health Benefits
may find it easier to communicate this option to retirees, according to 

CMS. 

In addition, depending on the option they choose, sponsors have to meet 

different MMA requirements for communicating information about the 

options to retirees. For example, sponsors that take the RDS are required 

to explain how their prescription drug coverage compares to the Medicare 

Part D benefit.38 In contrast, sponsors that offer their own PDP or MA-PD 

plan are required to meet more strict CMS communication requirements 

on Part D plans—such as developing and sending more detailed 

information about prescription drug coverage to retirees.39

Sponsors Considered the 

Administrative 

Requirements Associated 

with Each MMA Option 

According to CMS and the experts and sponsors we interviewed, each 

option has different administrative requirements—some of which take up

a considerable amount of time and resources, so sponsors also considered 

these requirements when selecting an option. For example, according to 

CMS, sponsors that offer their own PDP or MA-PD plan are required to 

calculate “true out-of-pocket” costs40 and adjust premiums for low-income 

 38With certain exceptions, sponsors that provide prescription drug coverage to Medicare

Part D-eligible individuals must disclose to retirees whether the coverage is or is not 

“creditable prescription drug coverage” (i.e., the coverage would be able to pass the gross 

benefit test used in calculating actuarial equivalence). 

39Among other CMS communication requirements, sponsors that offer their own PDP or 

MA-PD plan are required to send retirees certain marketing-related communications, such 

as the Annual Notice of Change, Summary of Benefits, and Evidence of Coverage. The

Annual Notice of Change explains changes that a PDP or MA-PD plan has made to its

coverage from the previous year. The Summary of Benefits provides benefit design details. 

The Evidence of Coverage explains the rights, benefits, and responsibilities of plan 

members. 

40Part D enrollees with standard coverage must have $3,850 in true out-of-pocket costs in 

2007 before Part D catastrophic coverage begins. True out-of-pocket costs include only 

those payments made by the individual; made by another person (which may include

another family member, individual, corporation, or charity) on behalf of the individual;

made on behalf of the individual under the low-income subsidy provisions; or made under a 

state pharmaceutical assistance program. Payments by insurance, a group health plan, a

government-funded health program, or other third-party payment arrangement, such as

those from employers and other retiree health benefit sponsors, do not count toward this

limit. 

Page 19 GAO-07-572 Retiree Health Benefits
retirees,41 among other administrative requirements. One sponsor we 

interviewed that offered its own PDP for 2006 indicated that it took 11 fulltime employees and 13 part-time employees over 15,000 hours to 

implement the PDP.42 Conversely, according to CMS, sponsors that take 

the RDS are not required to calculate true out-of-pocket costs, adjust 

premiums for low-income retirees, or meet many of the other 

administrative requirements required of other options. Some sponsors we 

interviewed told us that the RDS would be administratively easy or easier 

than other MMA options, although many reported some first-year 

implementation issues, such as issues in submitting a list of eligible 

retirees to CMS, which made administration of the RDS more difficult than 

originally anticipated.43

 41Sponsors that contract with or become a PDP or MA-PD are required to adjust premiums

for retirees eligible for the low-income subsidy. For most beneficiaries entitled to the lowincome subsidy, CMS pays the beneficiary’s premium (up to the low-income premium 

subsidy amount). CMS requires that the low-income premium subsidy first be used to

reduce the portion of the monthly beneficiary premium paid for by the beneficiary, with 

any remainder then used to reduce the employer’s premium contribution. For example, if, 

under the terms of the retiree plan, the beneficiary is responsible for paying $20 of a 

$40 monthly premium with the employer paying the remaining $20, a monthly low-income 

premium subsidy of $35 would be used first to reduce the beneficiary’s liability to $0 and 

then to reduce the employer’s liability from $20 to $5. 

42This sponsor told us that these additional resources were needed to address a number of 

issues related to offering its own PDP, such as researching and keeping up with CMS 

guidance in a timely manner. This sponsor, however, also said that most of the issues had

been resolved for 2007. 

43For example, sponsors applying for the RDS must submit a retiree file to CMS that

contains data about the retirees for whom a sponsor has applied for the subsidy and that 

CMS uses to determine whether the submitted retirees are eligible for the subsidy. Several 

sponsors we interviewed told us they experienced difficulties when they submitted the

retiree file, such as having some of their submitted retirees rejected by CMS without an

explanation for why this occurred. According to one sponsor, retirees were rejected for 

reasons such as an incorrect Social Security number or a name misspelling, and it was the

responsibility of the sponsor to determine why the retirees were rejected. Another sponsor 

we interviewed had difficulty with the online application, indicating that it was slow and 

nonintuitive. Several of the sponsors we interviewed expected that these implementation 

issues would be fixed by the second year of the RDS. Other RDS-related administrative 

issues, such as difficulties in determining whether a drug should be submitted for 

reimbursement under Medicare Part B or Medicare Part D, may be longer lasting. 

According to the 2006 Kaiser/Hewitt survey, the operational and administrative issues

associated with the RDS were among the reasons some employers cited for not planning to 

take the RDS in the future. 

Page 20 GAO-07-572 Retiree Health Benefits
Sponsors also reported that the extent of available information regarding 

the MMA options at the time they needed to make decisions was a factor 

they considered in selecting an option. CMS did not approve PDP and MAPD plans until September 2005—the same month in which sponsors had to 

apply for the RDS for plans ending in 2006.

44 Some sponsors we 

interviewed reported that they did not have enough information about the 

PDP and MA-PD plan options at the time they had to make their decision 

for 2006. For example, one sponsor we interviewed that took the RDS told 

us that there were too many unknowns at the time it had to make its 

decision for 2006 and that if the sponsor wanted to make changes to its 

retiree health benefits, it would need to provide a transition period for 

retirees in order to prepare them for plan changes. In addition, according

to the 2005 Mercer survey, the timing of the plan and rate information 

available from health plans in the Medicare market was a key factor that 

led many employers to seek the RDS or to delay taking any action for 2006. 

When selecting an option for 2007, sponsors we interviewed continued to

have concerns about the extent of the information available about the PDP 

and MA-PD plans. For example, one sponsor we interviewed told us that 

while there was better information available when it had to make its 

decision for 2007 compared with 2006, the sponsor still did not have a full

year’s worth of data on PDPs when it had to make its decision. As the 

markets for PDPs and MA-PD plans mature and more detailed information 

becomes available, the availability of information on the various MMA 

prescription drug coverage options may become less of a factor in future 

years. According to one expert we interviewed, when employers are 

making their decisions for 2008, there should be a full year of information 

on the MMA prescription drug coverage options so that sponsors will be 

able to make more fully informed decisions. 

When making decisions about which, if any, MMA option to pursue, public 

sponsors may have to consider some factors that private sponsors do not. 

For example, some public sponsors may be influenced at the state level to

Sponsors Considered the 

Extent of Available 

Information Regarding 

MMA Options 

Public Sponsors May Have 

to Consider Unique 

Factors 

 44After CMS published its final rule implementing the MMA prescription drug benefit, in 

January 2005, the various companies that planned to issue private PDPs began to assess the 

feasibility of entering the market and what products they should offer, but most of these 

companies focused on signing up individual beneficiaries for Part D rather than on 

developing the alternative employer options created by the MMA, such as contracting with 

employers to offer a PDP or MA-PD plan. See Dale H. Yamamoto, “What Comes After the

Retiree Drug Subsidy?” Benefits Quarterly, vol. 22, no. 3 (2006). 

Page 21 GAO-07-572 Retiree Health Benefits
either offer health insurance or choose a certain MMA option. One public

sponsor we interviewed was directed by the budget committee of its state 

legislature to take the RDS in 2007 even though the sponsor—a state 

retirement system—had concluded that contracting with a PDP would 

allow the sponsor to decrease premiums for the state, contracting 

agencies, and some enrollees; decrease prescription drug copayments for 

enrollees; or both. As we stated earlier in this report, CMS estimates 

indicate that the relative value of savings from the tax-free RDS, as 

compared with savings from offering a PDP or MA-PD plan, for example, 

would be greater for private, tax-paying sponsors than it would be for 

public, non-tax-paying sponsors. In addition, OPM, which administers 

FEHBP, opted to continue offering prescription drug coverage to retirees

without taking the RDS or any of the other MMA options. We reported 

previously that OPM officials told us OPM did not apply for the RDS for 

FEHBP because they said the intent of the RDS was to encourage 

sponsors to continue offering prescription drug coverage to enrolled 

Medicare beneficiaries, which all FEHBP plans were already doing.45 As 

such, OPM officials told us, the government would be subsidizing itself to 

provide coverage for prescription drugs to Medicare-eligible federal 

employees and retirees. 

 45In a recent report, we discussed the potential effect of the RDS on FEHBP premiums. 

Specifically, we reported that “plan officials differed on whether the subsidy would have

affected growth in FEHBP premiums in 2006 had OPM applied for the subsidy and used it 

to mitigate premium growth. Most plan officials we interviewed stated that the subsidy 

would have had a small effect on premium growth. Officials from two large plans with 

higher-than-average shares of retirees stated that the subsidy would have lowered their 

plans’ premium growth—officials from one plan claimed by at least 3.5 to 4 percentage

points for their plan. We estimated that the subsidy would have lowered the growth in

premiums across all FEHBP plans for 2006 by more than 2 percentage points on average,

from 6.4 percent to about 4 percent.” See GAO, Federal Employees Health Benefits 

Program: Premium Growth Has Recently Slowed, and Varies among Participating 

Plans, GAO-07-141 (Washington, D.C.: Dec. 22, 2006). 

Page 22 GAO-07-572 Retiree Health Benefits
Sponsors’ decisions regarding the various MMA options appear to have 

resulted in the provision of retiree health benefits remaining relatively

unchanged in the short term, although the effect over the longer term on 

the provision of health benefits to retirees is unclear. The short-term effect 

of sponsors’ decisions appears to have resulted in benefits remaining 

relatively unchanged, in part because the majority of sponsors continued 

to offer prescription drug benefits and accepted the RDS during the first 

2 years this option was offered. In addition, according to the 2005 Mercer 

survey, 72 percent of employers with 500 or more employees reported that

the MMA options would have no effect on their ability to provide retiree 

health coverage. Similarly, many sponsors we interviewed told us that they

did not make changes to their retiree health benefits—including 

decreasing coverage—in direct response to the MMA. Only one of the 

sponsors we interviewed that selected the RDS for 2006 reported making 

any changes to its benefits to meet the RDS actuarial equivalence 

standard. This sponsor told us it eliminated one of its plans that did not 

meet CMS’s actuarial equivalence standard for the RDS, but the sponsor 

said it moved all affected Medicare-eligible retirees into coverage that did 

qualify for the RDS. In addition, some sponsors we interviewed told us 

that they shared part of the subsidy they received from accepting the RDS 

with retirees by reducing retiree premiums. Furthermore, the 2005 Mercer 

survey reported that only 3 percent of employers with 500 or more 

employees indicated they were likely to terminate drug coverage for 

Medicare-eligible retirees—rather than choosing one of the MMA 

options—in response to the availability of the Part D prescription drug 

benefit. 

In the Short Term, 

Sponsors’ Decisions 

Regarding MMA 

Options Resulted in 

Benefits Remaining 

Relatively Unchanged, 

but over the Longer 

Term the Effect Is 

Unclear 

While, in the short term, sponsors’ decisions regarding the MMA options 

resulted in benefits remaining relatively unchanged, the effect over the 

longer term of sponsors’ decisions on the provision of employment-based 

retiree health benefits is unclear. Experts we interviewed differed in their 

assessments of what the effect is likely to be over the longer term. In 

particular, some experts we interviewed indicated that the MMA may 

extend the amount of time that sponsors offer benefits without reducing 

coverage. Furthermore, one sponsor we interviewed indicated that the 

RDS increased the number of years that its retiree health benefits program 

would be solvent. On the other hand, other experts said that it was 

possible that the availability of the Medicare Part D benefit may make it 

more likely that sponsors will stop offering prescription drug benefits for 

retirees. Nearly all experts we interviewed told us that it was unlikely that

an employer or other potential sponsor that did not offer retiree 

prescription drug coverage prior to the MMA would begin sponsoring 

these benefits in response to the new options resulting from the MMA. 

Page 23 GAO-07-572 Retiree Health Benefits
According to experts, employers are not planning to improve or expand

retiree health coverage and do not want the additional financial liability of

providing these benefits.

Furthermore, it is unclear to what extent sponsors will continue to select 

the same MMA option in the future. For example, the 2006 Kaiser/Hewitt 

survey reported that of those respondents that accepted the RDS for 2006, 

only 54 percent said they were very or somewhat likely to accept the RDS 

for 2010. Furthermore, 25 percent said they did not know whether they 

would accept the RDS for 2010. Most of the sponsors that we interviewed 

that took the RDS for 2006 and planned to take the RDS for 2007 said they 

were unsure which option they would be taking for 2008. The 2006 

Kaiser/Hewitt survey also reported that employers that are unlikely to take 

the RDS in the future are considering a number of other MMA options, 

including contracting with a PDP to offer enhanced coverage.

46 To the 

extent that sponsors that have accepted the RDS select other MMA 

options in subsequent years, sponsors’ provision of retiree health benefits

may change.

In addition to the MMA options, a host of other long-standing factors may 

affect a sponsor’s provision of health benefits to retirees. These include 

the existence of union contracts that may require the provision of certain 

health benefits, increasing costs for health care, the degree of industry 

competition, and the strength of sponsors’ financial conditions. For 

example, in 2005 we reported that sponsors that negotiated retiree health

benefits with unions might not have as much flexibility to change these 

benefits prior to negotiations.47 Sponsors we interviewed also cited the 

competitiveness of the industry as another factor that affected retiree 

 46Sponsors we interviewed told us that they were considering alternative options other than

the RDS for the future, such as offering MA-PD plans—which may have lower premiums

than sponsors’ current plans. Some sponsors also told us they may be forced to move away 

from the RDS in the future because limits on their contributions to retiree health plans

jeopardize their ability to meet CMS’s actuarial equivalence standard for the RDS. For 

public sponsors, experts we interviewed told us that requirements published in June 2006

by the Governmental Accounting Standards Board (GASB) that limit the ability of public 

sector sponsors to account for future RDS payments on their financial statements may 

affect the long-term MMA options selected by public sponsors. See GASB Technical 

Bulletin No. 2006-1, Accounting and Financial Reporting by Employers for Payments 

from the Federal Government Pursuant to the Retiree Drug Subsidy Provisions of 

Medicare Part D (Norwalk, Conn.: GASB, June 30, 2006). 

47GAO-05-205. 

Page 24 GAO-07-572 Retiree Health Benefits
coverage, with one sponsor stating that it strove to have benefit packages 

that were in line with the overall market as well as the specific industry. 

We provided a draft of this report to CMS and experts on retiree health

benefits at the Employee Benefit Research Institute, Hewitt Associates, 

Mercer Health & Benefits, and the National Opinion Research Center.48

Agency and Other 

External Comments 

In its written comments on a draft of this report, CMS stated that the 

report provided an excellent summary of available information concerning

the choices sponsors made among MMA options. (CMS’s comments are 

included in app. IV.) 

CMS agreed with the finding that the majority of sponsors reported 

continuing to offer prescription drug coverage and accepting the RDS for 

2006, with smaller percentages of sponsors reporting selecting other MMA 

options. In commenting on the draft report’s identification of several 

factors that may have contributed to the differences in the surveys’ 

reported percentages of employers accepting the RDS for 2006, CMS 

suggested an additional factor that may have contributed to the 

differences in the survey finding. Specifically, CMS said that some of the 

surveys reported what sponsors said they intended to do or were 

considering doing at the time of the survey, and it was possible that a 

portion ultimately decided not to pursue those options. However, both the 

2006 Kaiser/Hewitt survey—which reported that 82 percent of surveyed 

employers accepted the RDS for 2006—and the 2006 Mercer survey—

which reported that 51 percent of surveyed employers accepted the RDS 

for 2006—were reporting decisions surveyed employers said they had

already made, not what they planned to do. Therefore, it is not likely this 

factor would explain the difference in the survey results. CMS also agreed 

with the draft report’s related finding regarding the number of sponsors 

participating in the RDS program. CMS suggested that we identify the 2007 

data as preliminary, since it was compiled in February. We have made this

clarification to the final report. 

CMS stated that it agreed with the report’s second finding, that sponsors 

considered a variety of factors when selecting which MMA prescription 

drug coverage options to pursue, with one clarification. The draft report 

 48The researcher with the National Opinion Research Center who reviewed our report is

also an author of the 2006 Kaiser/HRET survey. 

Page 25 GAO-07-572 Retiree Health Benefits
stated that, in general, in order to implement most MMA options other 

than the RDS, sponsors would likely have to change the prescription drug 

benefits they offer. CMS stated that the report did not fully acknowledge 

that CMS has used its statutory waiver authority for several MMA options 

to afford flexibility in benefit design, and as a result, MMA options may 

require minimal (if any) adjustments to premiums, cost-sharing, and other 

primary elements of benefit design. The draft report did describe CMS’s 

authority to waive or modify Part D requirements added by the MMA that 

hinder the design of, offering of, or enrollment in certain employer- or 

union-sponsored Part D retiree plans. In response to CMS’s comments, we 

have included additional information clarifying that CMS has waived or 

modified Part D requirements for multiple MMA options. However, while 

CMS has used this waiver authority, our report notes that sponsors may 

still need to make changes to benefits—such as changing the drugs 

included on their formularies—and, according to sponsors we 

interviewed, any changes to benefits can complicate communications with 

retirees. 

CMS also agreed with the draft report’s finding that in the short term 

sponsors’ decisions regarding MMA options resulted in benefits remaining 

relatively unchanged, but over the longer term the effect is unclear. 

However, CMS stated that the examples of differing experts’ assessments 

of the likely effect over the longer term lacked sufficient context to be 

included in the findings. CMS also stated that there was no indication in 

the finding of the preponderance of expert opinion in favor of one or the 

other point of view. Our report states that the effect over the longer term 

is unclear and that experts we interviewed differed in their assessments of 

what the effect was likely to be. The report describes both the opinions of

experts who said the MMA may extend the amount of time that sponsors 

offer benefits without reducing coverage and those who said the Medicare 

Part D benefit may make it more likely that sponsors will stop offering 

prescription drug benefits for retirees, and there was not a preponderance 

of opinion for either perspective. 

The experts who reviewed the draft report generally indicated that the 

report provided an accurate portrayal of employment-based retiree health

benefits and sponsors’ decisions about the options available under the 

MMA. 

CMS and several of these experts also provided technical comments, 

which we incorporated into the report as appropriate. 

Page 26 GAO-07-572 Retiree Health Benefits
We will send copies of this report to the Administrator of CMS and 

interested congressional committees. We will also provide copies to others

on request. In addition, the report is available at no charge on GAO’s Web 

site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

me at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix V. 

John E. Dicken 

Director, Health Care 

Page 27 GAO-07-572 Retiree Health Benefits
List of Committees 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable Edward M. Kennedy 

Chairman 

The Honorable Michael B. Enzi 

Ranking Member 

Committee on Health, Education, Labor, and Pensions 

United States Senate 

The Honorable George Miller 

Chairman 

The Honorable Howard P. “Buck” McKeon 

Ranking Member 

Committee on Education and Labor

House of Representatives 

The Honorable John D. Dingell 

Chairman 

The Honorable Joe Barton 

Ranking Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable Charles B. Rangel 

Chairman 

The Honorable Jim McCrery 

Ranking Member 

Committee on Ways and Means 

House of Representatives 

Page 28 GAO-07-572 Retiree Health Benefits
A

Based Reti

sin

ppendix I: Information on Employmentree Health Coverage, Updated 

ce GAO’s 2005 Report

Page 29 GAO-07-572

Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report 

This appendix describes information on employment-based retiree health

coverage since the initial mandated GAO study, published in 2005.1

 We 

reported in 2005 that the long-term decline in employment-based retiree 

health coverage had leveled off, and retirees were paying an increasing 

share of the costs. We reported that the percentage of employers offering

health benefits to retirees, including those who are Medicare-eligible, had 

decreased beginning in the early 1990s, but had leveled off by the early 

2000s. This leveling off has continued since the initial mandated study. We

also reported in 2005 that the percentage of Medicare-eligible retirees aged 

65 and older with employment-based coverage remained relatively 

consistent from 1995 through 2003. Since issuance of our 2005 report, we 

received data for 2004 and 2005 showing that the overall percentage

remained relatively consistent from 2003 through 2005 at about 31 percent,

although some modest changes occurred within specific age cohorts. 

Sponsors continued to respond to increasing costs by implementing 

strategies that required retirees to pay more for coverage and thus 

contributed to a gradual erosion of the value and availability of benefits. 

For example, one employer benefit survey reported that over half of 

surveyed employers reported increases in retiree contributions to 

premiums between 2005 and 2006. 

According to surveys of sponsors of retiree health benefits, the percentage 

of employers offering health benefits to retirees declined beginning in the 

early 1990s and then remained relatively stable by the early 2000s through 

2005. In our 2005 report, we reported that a series of surveys conducted by

Mercer Human Resource Consulting indicated that the percentage of 

employers with 500 or more employees offering health insurance to 

retirees who are eligible for Medicare2

 declined from 1993 to 2001, 

although this decline had leveled off from 2001 through 2004. Data 

obtained after the publication of our 2005 report showed that this levelingoff trend continued, with approximately 29 percent of employers with 500 

or more employees offering the benefits to Medicare-eligible retirees in 

2006.

3

 (See fig. 1.) 

Employer Benefit 

Surveys Showed a 

Decline, then a 

Leveling Off, in Share 

of Employers Offering 

Health Benefits to 

Retirees; New Data 

Showed Continuation 

of Leveling-Off Trend 

 1

See GAO, Retiree Health Benefits: Options for Employment-Based Prescription Drug 

Benefits under the Medicare Modernization Act, GAO-05-205 (Washington, D.C.: Feb. 14, 

2005). 

2

Medicare-eligible generally refers to retirees aged 65 and over. 

3

See Mercer Health & Benefits, National Survey of Employer-Sponsored Health Plans:

2006 Survey Report (New York, N.Y.: Mercer Health & Benefits, LLC, 2007). Mercer Health

& Benefits is a business of Mercer Human Resource Consulting. 

Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

Figure 1: Mercer Survey Results—Percentage of Employers with 500 or More Employees Offering Health Benefits to

Medicare-Eligible Retirees, 1993–2006 

0

10

20

30

40

50

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Percentage

Sources: GAO analysis of Mercer Health & Benefits; Mercer Human Resource Consulting; William M. Mercer,

Incorporated; and Foster Higgins data.

Year

Not available

44

29

Note: Based on employer benefit surveys from 1993 through 2006. The Mercer data include 

employers that offer coverage on a continuing basis to newly hired employees as well as employers 

that may limit coverage to individuals who were hired or who retired before a specified year. The

dotted line from 2001 to 2003 indicates that comparable 2002 data were not available because of a 

wording change on the 2002 survey questionnaire. In 2003, Mercer modified the survey questionnaire 

again to make the data comparable to prior years (except 2002). Thus, consistent with the Mercer 

2003 survey, we have excluded data for 2002. 

Page 30 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

We also reported in our 2005 report that a series of surveys conducted by

the Kaiser Family Foundation and Health Research and Educational Trust 

(HRET) estimated that the percentage of employers with 200 or more 

employees offering retiree health coverage decreased from 46 percent in 

1991 to 36 percent in 1993. This decline leveled off from 1993 through 

2004, with approximately 36 percent of employers with 200 or more 

employees offering coverage to these groups in 2004.4

 Data obtained after 

our 2005 report showed that this trend continued. According to the 

Kaiser/HRET survey, approximately 33 percent and 35 percent of 

employers with 200 or more employees offered retiree health benefits in

2005 and 2006, respectively. For Medicare-eligible retirees specifically, the 

percentage of employers reporting that they offered health benefits to this

group has generally not changed since our 2005 report, in which we 

reported that 27 percent of employers with 200 or more employees offered 

coverage, according to Kaiser/HRET. (See fig. 2.) 

 4

Gary Claxton and others, Kaiser Family Foundation; Samantha Hawkins, HRET; and 

Jeremy Pickreign, Heidi Whitmore, and Jon Gabel, Center for Studying Health System 

Change, Employer Health Benefits: 2006 Annual Survey (Menlo Park, Calif.: The Henry J.

Kaiser Family Foundation; Chicago, Ill.: HRET, 2006). 

Page 31 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

Figure 2: Kaiser/HRET Survey Results—Percentage of Employers with 200 or More Employees Offering Health Benefits to All 

Retirees and to Medicare-Eligible Retirees, 1991–2006 

0

10

20

30

40

50

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Percentage

Sources: GAO analysis of Kaiser/HRET and KPMG Peat Marwick data.

Year

All

Medicare-eligible

Not available

46

28

35

27

Notes: Based on KPMG Peat Marwick surveys from 1991 through 1998 and Kaiser/HRET surveys 

from 1999 through 2006. The data for “all” retirees may include employers that offer health benefits to

Medicare-eligible retirees, retirees under age 65, or both. Data for all retirees were unavailable for 

1994 and 1996. Data for Medicare-eligible retirees were unavailable from 1991 through 1994 and for 

1996. 

In 2003, Kaiser/HRET made changes to its survey methodology that resulted in adjustments to some

of the estimates reported in prior-year reports. The differences resulting from these adjustments for 

the retiree health benefits data were not statistically different. 

Page 32 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

For retirees under age 65, we reported in our 2005 report that coverage 

showed a steady decline from 1993, when 50 percent of employers with 

500 or more employees offered coverage to this group of retirees, to 2001,

although this percentage generally leveled off from 2001 through 2004.5

New data reported by Mercer showed that 39 percent of employers with 

500 or more employees offered coverage to these retirees in 2006. 

The survey data we reviewed for our current report indicated that some 

types of employers are more likely to provide health benefits to retirees 

than others. Data on retiree health coverage showed that larger employers, 

for example, are more likely than smaller employers to offer coverage to 

retirees, including Medicare-eligible retirees. The 2006 Mercer survey 

reported that 56 percent of employers with 20,000 or more employees 

offered coverage to Medicare-eligible retirees, compared with about 

22 percent of employers with 500 to 999 employees. The 2006 Kaiser/HRET 

survey also showed that 54 percent of employers with 5,000 or more 

employees offered health benefits to retirees, while 35 percent of 

employers with 200 or more employees offered health benefits to retirees. 

For smaller employers in the Kaiser/HRET survey—those with 3 to 199 

employees—approximately 9 percent offered retiree health benefits. These 

data are similar to the data reported in our 2005 report, although the 

percentage of employers with 5,000 or more employees offering health 

benefits to retirees is slightly lower than in previous surveys. 

In addition, employers with a union presence continued to be more likely 

to offer retiree health coverage than employers without a union presence. 

For example, in the 2006 Kaiser/HRET survey, among employers with 200 

or more employees, 50 percent of those employers that had union 

employees offered health coverage to retirees, compared with 27 percent

without union employees. 

According to federal and employer benefit surveys, certain industries 

continued to be more likely to offer retiree health coverage than others. 

For example, the most recent Agency for Healthcare Research and 

Quality’s Medical Expenditure Panel Survey (MEPS) data showed that 

approximately 88 percent of state entities offered health insurance for 

retirees aged 65 and older.6

 In addition, new data released from 

Kaiser/HRET in 2006 showed that 82 percent of state and local government 

 5

Data based on Mercer surveys from 1993 through 2004. 

6

MEPS data are for 2004. 

Page 33 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

employers with 200 or more employees offered coverage to retirees.7

Furthermore, these data are similar to the data reported in our 2005 report. 

Recent data released by Kaiser/HRET continued to list the 

transportation/communication/utility industry as the second likeliest 

industry, after government, to offer health benefits to its retirees, with 

52 percent of all employers with 200 or more employees in this industry 

sector offering health benefits to their retirees.8

 This survey also continued 

to show, as we reported in 2005, that the industries least likely to offer 

coverage were health care and retail, with 15 percent and 11 percent, 

respectively, of employers with 200 or more employees in these industry 

sectors offering retiree health benefits. 

In our 2005 report, we stated that the overall percentage of Medicareeligible retirees and their insured dependents aged 65 and older obtaining

employment-based health benefits through a former employer remained 

relatively consistent from 1995 through 2003, based on data from the U.S. 

Census Bureau’s Current Population Survey (CPS). Since issuance of that 

report, we received subsequent data for 2004 and 2005 showing that the

overall percentage remained relatively consistent from 2003 through 2005,

although some modest changes occurred within specific age cohorts (see 

fig. 3). 

Percentage of 

Medicare-Eligible 

Retirees with 

Employment-Based 

Health Coverage 

Remained Consistent 

 7

As we reported in 2005, there continues to be a concern that standards adopted by the

Governmental Accounting Standards Board (GASB) in 2004, which affect the reporting of 

postretirement benefit obligations, may put new pressures on public sector funding of

retiree health care benefits. The 2005 Mercer survey reported that although the GASB 

changes do not require sponsors to fund health plan liabilities, it is possible that the

changes will prompt a decline in coverage in the public sector. GASB Statement No. 43: 

Financial Reporting for Postemployment Benefit Plans other than Pension Plans 

(Norwalk, Conn.: GASB, April 2004) and GASB Statement No. 45: Accounting and

Financial Reporting by Employers for Postemployment Benefits other than Pensions

(Norwalk, Conn.: GASB, June 2004). The standards are effective in three phases, depending 

on a public sector entity’s total annual revenues. For the largest employers, the effective 

date for Statements No. 43 and No. 45 began in the first period after December 15, 2005, 

and December 15, 2006, respectively. 

8

Kaiser/HRET, Employer Health Benefits: 2006 Annual Survey.

Page 34 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

Figure 3: Percentage of Medicare-Eligible Retirees and Their Insured Dependents with Employment-Based Health Benefits, by 

Age Group, 1995–2005 

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Percentage

Source: GAO analysis of CPS data.

Year

65 to 69

70 to 79

80 and older

35

28

32

39

33

21

Notes: Based on the March CPS Supplement from 1996 through 2002 and the Annual Social and 

Economic Supplement to the CPS from 2003 through 2006. The age categories for insured 

dependents are based on the age of the actual individual, not the primary policyholder. For example,

an 80-year-old insured dependent is counted as 80 years of age regardless of the age of the primary 

policyholder. Differences for ages 65 to 69 and age 80 and older are statistically significant. 

As noted in Census Bureau press release dated March 23, 2007, the Census Bureau will be revising 

the historical health insurance coverage estimates from the CPS due to an identified programming 

error. According to the Census Bureau, the impact of the required revisions is small—the original and 

revised estimates for 2004 and 2005 differ by less than 1 percent—and the Census Bureau’s 

assessment is that the impact of the required revisions is relatively constant from one year to the 

next. 

According to our analysis of CPS data, for those aged 65 and older, 

approximately 32 percent had coverage in 1995 and approximately 

31 percent had coverage in 2005 (no change from last report). Medicareeligible retirees and their insured dependents for two groups—those aged 

65 through 69 and those aged 80 and older—continued to show

approximately the same modest decline and increase, respectively, in the

percentage with employment-based health coverage. For those aged 

Page 35 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

70 through 79, the modest decline reported in our initial report was no 

longer statistically significant.9

According to employer benefit surveys and our interviews with sponsors 

and experts, sponsors have continued to rely on various strategies, as we 

noted in our 2005 report, for mitigating the increasing costs of providing 

health benefits to retirees that have contributed to a gradual erosion of the 

value and availability of health benefits. These strategies included the 

same strategies identified in our 2005 report: restricting retirees’ eligibility 

for health benefits; limiting sponsors’ contributions to retirees’ health 

benefits; and increasing retirees’ copayments, coinsurance, and premiums. 

Employers participating in the 2006 Kaiser/Hewitt Associates survey 

reported that between 2005 and 2006 they limited retiree eligibility for 

health benefits by restricting eligibility to certain groups of retirees and by

increasing age, years of service, or both, needed to be eligible for such 

benefits. For example, according to 2006 Kaiser/Hewitt survey data, 

11 percent of employers that currently offer retiree health benefits 

reported that they would not provide future employer-subsidized health 

benefits to a particular group of individuals, such as those hired after 

January 1, 2006, if they retire under the age of 65.10 Nine percent of the 

surveyed employers reported that they would not provide future employersubsidized health benefits to a particular group of individuals if they retire

at age 65 or older. In addition, 4 percent of surveyed employers reported 

that they raised the age requirements, years of service requirements, or 

both, for retiree health benefit eligibility for retirees under the age of 65,

and 2 percent made such changes for retirees at age 65 or older. Similarly, 

one sponsor we interviewed told us about changes the sponsor had made 

to coverage for future retirees since our 2005 report. This sponsor told us 

Employer Strategies 

Implemented to 

Mitigate Increased 

Costs of Providing 

Coverage Continued 

to Require Greater 

Retiree Contribution 

Sponsors Have Limited 

Retirees’ Eligibility for 

Benefits 

 9

In our 2005 report, we reported a modest decline for those aged 70 through 79 from 1995 

through 2003 (33 percent in 1995; 31 percent in 2003) that was statistically significant. 

When updated with the 2005 CPS data, the change from 1995 to 2005 was no longer 

statistically significant. 

10In the survey, nearly half of the employers that terminated subsidized coverage for future

retirees indicated that they provide a form of access-only coverage—where retirees have

the option to buy into a health plan at a group rate, but without any financial assistance 

from a sponsor.

Page 36 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

about coverage beginning January 1, 2007, in which future retirees will 

have the option to receive a lump sum of money that can then be used to 

purchase coverage in the individual market at the time of retirement. 

Data from the 2006 Mercer survey showed that 20 percent of employers 

with 500 or more employees have implemented limits—often referred to as 

caps—on contributions to retirees’ health benefits. The survey data also 

showed that an additional 8 percent of such employers were considering 

such caps. Caps were most common among the employers in the Mercer 

study with the largest number of employees; 47 percent of employers with 

20,000 or more employees had implemented caps and 4 percent were 

considering implementing caps. Data from the 2006 Kaiser/Hewitt survey 

showed that 50 percent of employers with 1,000 or more employees 

reported having capped contributions to the health benefits for Medicareeligible retirees. Of these employers, 61 percent reported hitting the cap 

and another 20 percent expected to hit the cap within the next 1 to 3 years.

One sponsor we interviewed with financial caps in place but not yet 

reached told us that sponsors generally have two options once they reach 

these spending limits: (1) negotiate plan design changes to bring spending 

under the limits or (2) pass costs on to retirees through higher premiums. 

More than one-fourth of employers participating in the 2006 Kaiser/Hewitt 

survey reported that between 2005 and 2006 they increased required outof-pocket contributions from retirees and increased the use of other costsharing strategies. In addition, some of these strategies were intended to 

address the costs of providing prescription drug coverage to retirees.11 For 

example, according to the 2006 Kaiser/Hewitt survey, 25 percent of 

employers raised copayments or coinsurance for prescription drugs for 

retirees aged 65 and older, and 10 percent of employers replaced fixed

dollar copayments for prescription drugs with coinsurance, which can

Sponsors Have Limited 

Their Contributions to 

Retirees’ Health Benefits 

Sponsors Have Increased 

Retirees’ Copayments, 

Coinsurance, and 

Premiums 

 11In 2005 we reported that, according to 2001 Medicare Current Beneficiary Survey (MCBS)

data, prescription drug expenditures for retired Medicare beneficiaries that were paid by 

employment-based insurance accounted for 45 percent of all health care expenditures for 

these beneficiaries. See GAO-05-205. In 2004, these costs accounted for 52 percent of all 

health care expenditures for these beneficiaries, based on MCBS data. 

Page 37 GAO-07-572 Retiree Health Benefits
Appendix I: Information on EmploymentBased Retiree Health Coverage, Updated 

since GAO’s 2005 Report

increase retirees’ out-of-pocket expenses as the total cost of the benefit

rises.12

More than one-half of employers in the 2006 Kaiser/Hewitt survey also 

reported that between 2005 and 2006 they increased retiree contributions 

to health care premiums for retirees aged 65 and older.13 However, the 

survey reported a lower rate of increase in the amount that retirees aged 

65 and older contributed to premiums as compared to the amount that 

retirees under age 65 contributed to premiums, which the survey largely 

attributed to the Medicare Part D program. Sponsors we interviewed also 

told us that they had increased retiree premiums to compensate for the 

trend in increasing health care costs.14 For example, one public sponsor 

told us that premiums for its coverage designed for active workers and 

retirees under the age of 65 increased 9 percent for 2005 and 2006. Finally, 

according to the 2006 Mercer survey, about 41 percent of retiree health 

plans for employers with 500 or more employees required Medicareeligible retirees to pay the full cost of their employment-based health 

benefits plan.15

 12Coinsurance requires beneficiaries to pay a percentage of benefit costs as opposed to a 

fixed amount, such as a copayment. 

13In a previous survey, Kaiser/Hewitt also reported how the increase in retiree 

contributions to premiums compared to the rate of increase for total health care premium 

costs. In the 2005 Kaiser/Hewitt survey, 42 percent of surveyed employers with 1,000 or 

more employees increased retiree premiums for retirees aged 65 or older at a rate that was 

higher than the reported increase in total premium costs, suggesting an increase in the

share of premiums these retirees were required to pay. However, the survey researchers 

noted that this subgroup of employers tended to require retirees to contribute a lower

share of premiums than other surveyed employers in that year. Comparable information is 

not reported in the 2006 Kaiser/Hewitt survey. 

14Benefit surveys also reported increased health care costs for retirees. The 2006 

Kaiser/Hewitt survey reported that the total cost of providing health benefits to all retirees

for surveyed employers increased, on average, by an estimated 6.8 percent between 2005 

and 2006. Respondents to the 2006 Mercer survey were asked about their retiree costs for

both 2005 and 2006, and Mercer used this information to estimate an average annual cost 

increase of approximately 2.6 percent per Medicare-eligible retiree from 2005 to 2006.

Because of the low response rate for this part of the survey, these results are not

projectable nationwide and should be viewed only as a general indicator of retiree medical 

plan cost. 

15Data reflect retiree contributions for health plans for retiree-only coverage. 

Page 38 GAO-07-572 Retiree Health Benefits
Appendix II: Alternative Approaches to

Providing Retiree Health Coverage Suggested Appendix II: Alternative Approaches to by Sponsors and Experts 

Providing Retiree Health Coverage Suggested 

by Sponsors and Experts 

The Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA) required GAO to describe both (1) alternative approaches to 

providing employment-based retiree health coverage suggested by retiree 

health benefit sponsors and (2) recommendations by sponsors and other 

experts for improving and expanding such coverage. In this appendix we 

present a range of alternative approaches to providing employment-based 

retiree health coverage and options for expanding and improving these 

alternative approaches, as described by retiree health benefit sponsors 

and experts we interviewed. To obtain this information, we interviewed 

officials from 15 private and public sponsors of retiree health benefits and 

several experts on areas relating to the provision of employment-based 

retiree health coverage, including five benefit consulting firms; six 

organizations, including one representing unions, one representing 

multiemployer plans, two representing large employers, and two 

representing health plans; one professional organization for actuaries; and 

other research organizations. The alternative approaches we describe are

not intended to be a comprehensive list but rather represent the 

approaches that were mentioned by the sponsors and experts we spoke 

with. 

Many of the alternative approaches to providing employment-based retiree 

health coverage that were described to us rely on tax advantages that 

provide an incentive for a sponsor, an employee, or both to set aside funds 

for future health care needs. Some of these tax-advantaged approaches are 

made available as part of consumer-directed health plans, which usually 

consist of a savings account—such as a health savings account (HSA) or 

health reimbursement arrangement (HRA)—and a health plan with a high

deductible. In addition to consumer-directed health plans, there are other 

tax-advantaged accounts and trusts that do not require enrollment in a 

high-deductible health plan, such as a voluntary employees’ beneficiary

association (VEBA). Some sponsors and experts described a third 

category of arrangement, generally without tax advantages, that assists 

sponsors in providing retiree health care coverage, such as establishing 

savings accounts that provide a sponsor’s match to the employee’s 

contribution. Although there is no requirement that retiree health benefit

sponsors prefund their retiree health benefit plans, many of the 

approaches sponsors and experts described are prefunded vehicles—

wherein the sponsor directly contributes, rather than earmarks, dedicated

funds to an account or trust. The alternative approaches these sponsors 

and experts described are listed in table 2. 

Page 39 GAO-07-572 Retiree Health Benefits
Appendix II: Alternative Approaches to

Providing Retiree Health Coverage Suggested 

by Sponsors and Experts 

Table 2: Alternative Approaches to Providing Employment-Based Retiree Health Coverage Described by Sponsors and

Experts 

Approach

Funding/tax

advantage status Details 

Consumer-directed health plans 

Health savings account (HSA) Prefunded/tax 

advantaged 

• Allows limited individual (tax-deductible) or sponsor-based 

(tax-exempt) contributions; however, Medicare enrollees are 

not eligible to make contributions. 

• Requires a minimum deductible amount and a maximum limit 

on enrollee out-of-pocket spending. 

• Allows tax-free withdrawals for qualifying medical expenses. 

• Is portable from job to job. 

Health reimbursement arrangementa (HRA) Not prefundedb/tax 

advantaged 

• Allows sponsors to establish accounts that are not prefunded; 

however, individuals are not eligible to make contributions. 

• Distributions for medical care expenses are tax-free. 

• Provides that sponsors’ credits to an HRA may accumulate 

tax-free on an annual basis. 

• Places no limit on contributions. 

• Is not required to be portable from job to job. 

Medical savings account (MSA) Prefunded/tax 

advantaged 

• Was designed for small businesses (with 50 or fewer 

employees) and the self-employed. 

• Allows limited individual (tax-deductible) or sponsor-based 

(tax-exempt) contributions, but not both in the same year. 

• Is portable from job to job. 

Other tax-advantaged arrangements 

Retiree medical account Not prefundedb/tax 

advantaged 

• Allows sponsors to establish accounts that are not prefunded 

to track dollars that will be available for an employee to spend 

on health benefits in retirement. 

• Allows individual contributions on an after-tax basis. 

• Distributions for retiree health benefits are tax-free. 

• Is dedicated exclusively to the use of medical expenses during 

retirement. 

Voluntary employees’ beneficiary association

(VEBA) 

Prefunded/tax 

advantaged 

• Employs a trust to fund certain benefit plans. 

• Must be based on voluntary membership. 

• Allows limited sponsor contributions, which are tax-deductible. 

• Allows the tax-free withdrawal of funds by retirees for 

qualifying health care expenses. 

Section 420 transfer/401(h) subaccount Prefunded/tax 

advantaged 

• Permits the transfer of excess pension assets of an 

overfunded defined benefit plan (the “Section 420 transfer”) 

into a 401(h) subaccount for the payment of retiree health 

benefits. 

• Has certain restrictions to the subaccount relative to the size

and method of the defined benefit plan. Medical benefits, 

together with life insurance benefits, must be subordinate to 

the defined plan’s retirement benefits. 

Page 40 GAO-07-572 Retiree Health Benefits
Appendix II: Alternative Approaches to

Providing Retiree Health Coverage Suggested 

by Sponsors and Experts 

Approach

Funding/tax

advantage status Details 

Sponsor/industry arrangementsc

Employer-sponsored savings account Prefunded/tax 

advantaged 

• Specifies a sponsor-provided match (e.g., dollar-for-dollar) to 

an employee contribution. 

• Is available upon retirement to pay for retiree medical 

premiums. 

• Earnings and sponsor match are not taxed upon withdrawal. 

Purchasing coalition Not prefunded/not 

tax advantaged

• Used to increase leverage in the marketplace to gain better

prices for both active and retired employees of certain trades. 

Premium reimbursement Not prefunded/not 

tax advantaged 

• Provides capped premium reimbursement to retirees who 

purchase health care coverage outside of the sponsor’s plan. 

Source: GAO interviews with retiree health benefit sponsors and other experts. 

a

Although HRAs are usually combined with a high-deductible health insurance plan, this is not 

required. 

b

These accounts are generally set up as notional accounts, which means they do not require 

prefunding, although sponsors may choose to do so. 

c

The details of these arrangements were provided by sponsors and experts we interviewed. The 

specific details of these arrangements may vary across sponsors. 

In addition to describing examples of the alternative approaches to 

traditional employment-based retiree health coverage, sponsors and 

experts we interviewed provided a variety of recommendations for 

improving and expanding these approaches. For example, some sponsors 

and experts recommended permitting tax-advantaged contributions by 

Medicare-eligible retirees to HSAs and allowing stand-alone HSAs that do 

not require an accompanying high-deductible health plan.1

 Another expert

also suggested increasing the maximum annual contribution that is 

currently allowed for an HSA and expanding the ability of retirees to use 

HSA funds to pay for health insurance premiums.2

 One sponsor we 

interviewed highlighted the increased portability of an HSA as a factor in 

 1

Under current law, ongoing contributions to HSAs must be accompanied by active 

enrollment in a high-deductible health plan. 

2

The Health Opportunity Patient Empowerment Act of 2006 makes several adjustments to 

federal policy regarding HSAs. First, the annual deductible limit on contributions to HSAs

was repealed. Second, individuals can now make a onetime transfer of funds from their 

HRA or flexible spending account (an annual employer-sponsored “use-it-or-lose-it” fund 

for medical expenses not covered by health insurance) to their HSA. However, the 

contribution must be made prior to 2012. Finally, individuals can now also make a onetime 

transfer of funds from retirement accounts such as individual retirement accounts, subject 

to certain penalties, taxes, and limitations, to their HSA. Pub. L. No. 109-432, §§ 302, 303, 

307, 120 Stat. 2922, 2948, 2949, 2951. 

Page 41 GAO-07-572 Retiree Health Benefits
Appendix II: Alternative Approaches to

Providing Retiree Health Coverage Suggested 

by Sponsors and Experts 

the sponsor’s decision to stop offering an HRA at the end of 2006 and to 

begin instead to offer an HSA option for early retirees and active workers. 

In addition, according to one expert we interviewed, because sponsors are 

not required to make unused HRA balances available to employees when

they change jobs, individuals may have an incentive to spend down 

accumulated funds.3

 Several sponsors and other experts also suggested 

creating additional tax-advantaged arrangements for retiree health benefit

sponsors. For example, one expert suggested allowing the tax-free transfer 

of funds from individual tax-preferred vehicles—such as 401(k) retirement 

accounts—and pensions to pay for health care costs, including health care 

premiums. 

Overall, a majority of the sponsors we interviewed indicated that sponsors 

are willing to use or consider alternative approaches, such as the ones 

described above, to assist retirees with their future health care needs 

without increasing their costs. Indeed, one sponsor indicated that it would 

support anything that would expand its ability to offer and fund retiree 

health coverage, such as additional subsidies or favorable tax treatment. 

Moreover, one expert indicated that alternative approaches such as HSAs 

offer a level of predictability that allows sponsors to sustain their retiree 

benefit packages. One reason for this predictability is that contributions by 

the sponsor in many of these alternative approaches are limited to a 

defined contribution. 

Most alternatives that sponsors and experts described in our interviews 

were established (or are currently under consideration) for active 

employees to use for current and future expenses rather than for those 

who are currently retired. For example, among the alternative approaches

described, few of the sponsors we interviewed indicated that they make 

such approaches available to current retirees. Specifically, only one 

sponsor we interviewed told us that it makes consumer-directed health

plans available to current retirees.4

 Seven sponsors told us that their 

current use (or consideration) of consumer-directed health plans is 

targeted to active employees for current and future health care costs. Two 

 3

Currently, employers are not required to make unused HRA balances available to 

employees upon job separation. 

4

According to the 2006 Kaiser/Hewitt survey on retiree health benefits, 10 percent of those 

surveyed among large private sector employers (defined as those with 1,000 or more

employees) offering retiree health benefits offered retirees under age 65 an account-based

retiree health plan such as an HSA or HRA in 2006, whereas fewer (3 percent) did so for 

retirees aged 65 and older. 

Page 42 GAO-07-572 Retiree Health Benefits
Appendix II: Alternative Approaches to

Providing Retiree Health Coverage Suggested 

by Sponsors and Experts 

experts we interviewed, however, noted flaws with using consumerdirected health plans as adequate savings mechanisms for retiree health

care costs because this approach assumes that active employees will not

need the account funds for current health care expenses. Similarly, one 

sponsor noted that because many of the alternative approaches are geared 

toward active employees, they were less likely to be effective solutions for 

retiree health care needs.

Page 43 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

Page 44 GAO-07-572

Appendix III: Scope and Methodology 

This appendix describes in detail the scope and methodology used to 

address the three report objectives—(1) which MMA prescription drug 

coverage options sponsors selected, (2) the factors they considered in 

selecting these options, and (3) the effect these decisions may have on

sponsors’ provision of employment-based health benefits for retirees. It 

also addresses the mandated update on employment-based retiree health

coverage since our 2005 report (reported in app. I) and sponsors’ and 

others’ views on alternative approaches for the provision of employmentbased retiree health coverage that may help maintain, expand, or improve 

retiree health coverage (reported in app. II). Because some of the 

methodologies apply to more than one objective or appendix, we have 

organized this appendix by data source. Specifically, this appendix briefly 

describes the methodologies by objective and then discusses (1) surveys 

of employment-based health benefits, (2) federal surveys, (3) data from the 

Centers for Medicare & Medicaid Services (CMS), and (4) interviews with

sponsors and other experts. 

To determine which MMA prescription drug coverage options sponsors 

selected, we reviewed data from four surveys collected by three benefit 

consulting firms on the options that sponsors reported selecting for 2006 

and the options that sponsors reported that they planned to select for 

2007. One survey is an annual survey of employer health benefits, 

including private and public sector employers, conducted since the early

1990s through 2006, and one is a private sector survey on retiree health 

benefits conducted in 2006. We obtained and analyzed data provided by

CMS on the number and characteristics of sponsors that were approved 

for the retiree drug subsidy (RDS) for plans ending in 2006 and 2007. To 

describe the factors that sponsors considered in selecting the MMA 

options and the effect their decisions about the options may have on the 

provision of benefits for retirees, we relied on two of the employer benefit

surveys and reviewed documents from the literature on the factors that 

sponsors may consider in selecting the MMA options. We also interviewed 

private and public sponsors and experts on sponsors’ decisions regarding 

the MMA options and employment-based retiree health benefits, including 

benefit consultants and officials at health plans, groups representing large 

employers, and other organizations. 

Methodology by 

Objective 

To update information on employment-based retiree health coverage since 

our 2005 report, we reviewed data from employer benefit surveys and data

from three large federal surveys that contained information either on 

Medicare beneficiaries or on the percentage of public sector employers 

that offer retiree health benefits. We also obtained this information in our 

Retiree Health Benefits
Appendix III: Scope and Methodology

interviews with sponsors and experts. We focused on trends particularly 

affecting Medicare-eligible retirees, but in some cases when information 

specific to Medicare-eligible beneficiaries was not available, we reported 

on trends affecting all retirees, including those who were under age 65 and

those who were eligible for Medicare. To describe alternative approaches 

for the provision of employment-based retiree health coverage, we 

reviewed data from several of the same sources used to address the other 

report objectives, including employer benefit surveys, reports and 

analyses from the literature, and interviews with sponsors and experts. 

We relied on data from annual surveys of employment-based health 

benefit plans. Kaiser/HRET and Mercer each conduct an annual survey of

employment-based health benefits, including a section on retiree health

benefits. Each survey has been conducted for at least the past decade, 

including 2006.1

 We also used data from a survey focused solely on retiree 

health benefits that Kaiser/Hewitt conducted in 2006. For each of these 

surveys of employment-based benefits, we reviewed the survey 

instruments and discussed the data’s reliability with the sponsors’ 

researchers and determined that the data were sufficiently reliable for our

purposes. We also reviewed two 2006 surveys by The Segal Company. The 

first represented a nonrandom sample of multiemployer plans from a 

range of industries and geographic regions; the second collected data from 

a nonrandom sample of public sponsors that offered prescription drug 

coverage to Medicare-eligible retirees. 

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.

2

Kaiser/HRET selects a random sample from a Dun & Bradstreet list of 

Surveys of 

Employment-Based 

Health Benefits

Kaiser/HRET 

 1

Year-to-year fluctuations in these employer benefit survey results need to be interpreted

with caution. These surveys are based on random samples designed to be representative of

a broader employer population and are used widely, but may not have the precision needed 

to distinguish small changes in coverage from year to year because of their response rates

and the number of firms surveyed. 

2

Kaiser/HRET has been conducting the survey of small and large employers beginning in

1999. From 1991 through 1998, KPMG Peat Marwick conducted the survey using the same 

instrument. However, data for all sizes of employers are not available for all years. For 

example, KPMG Peat Marwick sampled only large employers in 1991, 1992, 1994, and 1997

and sampled both large and small employers in 1993, 1995, 1996, and 1998. 

Page 45 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

private and public sector employers with three or more employees, 

stratified by industry and employer size. It attempts to repeat interviews 

with some of the same employers that responded in prior years. For the 

most recently completed annual survey—conducted from January to May 

2006 and published in September 2006—2,122 employers responded to the 

full survey, giving the survey a 48 percent response rate. In addition, 

Kaiser/HRET asked at least one question of all employers it contacted—

”Does your company offer or contribute to a health insurance program as 

a benefit to your employees?”—to which an additional 1,037 employers, or 

cumulatively about 72 percent of the sample, responded. By using 

statistical weights, Kaiser/HRET is able to project its results nationwide. 

Kaiser/HRET uses the following definitions for employer size: (1) small—3 

to 199 employees—and (2) large—200 and more employees. In some 

cases, Kaiser/HRET reported information for additional categories of small 

and large employer sizes. 

Mercer Since 1993, Mercer has surveyed a stratified random sample of employers 

each year through mail questionnaires and telephone interviews and 

published the results in its annual report—National Survey of EmployerSponsored Health Plans.

3

 Mercer selects a random sample of private 

sector employers from a Dun & Bradstreet database, stratified into eight 

categories, and randomly selects public sector employers—state, county, 

and local governments—from the Census of Governments. The random 

sample of private sector and government employers represents employers 

with 10 or more employees. For the 2006 survey, which was published in 

2007, Mercer mailed questionnaires to employers with 500 or more 

employees in July 2006 along with instructions for accessing a Web-based 

version of the survey instrument, another option for participation. 

Employers with fewer than 500 employees, which, according to Mercer, 

historically have been less likely to respond using a paper questionnaire, 

were contacted by phone only. Telephone follow-up was conducted with 

employers with 500 or more employees in the random sample and some 

mail and Web respondents were contacted by phone to clear up 

inconsistent or incomplete data. A total of 2,136 employers responded to 

the complete survey, yielding a response rate of 24 percent. By using 

statistical weights, Mercer projects its results nationwide and for four 

 3

Foster Higgins, which later merged with Mercer Human Resource Consulting, began 

conducting the survey in 1986. Mercer Health & Benefits, a business of Mercer Human 

Resource Consulting, conducted the 2005 and 2006 surveys.

Page 46 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

geographic regions.4 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). 

The 2006 Kaiser/Hewitt study—Retiree Health Benefits Examined: 

Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health 

Benefits—is based on a nonrandom sample of employers because there is

no database that identifies all private sector employers offering retiree 

health benefits from which a random sample could be drawn. 

Kaiser/Hewitt used previous Hewitt survey respondents and its proprietary 

client databases, which list private sector employers potentially offering

retiree health benefits. Kaiser/Hewitt conducted the survey online from 

June through October 2006 and obtained data from 302 large (1,000 or 

more employees) employers. Its results were published in December 2006. 

According to the survey, these employers represented 36 percent of all

Fortune 100 companies and 22 percent of all Fortune 500 companies. They

accounted for more than one quarter of the Fortune 100 companies with 

the largest retiree health liability in 2005. Because the sample is 

nonrandom and does not include the same sample of companies and plans 

each year, survey results for 2006 cannot be compared with results from 

prior years. 

We reviewed two nonrandom surveys conducted and published by The 

Segal Company in 2006 that report on responses by non-private-sector 

sponsors to the availability of prescription drug coverage under Medicare 

Part D. The first survey, which was published in spring 2006, was based on 

data collected in January and February 2006 from a nonrandom sample of

273 multiemployer plans that provided prescription drug coverage to 

Kaiser/Hewitt 

Segal 

 4

However, the 2006 Mercer report stated that the average annual cost increase data cited 

for Medicare-eligible retirees are not projectable. 

Page 47 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

Medicare-eligible retirees.

5

 The 273 multiemployer plans that participated 

in the survey are Segal clients and, according to Segal, represented a range 

of industries and geographic regions. The second survey, which was 

published in summer 2006, was conducted by Segal in conjunction with 

the Public Sector HealthCare Roundtable, a national coalition of public 

sector health care purchasers.6

 This survey was based on data collected in

May 2006 from a nonrandom sample of 109 public sponsors, including 

state and local sponsors, 82 of which offered prescription drug coverage to

Medicare-eligible retirees. 

We analyzed three federal surveys containing information either on 

Medicare beneficiaries or on the percentage of public sector employers 

that offer retiree health benefits. We obtained information on retired 

Medicare beneficiaries’ sources of health benefits coverage—including 

former employers and unions—from the CPS, conducted by the U.S. 

Census Bureau for the Bureau of Labor Statistics. We obtained data on the 

sources of coverage for all health care expenditures and for prescription 

drug expenditures for retired Medicare beneficiaries from the Medicare 

Current Beneficiary Survey (MCBS), sponsored by CMS. We obtained data

on the percentage of public sector employers that offer retiree health 

benefits from the Medical Expenditure Panel Survey (MEPS), sponsored 

by the Agency for Healthcare Research and Quality. Each of these federal 

surveys is widely used for policy research, and we reviewed 

documentation on the surveys to determine that they were sufficiently 

reliable for our purposes. 

We analyzed the Annual Supplement of the CPS for information on the 

demographic characteristics of Medicare-eligible retirees and their access 

Federal Surveys

Current Population Survey 

 5

A multiemployer plan is a pension, health, or other employee benefit plan to which more 

than one employer is required to contribute; that is maintained under one or more 

collective bargaining agreements between one or more employee organizations, such as a

union, and more than one employer; and that satisfies such other requirements the 

Secretary of Labor may prescribe by regulation. 29 U.S.C. § 1002(37) (2000). 

6

According to the survey, the goal of the Public Sector HealthCare Roundtable is to 

represent the interests of the public sector during the formulation and debate of federal 

health care reform initiatives. 

Page 48 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

to insurance.7 The survey is based on a sample designed to represent a 

cross section of the nation’s civilian noninstitutionalized population. In the 

2006 CPS Annual Supplement, about 83,800 households were included in 

the sample for the survey, a significant increase in sample size from about 

60,000 households prior to 2002. The total response rate for the 2006 CPS 

Annual Supplement was about 83 percent. We present only those 

differences that were statistically significant at the 95 percent confidence

level. 

The CPS asked whether a respondent was covered by employer- or unionsponsored, Medicare, Medicaid, private individual, or certain other types 

of health insurance in the last year. The CPS questions that we used for 

employment status, such as whether an individual is retired, are similar to 

the questions on insurance status. Respondents were considered 

employed if they worked at all in the previous year and not employed only 

if they did not work at all during the previous year. 

The CPS asked whether individuals had been provided employment-based 

insurance “in their own name” or as dependents of other policyholders. 

We selected Medicare-eligible retirees aged 65 and older who had 

employment-based health insurance coverage in their own names because

this coverage could most directly be considered health coverage from a 

former employer. For these individuals, we also identified any retired 

Medicare-eligible dependents aged 65 or older, such as a spouse, who were 

linked to this policy. We used two criteria to determine that these policies 

were linked to the primary policyholder: (1) the dependent lived in the 

same household and had the same family type as the primary policyholder 

and (2) the dependent had employment-based health insurance coverage 

that was “not in his or her own name.” 

Medicare Current 

Beneficiary Survey 

MCBS is a nationally representative sample of Medicare beneficiaries that 

is designed to determine for Medicare beneficiaries (1) expenditures and 

payment sources for all health care services, including noncovered 

services, and (2) all types of health insurance coverage.

8

 The survey also 

 7

See www.census.gov/hhes/www/income/p60_231sa.pdf (downloaded Apr. 3, 2007) for

additional information. We analyzed data from the March CPS Supplement from 1996 

through 2002 and the Annual Social and Economic Supplement to the CPS from 2003

through 2006. 

8

See http://www.cms.hhs.gov/apps/mcbs/Overview.asp (downloaded Feb. 21, 2007) for 

additional information. 

Page 49 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

relates coverage to payment sources. The MCBS Cost and Use file links

Medicare claims to survey-reported events and provides expenditure and

payment source data on all health care services, including those not 

covered by Medicare. We used the 2004 MCBS Cost and Use file, the most 

current data available, to determine the percentage of Medicare-eligible 

beneficiaries obtaining supplemental coverage from a former employer or 

union. We also used the MCBS data to determine the percentage of all

health care expenditures for retired Medicare beneficiaries paid by 

employment-based insurance for prescription drug expenditures. 

MEPS consists of four surveys and is designed to provide nationally 

representative data on health care use and expenditures for U.S. civilian 

noninstitutionalized individuals.9

 We used data from one of the surveys, 

the MEPS Insurance Component, to identify the percentage of state 

entities that offered retiree health benefits in 2004. Insurance Component 

data are collected through two samples. The first, known as the 

“household sample,” is a sample of employers and other insurance 

providers (such as unions and insurance companies) that were identified

by respondents in the MEPS Household Component, another of the four 

surveys, as their source of health insurance. The second sample, known as 

the “list sample,” is drawn from separate lists of private and public 

employers. The combined samples provide a nationally representative 

sample of employers. The target size of the list sample is approximately 

40,000 employers each year. 

We analyzed data provided by CMS on the number and characteristics of 

sponsors approved for the RDS for plans ending in 2006 and of sponsors 

approved for the RDS for plans ending in 2007. The data include selected

variables from applications that were approved for the RDS. For plans 

ending in 2006, the CMS data are current as of September 11, 2006; for 

plans ending in 2007, the CMS data are current as of February 16, 2007. 

Based on conversations with CMS and data reliability checks that we 

performed, we have determined that these data were sufficiently reliable 

for our purposes. 

Medical Expenditure Panel 

Survey 

CMS Data 

 9

See http://www.meps.ahrq.gov/mepsweb/about_meps/survey_back.jsp (downloaded 

Apr. 4, 2007) for additional information. 

Page 50 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

To learn more about retiree health benefit trends, the factors that sponsors 

considered in selecting the MMA options, the effect that sponsors’ 

decisions about the MMA options may have on the provision of health 

benefits for retirees, and alternative approaches for the provision of 

employment-based retiree health coverage, we interviewed 13 of the 

15 private and public sector sponsors of employment-based retiree health

benefits that we interviewed for the initial mandated study published in 

2005.

10 In our 2005 study, we interviewed officials of 12 Fortune 500 

employers that provided retiree health benefits; the Office of Personnel 

Management, which administers the Federal Employees Health Benefits 

Program; and two state retirement systems. To select the 12 Fortune 500

employers in our 2005 study, we judgmentally selected 10 employers from 

a stratified random sample of 50 Fortune 500 employers. We interviewed 

at least 1 employer from each of the five groups of 100 Fortune 500 

employers that were stratified on the basis of annual revenues. In addition 

to considering revenues, where data were available, we considered each 

employer’s industry, number of employees, postretirement benefit 

obligations, preliminary MMA option decision as reported on its annual 

financial statement, and union presence when making our selection. We 

also interviewed officials at two additional Fortune 500 employers at the 

recommendation of a benefit consultant. In our 2005 study, we 

judgmentally selected two large states’ retiree health benefits systems on 

the basis of a review of selected state data and referrals from a benefit 

consultant that works with public sector clients. For our current study, we 

also interviewed 2 sponsors that chose to offer their own Medicare Part D 

plans instead of implementing the RDS or another MMA option. These 

sponsors were not interviewed for our 2005 report. 

Interviews with 

Sponsors and Experts 

To obtain broader-based information about retiree health benefit trends, 

MMA options, and alternative approaches for the provision of 

employment-based retiree health coverage, we interviewed benefit 

consultants and other experts at several other organizations. Specifically, 

we interviewed representatives of five large employer benefit consulting 

firms. Benefit consultants help their clients, which include private sector 

employers, public sector employers, or both, develop and implement 

human resource programs, including retiree health benefit plans. While 

most of these benefit consulting firms’ clients were large Fortune 500 or

Fortune 1,000 employers, some also had smaller employers as clients. One 

 10See GAO-05-205. Two private sector employers that participated in the 2005 study 

declined to be interviewed for this study. 

Page 51 GAO-07-572 Retiree Health Benefits
Appendix III: Scope and Methodology

benefit consulting firm that we interviewed, in particular, provided 

actuarial, employee benefit, and other services to a range of public sector

clients, including state and local governments, statewide retirement 

systems and health plans, and federal government agencies. It also 

provided consulting services to multiemployer plans. We also interviewed 

officials from the American Academy of Actuaries, America’s Health 

Insurance Plans and its members, AARP, the American Benefits Council, 

the BlueCross BlueShield Association and its members, the Employee 

Benefit Research Institute, the National Business Group on Health, and the 

National Coordinating Committee for Multiemployer Plans. Finally, we 

reviewed other available literature on retiree health benefit trends, factors 

affecting sponsors’ decisions about the MMA options, and alternative 

approaches for the provision of employment-based retiree health 

coverage. 

Page 52 GAO-07-572 Retiree Health Benefits
Appendix IV: Comments from the Centers Appendix IV for Medicare & Medicaid Services : Comments from the Centers for 

Medicare & Medicaid Services 

Page 53 GAO-07-572 Retiree Health Benefits
Appendix IV: Comments from the Centers 

for Medicare & Medicaid Services 

Page 54 GAO-07-572 Retiree Health Benefits
Appendix IV: Comments from the Centers 

for Medicare & Medicaid Services 

Page 55 GAO-07-572 Retiree Health Benefits
Appendix IV: Comments from the Centers 

for Medicare & Medicaid Services 

Page 56 GAO-07-572 Retiree Health Benefits
Appendix V: 

St

GAO Contact and 

aff Acknowledgments

Page 57 GAO-07-572

Appendix V: GAO Contact and Staff 

Acknowledgments 

John E. Dicken, (202) 512-7119 or dickenj@gao.gov 

In addition to the contact named above, Kristi A. Peterson, Assistant 

Director; George Bogart; Kevin Dietz; Laura Sutton Elsberg; Krister Friday; 

Gregory Giusto; Elizabeth T. Morrison; Giao N. Nguyen; and Suzanne 

Worth made key contributions to this report. 

Retiree Health Benefits

Contact 

Acknowledgments 

(290541) 
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