United States Government Accountability Office

GAO Report to Congressional Committees

RETIREE HEALTH 

BENEFITS 

Options for 

Employment-Based 

Prescription Drug 

Benefits under the 

Medicare 

Modernization Act 

February 2005 

 

GAO-05-205 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 2005

RETIREE HEALTH BENEFITS 

Options for Employment-Based

Prescription Drug Benefits under the

Medicare Modernization Act 

Highlights of GAO-05-205, 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 included incentives for

sponsors of employment-based

retiree health plans to offer

prescription drug benefits to

Medicare-eligible retirees, such as a 

federal subsidy when sponsors 

provide benefits meeting certain

MMA requirements. Plan sponsors 

cannot receive a subsidy for retired 

Medicare beneficiaries who enroll

in part D. In response to an MMA 

mandate, GAO determined (1) the 

trends in employment-based retiree 

health coverage prior to the MMA

and (2) which MMA prescription 

drug options plan sponsors said 

they would pursue and the effect

these options might have on retiree 

health benefits. 

GAO identified trends using data 

from federal and private sector 

surveys of employers’ health

benefit plans and financial 

statements of 50 randomly selected

Fortune 500 employers. Where 

data for Medicare-eligible retirees 

were not available, GAO reported 

data for all retirees, including

Medicare-eligible retirees. To

obtain plan sponsors’ views about

options they were likely to pursue,

GAO reviewed the 50 employers’

financial reports and interviewed 

benefit consultants; private and 

public sector plan sponsors, 

including the Office of Personnel 

Management for federal employees’

health benefits; and other experts. 

A long-term decline in the percentage of employers offering retiree health 

coverage has leveled off in recent years, but retirees face an increasing share 

of costs, eligibility restrictions, and benefit changes that contribute to an 

overall erosion in the value and availability of coverage. Although the

percentages and time frames differed, two employer benefit surveys showed

that the percentage of employers offering health coverage to retirees has 

declined since the early 1990s; this trend, however, has leveled off. The cost 

to provide retiree health coverage, including coverage for Medicare-eligible

retirees, has increased significantly: one employer benefit survey cited 

double-digit increases each year from 2000 through 2003. Prescription drugs 

for Medicare-eligible retirees constituted a large share of retiree health costs. 

Employers and other plan sponsors have used various strategies to limit 

overall benefit cost growth that included increasing retiree cost sharing and 

premiums, restricting eligibility for benefits, placing financial caps on health 

care expenditures, and revising prescription drug benefits. 

Many plan sponsors had not made final decisions about which MMA 

prescription drug options they would choose for their Medicare-eligible

retirees at the time of GAO’s review. Specifically, 13 of the 15 private and 

public plan sponsors GAO interviewed were undecided for some or all

retirees. However, most plan sponsors interviewed had chosen the federal

subsidy option for some or all retirees or were considering the subsidy as 

one of several options. Alternatively, some plan sponsors that had set caps 

on their retiree health benefit obligations were considering supplementing 

(known as “wrapping around”) the new Medicare prescription drug benefit 

for some or all retirees rather than providing their own comprehensive 

prescription drug coverage in lieu of the Medicare drug benefit. Also, some

plan sponsors and benefit consultants said they were waiting to see how the 

market for other MMA options, such as Medicare Advantage plans, develops. 

About two-thirds of financial statements GAO reviewed for Fortune 500 

employers reporting obligations for retiree health benefits had begun to 

reflect reduced obligations resulting from the MMA options. While plan 

sponsors contacted said they did not anticipate reducing their drug coverage

in view of new coverage offered through the MMA, increasing health care 

costs might cause them to do so in the future. Benefit consultants and other 

experts interviewed said that the MMA was not likely to induce employers to

begin to provide prescription drug coverage or to supplement the Medicare 

drug benefit if they had not previously offered retiree health coverage. 

In commenting on a draft of this report, the Centers for Medicare & Medicaid

Services and four experts generally agreed with the report’s findings. The 

Office of Personnel Management indicated that it has not made final

decisions about which MMA prescription drug option it would choose for the

Federal Employees Health Benefits Program, but it does not expect to 

choose the subsidy option.

www.gao.gov/cgi-bin/getrpt?GAO-05-205.

To view the full product, including the scope 

and methodology, click on the link above.

For more information, contact Kathryn G. 

Allen at (202) 512-7118.
Contents 

Letter 1

Results in Brief 4

Background 6

Long-term Decline in Employment-Based Retiree Health Coverage 

Has Leveled Off, with Retirees Paying an Increasing Share of the 

Costs 13

Employers and Plan Sponsors Considering MMA Options for 

Prescription Drug Coverage, Often Considering Subsidy as

Primary Option for Some or All Medicare-Eligible Retirees 31 

Concluding Observations 46 

Agency and Other External Comments 46 

Appendix I Scope and Methodology 50 

Surveys of Employment-Based Health Benefits 50 

Federal Surveys 52 

Financial Data from Fortune 500 Employers 55 

Interviews with Benefit Consultants, Plan Sponsors, and Others 56 

Appendix II Comments from the Centers for Medicare & Medicaid 

Services 59 

Appendix III Comments from the Office of Personnel Management 61 

Appendix IV GAO Contact and Staff Acknowledgments 62 

GAO Contact 62 

Acknowledgments 62

Tables 

Table 1: Status of Decisions by 15 Private and Public Sector Plan 

Sponsors Interviewed regarding the MMA Subsidy Option 

for Prescription Drug Coverage 33 

Table 2: Actions Taken in Response to the MMA by 50 Randomly

Selected Fortune 500 Employers, Most as of the Quarter 

Ending September 30, 2004 42 

Page i GAO-05-205 Retiree Health Benefits
Figures 

Figure 1: Medicare Part D Standard Prescription Drug Benefit 10 

Figure 2: Mercer Survey Results—Percentage of Employers with 

500 or More Employees Offering Health Benefits to 

Medicare-Eligible Retirees, 1993-2004 15 

Figure 3: Kaiser/HRET Survey Results—Percentage of Employers 

with 200 or More Employees Offering Health Benefits to 

All Retirees and to Medicare-Eligible Retirees, 1991-2004 16 

Figure 4: Percentage of Medicare-Eligible Retirees and Their 

Insured Dependents with Employment-Based Health

Benefits, by Age Group, 1995-2003 20 

Figure 5: Under the MMA Subsidy Option, the Portion of Retired 

Medicare Beneficiaries’ Prescription Drug Expenditures 

Paid by Employment-Based Coverage and Paid Out-ofPocket Eligible for Subsidy, Estimate for 2006 36 

Page ii GAO-05-205 Retiree Health Benefits
Abbreviations 

CMS Centers for Medicare & Medicaid Services 

CPS Current Population Survey 

EEOC Equal Employment Opportunity Commission 

FAS Financial Accounting Standards 

FASB Financial Accounting Standards Board 

FEHBP Federal Employees Health Benefits Program 

GASB Governmental Accounting Standards Board 

HMO health maintenance organization 

HRET Health Research and Educational Trust 

HSA health savings account

MEPS Medical Expenditure Panel Survey 

MCBS Medicare Current Beneficiary Survey 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

OPM Office of Personnel Management

PPO preferred provider organization

SEC Securities and Exchange Commission 

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Page iii GAO-05-205 Retiree Health Benefits
United States Government Accountability Office

Washington, DC 20548 

February 14, 2005 

Congressional Committees 

As prescription drug costs have continued to increase, many retired senior 

citizens face significant out-of-pocket costs for prescription drugs.

Because the Medicare program as originally designed did not cover

outpatient prescription drugs, many beneficiaries relied on other sources 

to cover the costs of drugs. About a third of all retired Medicare 

beneficiaries obtained supplementary health benefits through plans 

sponsored by former employers or other employment-based groups, and 

most of these plans covered prescription drugs. However, most retired 

Medicare beneficiaries, including those with employment-based health

plans, still relied to varying degrees on their own financial resources to 

pay for prescription drugs. More broadly, there has been concern in recent 

years about a long-term decline in the availability of employment-based 

retiree health coverage.1

 To help senior citizens with increasing

prescription drug costs and encourage employment-based retiree health 

coverage, especially for prescription drugs, Congress passed the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) in

December 2003 that among other things, created a new prescription drug

benefit as part D of the Medicare program.

2

 The Medicare part D benefit 

begins in January 2006. The MMA also established various options and 

incentives to encourage sponsors of employment-based retiree health

plans to offer prescription drug benefits to retired Medicare beneficiaries. 

Once the Medicare drug benefit is available in 2006, employers and other 

sponsors of health coverage will have several options to provide 

prescription drug benefits to Medicare-eligible retirees. To encourage plan 

sponsors to offer prescription drug coverage to retired Medicare 

 1

See, for example, Frank McArdle, Amy Atchison, and Dale Yamamoto, Hewitt Associates;

and Michelle Kitchman and Tricia Neuman, The Kaiser Family Foundation, Current Trends

and Future Outlook for Retiree Health Benefits: Findings from the Kaiser/Hewitt 2004 

Survey on Retiree Health Benefits (Menlo Park, Calif., and Lincolnshire, Ill.: The Henry J.

Kaiser Family Foundation, December 2004), and GAO, Retiree Health Benefits: EmployerSponsored Benefits May Be Vulnerable to Further Erosion, GAO-01-374 (Washington, D.C.:

May 1, 2001). 

2

Pub. L. No. 108-173, sec. 101, §§ 1860D-1-1860D-42, 117 Stat. 2066, 2071–2152 (to be

codified at 42 U.S.C. §§ 1395w-101–1395w-152). 

Page 1 GAO-05-205 Retiree Health Benefits
beneficiaries—which they generally do on a voluntary basis—the MMA 

established a federal subsidy payment for plan sponsors that offer 

comprehensive drug benefits meeting certain MMA requirements.3, 4

Subsidy payments will be available for each retiree who chooses to enroll 

in the sponsor’s plan in lieu of enrolling in part D. Alternatively, plan

sponsors can provide coverage that supplements (wraps around) the 

retiree’s Medicare part D prescription drug benefit and forgo eligibility for

the subsidy. Plan sponsors also have several other options for providing 

prescription drug coverage to retired Medicare beneficiaries under the 

MMA, such as contracting with private plans that provide standard or 

enhanced Medicare part D prescription drug benefits. 

The MMA required that we conduct a study documenting trends in

employment-based retiree health coverage prior to the enactment of the

MMA, including coverage provided under the Federal Employees Health

Benefits Program (FEHBP),5

 and the options and incentives available

through the MMA that could affect the voluntary provision of employmentbased retiree health benefits.

6

 As discussed with the committees of

jurisdiction, this report addresses the following questions: 

• What were the trends in employment-based retiree health coverage, 

particularly for Medicare-eligible retirees, prior to the MMA?

 3

“Plan sponsor” refers to a sponsor of employment-based retiree group health coverage, 

including private sector employers and public sector employers, including federal, state, or

local governments; sponsors of church plans; and sponsors of plans offered under

collectively bargained agreements. 

4

MMA sec. 101, § 1860D-22, 117 Stat. 2125-28. The subsidy will be available to employmentbased group health plans regulated under the Employee Retirement Income Security Act of 

1974 (29 U.S.C. §§ 1001 et seq. (2000)) as well as to federal government and other public

sector plans and church plans.

5

The federal government, through FEHBP, is the nation’s largest purchaser of employmentbased health benefits. All active and retired federal workers and their dependents are 

eligible to enroll in health plans offered through FEHBP. For 2005, 11 nationwide fee-forservice plans, some of which are available only to certain federal retirees and most of

which offer a preferred provider organization (PPO), will be participating in FEHBP. While

federal retirees also have more than 260 health maintenance organization (HMO), point-ofservice, consumer-driven, and high-deductible health plan options, the number available 

varies by state. 

6

MMA § 111, 117 Stat 2175-76. The MMA also required that we conduct a second study after

the implementation of the Medicare drug benefit, following up on trends and the options

selected. 

Page 2 GAO-05-205 Retiree Health Benefits
• Which MMA prescription drug coverage options do plan sponsors say they 

are likely to pursue and what effect will these options likely have on health

benefits for Medicare-eligible retirees? 

To identify trends in employment-based retiree health coverage and 

expenditures, we reviewed data from several sources, including (1) three 

private sector surveys of employers’ health benefit plans nationwide, two 

of which covered both private and public sector employers and have been 

conducted annually for more than a decade; (2) three large federal

surveys, which contained information on public sector employers’ retiree 

health benefit offer rates, retired Medicare beneficiaries covered by 

employment-based health coverage from 1995 through 2003, and retired

Medicare beneficiaries’ prescription drug expenditures, respectively; 

(3) financial statements that 50 randomly selected Fortune 500 employers 

filed with the Securities and Exchange Commission (SEC) reporting their 

anticipated obligations for retiree health benefits;7

 and (4) studies, reports, 

and analyses from the literature on retirees’ health benefits. To

supplement these sources and to obtain more in-depth information, we

interviewed officials at (1) 6 firms providing benefit consulting services 

primarily for large public and private sector employers; (2) 12 Fortune 500 

employers that sponsored retiree health benefit plans;8

 (3) 3 public sector

sponsors of retiree health benefits, including the Office of Personnel

Management (OPM), which administers FEHBP; (4) 1 association 

representing unions and 1 representing multiemployer plans that sponsor 

retiree health benefit plans for unionized workers;

9

 (5) 2 associations 

representing small to midsized employers; (6) 4 trade organizations, 

including those representing large employers; and (7) 1 professional

 7

“Obligations” are incurred during employees’ active service and refer to projected costs

that employers will likely pay in the future for retirees. 

8

Ten of the 12 Fortune 500 employers we interviewed were selected from the 50 randomly

selected Fortune 500 employers whose financial statements we reviewed; the other 2 

Fortune 500 employers we interviewed were selected prior to our review of financial 

statements on the basis of recommendations by a benefit consultant. 

9

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

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

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

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

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

common in industries that typically include smaller employers and have a mobile

workforce, such as construction, trucking, and communications. A multiemployer plan’s

board of trustees, which has equal representation from labor and management, as opposed

to an individual employer or union, controls the design and financing of the plan. 

Page 3 GAO-05-205 Retiree Health Benefits
organization for actuaries. We focused on trends particularly affecting 

Medicare-eligible retirees, but in some cases when information specific to 

Medicare-eligible beneficiaries was not available, we reported on trends 

affecting all retirees, including those who were under age 65 and those 

who were eligible for Medicare.10 To determine which MMA prescription 

drug coverage options plan sponsors said they would likely pursue and 

what effect these options might have on retiree health benefits, we relied 

primarily on our review of the annual and quarterly financial statements 

that 50 Fortune 500 employers filed with the SEC and on our interviews

with benefit consultants, private and public sector sponsors of

employment-based retiree health benefit plans, and other experts. We also 

interviewed officials at the Centers for Medicare & Medicaid Services 

(CMS), the federal agency that administers Medicare, to obtain

information on MMA prescription drug options for plan sponsors. We

assessed the reliability of the data from the three employer benefit 

nationwide surveys and three large federal surveys and determined that

the data were sufficiently reliable for the purposes of our study. (App. I

provides more detailed information on our methodology.) We performed 

our work from April 2004 through February 2005 in accordance with 

generally accepted government auditing standards.

A long-term decline in the percentage of employers offering retiree health 

coverage has leveled off in recent years, with retirees shouldering a 

steadily increasing share of costs and facing additional constraints on 

eligibility and benefits. Although the percentages and time frames differed,

two employer benefit surveys showed that the percentage of employers 

that offer health coverage to retirees has declined since the early 1990s, 

but this trend has leveled off in recent years. For example, one survey 

found that the percentage of employers with at least 500 employees 

offering coverage to Medicare-eligible retirees declined from about 

44 percent in 1993 to 27 percent in 2001, then remained relatively stable 

through 2004. Meanwhile, the cost for employers and other plan sponsors

to provide health coverage to retirees, including Medicare-eligible retirees, 

has increased significantly, with one employer benefit survey reporting 

double-digit increases each year from 2000 through 2003. Prescription 

drugs represent a large share of these increases and a large share of plan 

Results in Brief

 10For this report, we specify when information is for Medicare-eligible retirees (primarily

those aged 65 years or older) and when it is for retirees under the age of 65. If information 

is not specific to Medicare-eligible retirees or to those under the age of 65, we use the term

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

Page 4 GAO-05-205 Retiree Health Benefits
sponsors’ overall health coverage costs for Medicare-eligible retirees. 

Employers and other plan sponsors have used various strategies to limit 

overall benefit cost growth, usually requiring retirees to pay more for 

coverage and thus contributing to an overall erosion in the value and 

availability of coverage. Cost-cutting strategies have included increasing 

retiree cost sharing; restricting eligibility for benefits, including

eliminating coverage for future retirees; and redesigning prescription drug 

benefits to encourage the use of lower-cost drugs. Public sector sponsors’

measures to cut costs have mirrored those in the private sector, with one 

major difference: they generally have not eliminated coverage for future 

retirees. 

Many employers and other plan sponsors had not made final decisions 

about which MMA drug coverage options they would choose for their 

Medicare-eligible retirees at the time of our review. Although they were in

various stages of decision making, 13 of the 15 plan sponsors we

interviewed were undecided with respect to some or all of their retirees. 

However, most plan sponsors we interviewed were considering the federal 

subsidy as the primary option in their deliberations—2 had chosen the 

subsidy option for all of their retirees; 10 had chosen the subsidy option 

for some of their retirees or were considering it as one of their options; 

and 3, including OPM for FEHBP, said that they would not or did not

expect to choose the subsidy option. Where plan sponsors had set

financial caps on their retiree health benefit obligations, they often were 

considering offering benefits that would wrap around Medicare’s drug 

benefit for all of their retirees or for those retirees whose benefits would 

not qualify for the subsidy. Plan sponsors would offer coverage wrapping 

around Medicare part D rather than providing their own comprehensive 

prescription drug coverage in lieu of the Medicare drug benefit. Also, some

plan sponsors and benefit consultants said they were waiting to see how

the market for other MMA options, such as private health plans offered

through the Medicare Advantage program, developed before they made

final decisions. About two-thirds of the financial statements we reviewed 

from a sample of Fortune 500 employers reporting obligations for retiree 

health benefits had begun to reflect reduced obligations for retiree health

benefits from the federal subsidy or other options, whereas the remainder 

had not reflected any changes as a result of the MMA. Generally, in 

response to our questions about the effects of the MMA on their retiree 

drug coverage, plan sponsors said that they did not anticipate immediately 

reducing the current drug coverage they provided for Medicare-eligible 

retirees but that increasing health care costs might cause them to reduce 

coverage in the future. Benefit consultants and other experts we

interviewed said that the MMA was not likely to induce employers that did

Page 5 GAO-05-205 Retiree Health Benefits
not already offer prescription drug coverage to retirees to begin to provide

such coverage or to supplement the Medicare drug benefit but that each 

employer would have to make this decision while considering its own

financial and business strategy. 

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

agreed with the report’s findings. In its written comments, CMS confirmed 

that many plan sponsors are still considering their options under the MMA. 

Having just released its final rule, CMS stated that it intends to provide 

additional guidance and continue conducting outreach and education 

efforts on the options for retirees’ prescription drug coverage available to 

plan sponsors. While at the time of our interviews OPM officials indicated 

that the agency was considering the federal subsidy for FEHBP, OPM 

indicated in its written comments on a draft of this report that it does not

expect to choose the federal subsidy option, and we revised the report

accordingly. 

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

health insurance coverage. Medicare covered about 41 million 

beneficiaries as of July 2003. The program covers hospital care as well as 

doctor visits and outpatient services but has never covered most

outpatient prescription drugs. 

Under traditional Medicare, eligible individuals may apply for part A, 

which helps pay for care in hospitals and some limited skilled nursing 

facility, hospice, and home health care, and may purchase part B, which 

helps pay for doctors, outpatient hospital care, and other similar services.

Depending on where they live, individuals may have the option of

obtaining traditional Medicare coverage (on a fee-for-service basis) or 

coverage from a managed care or other private plan offered through the 

Medicare Advantage program.11 Many beneficiaries have been attracted to 

Background 

Medicare and 

Supplemental Coverage 

before Implementation of 

Medicare Drug Benefit 

 11The MMA created the Medicare Advantage program to replace the Medicare+Choice

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

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

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

plan options and encourage wider availability of HMOs and other types of health plans,

such as PPOs, as an alternative to traditional fee-for-service. H.R. Conf. Rep. No. 108-391, at

524 (2003). While retaining many of the same provisions in Medicare+Choice, including the 

eligibility, enrollment, grievance, and appeals provisions, Medicare Advantage provides

additional features, such as increased payment rates and a new option for Medicare 

beneficiaries—regional PPOs. MMA § 221, 117 Stat. 2180-93. 

Page 6 GAO-05-205 Retiree Health Benefits
these plans because they typically have lower out-of-pocket costs than feefor-service plans and offer services not covered by traditional Medicare 

prior to the MMA, such as routine physical examinations and most 

outpatient prescription drugs.12 Nearly 4.7 million Medicare beneficiaries 

were enrolled in a local Medicare Advantage plan as of July 2004. 

To cover some or all of the costs Medicare does not cover, such as

deductibles, copayments, and coinsurance, Medicare beneficiaries may 

rely on private retiree health coverage through former employment or

through individually purchased Medicare supplemental insurance (known 

as Medigap).13, 14 For example, for 2001, the Medicare Current Beneficiary 

Survey (MCBS) found that about three-fourths of Medicare-eligible 

beneficiaries obtained supplemental coverage from the following sources: 

a former employer or union (29 percent); individually purchased coverage, 

including Medigap policies (27 percent); both employment-based and 

individually purchased coverage (7 percent); or Medicaid (13 percent).15

About 24 percent had Medicare-only coverage. 

 12For Medicare beneficiaries who purchase part B coverage on or after January 1, 2005, 

Medicare will cover a one-time preventive physical exam within the first 6 months that the

beneficiary is enrolled in part B. MMA sec. 601, § 1861 (s)(2) and (ww), 117 Stat. 2303-24

(to be codified at 42 U.S.C. § 1395x(s)(2) and (ww)).

13Medigap is a privately purchased health insurance policy that supplements Medicare by

paying for some of the health care costs not covered by Medicare. 42 U.S.C. 1395ss (2000). 

Medicare beneficiaries can purchase 1 of 10 standardized Medigap benefit packages. Three

of the 10 standardized Medigap benefit packages offer limited prescription drug benefits, 

paying 50 percent of drug charges up to either $1,250 per year or $3,000 per year after the 

beneficiary pays a $250 deductible. New Medigap plans sold after January 1, 2006, will no 

longer include prescription drug benefits. MMA sec. 104(a)(1), § 1882(v)(1), 117 Stat. 2161

(to be codified at 42 U.S.C. § 1395ss(v)(1)).

14Health plans typically require enrollees to pay a portion of the cost of their medical care. 

These cost sharing arrangements include deductibles, which are fixed payments enrollees

are required to make before coverage applies; copayments, which are fixed payments

enrollees are required to make at the time benefits or services are received; and 

coinsurance, which is a percentage of the cost of benefits or services that the enrollee is

responsible for paying directly to the provider. 

15Low-income Medicare beneficiaries may qualify for assistance from Medicaid, a joint

federal-state program that covers health care services for certain individuals with low

incomes and resources. 42 U.S.C. § 1396 et seq. (2000). For Medicare beneficiaries

qualifying for full Medicaid benefits, known as “dual eligible” individuals, state Medicaid 

programs pay for Medicare’s part A and part B cost sharing requirements up to the 

Medicaid payment rate as well as for services that are not generally covered by Medicare,

including prescription drugs.

Page 7 GAO-05-205 Retiree Health Benefits
Employers generally offer health benefits to retirees on a voluntary basis.16

While these benefits vary by employer, they almost always include 

prescription drugs and often cover both retirees under age 65 as well as

those eligible for Medicare. However, coverage can vary between these 

groups of retirees. For example, premiums are often lower for those aged 

65 and over because Medicare pays for certain costs, and cost sharing 

requirements, which can make retirees more sensitive to the costs of care,

may differ.17 Plan types may also differ based on Medicare eligibility. For 

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

organization (PPO) plan but offer a fee-for-service plan for retirees eligible 

for Medicare. Regardless of the type of plan offered, retirees who have 

employment-based coverage generally have a choice of more than one 

plan. 

Plan sponsors typically coordinate their retiree health benefits with

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

and the plan sponsor as the secondary payer. Several types of

coordination occur between plan sponsors and Medicare. For example, 

some plan sponsors coordinate through a carveout approach, in which the

plan calculates its normal benefit and then subtracts (or carves out) the 

Medicare benefit, generally leaving the retiree with out-of-pocket costs 

comparable to having the employment-based plan without Medicare.

Another approach used by plan sponsors is full coordination of benefits, in

 16Since World War II, many employers have voluntarily sponsored health insurance as a

benefit to employees for purposes of recruitment and retention and some have also offered 

these benefits to their retirees. The federal tax code provides incentives for employers to

offer health benefits because qualified employer contributions do not count as taxable 

income to employees and may be deducted from the employer’s income for tax purposes. 

26 U.S.C. §§ 106(a) and 419(a), respectively (2000). Requirements for most employmentbased health plans for workers or retirees are prescribed by the Employee Retirement

Income Security Act of 1974, which gives employers considerable flexibility to manage the 

cost, design, and extent of health care benefits they provide. 29 U.S.C. §§ 1001 et seq. 

(2000). 

17In 2000, a federal court held that an employer providing Medicare-eligible retirees a health

benefit that is different from that offered to other retirees constitutes age discrimination 

unless, under an exception established by regulation, the health benefits provided by both 

the employer and Medicare are equal to, or cost the employer as much as, the health

benefit provided to other retirees. Erie County Retirees Ass’n v. County of Erie, 220 F.3d

193 (3d Cir. 2000), cert. denied, 532 U.S. 913 (2001). The Equal Employment Opportunity

Commission (EEOC) published a proposed rule on July 14, 2003, that would establish an

additional exception under which altering, reducing, or eliminating health benefits when 

retirees are eligible for Medicare would not constitute age discrimination. 68 Fed. Reg. 

41,542. During a public meeting on April 22, 2004, EEOC voted to approve the final rule, but

before it becomes final, it must be published in the Federal Register. 

Page 8 GAO-05-205 Retiree Health Benefits
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.18 According to 

one employer benefit survey, carveout is the most common type of 

coordination used by employers that sponsor retiree health plans.19

In January 2006, Medicare will begin offering beneficiaries outpatient

prescription drug coverage through a new Medicare part D. Medicare 

beneficiaries who choose to enroll for this voluntary benefit will have 

some of their prescription drug expenditures covered by prescription drug

plans authorized by the MMA.20 In addition to paying a premium—

estimated initially to be about $35 per month ($420 per year)—

beneficiaries must meet other out-of-pocket expense requirements: 

The MMA Established a 

New Prescription Drug 

Benefit for Medicare 

Beneficiaries 

• a $250 deductible; 

• 25 percent of their next $2,000 in prescription drug expenditures; and 

• 100 percent of the next $2,850 in prescription drug expenditures, a 

coverage gap often referred to as the Medicare part D benefit “doughnut 

hole.” 

Medicare beneficiaries must therefore pay $3,600 out-of-pocket for 

prescription drugs in 2006 before part D catastrophic coverage begins. 

Part D catastrophic coverage pays most drug costs once total costs exceed

$5,100, with beneficiaries paying either the greater of a $2 copayment for 

each generic drug and $5 copayment for other drugs, or 5 percent 

coinsurance. Only prescription drug costs paid by the part D enrollee or by 

another person or certain charitable organizations or state pharmaceutical 

assistance programs on behalf of the enrollee, rather than by a plan 

 18Different coordination approaches can result in different costs for plan sponsors and

retirees. For example, consider an individual with total health care costs of $10,000 and 

retiree health benefits paying (without Medicare) $8,500 of these costs. Under full

coordination of benefits, if Medicare paid $8,000, the plan payment would be $2,000, and

the retiree would have no out-of-pocket costs. In a carveout, if Medicare paid $8,000, the 

plan payment would be $500, and the retiree would pay $1,500 out-of-pocket. See Frank B.

McArdle and Dale H. Yamamoto, Hewitt Associates LLC, for the Kaiser Medicare Policy 

Project, Retiree Health Trends and Implications of Possible Medicare Reforms 

(Washington, D.C.: The Henry J. Kaiser Family Foundation, September 1997).

19Kaiser/Hewitt 2004 Survey on Retiree Health Benefits. 

20The initial enrollment period for Medicare part D will run from November 15, 2005, to May

15, 2006. MMA secs. 101 and 102, §§ 1860D-1(b)(2)(A) and 1851(e)(3)(B)(iii), 117 Stat. 2073

and 2152 (to be codified at 42 U.S.C. §§ 1395w-101(b)(2)(A) and 1395w-21(e)(3)(B)(iii)).

Page 9 GAO-05-205 Retiree Health Benefits
sponsor, are considered in determining a beneficiary’s true out-of-pocket

costs. (See fig. 1.) 

Figure 1: Medicare Part D Standard Prescription Drug Benefit 

Deductible

Coinsurance

Coverage gap

Catastrophic 

coveragea

Source: GAO analysis of the MMA.

First $250 in drug 

expenditures:

Total drug expenditures: $250

Beneficiary out-of-pocket costs: $250

Next $2,000:

Cumulative drug expenditures: $2,250

Beneficiary out-of-pocket costs: $750

Next $2,850:% ($0)

Cumulative drug expenditures: $5,100

Beneficiary out-of-pocket costs: $3,600

Rest of drug 

expenditures:

Cumulative drug expenditures: $5,100 or more

Beneficiary out-of-pocket costs: $3,600 or more

Beneficiary cost:

25% ($500)

Medicare cost:

75% ($1,500)

Beneficiary cost:

100% ($2,850)

Medicare cost:

0% ($0)

Beneficiary cost:

5%

Medicare cost:

95%

Beneficiary cost:

100% ($250)

Medicare cost:

0% ($0)

a

If a $2 copayment for generic drugs and a $5 copayment for other drugs is greater than the 5 percent

coinsurance, the beneficiary is required to pay the copayment.

After the part D benefit becomes effective in January 2006, Medicare 

beneficiaries will be able to receive prescription drug coverage in several 

ways, such as the following: 

Page 10 GAO-05-205 Retiree Health Benefits
• Beneficiaries covered through the traditional fee-for-service Medicare 

program will be able to enroll in privately sponsored prescription drug 

plans that contract with CMS to receive their drug benefits. 

• Beneficiaries enrolled in Medicare Advantage plans providing part D 

prescription drug benefits will receive all of their health care services, 

including part D benefits, through their Medicare Advantage plan.21

• Beneficiaries will be able to continue to receive prescription drug benefits

from other sources, such as an employment-based plan, if the plan sponsor

chooses to provide prescription drug coverage to Medicare-eligible 

retirees. 

The MMA creates options and incentives for a current or a potential 

sponsor of an employment-based retiree health plan to provide 

prescription drug coverage to Medicare-eligible retirees. Options for plan 

sponsors under the MMA include the following: 

The MMA Provides Plan 

Sponsors Options and 

Incentives for Providing 

Prescription Drug 

Coverage • Offer retirees comprehensive prescription drug coverage through an 

employment-based plan in lieu of Medicare part D prescription drug

coverage. Under this option, a sponsor of a plan with prescription drug 

coverage actuarially equivalent

22 to that under part D will receive an 

incentive to maintain coverage through a federal tax-free subsidy equal to 

28 percent of the allowable gross retiree prescription drug costs over $250 

through $5,000 (maximum $1,330 per beneficiary) for each individual 

eligible for part D who is enrolled in the employment-based plan. For 2006, 

CMS estimated that the average annual subsidy would be $668 per 

beneficiary.23 In order to qualify for this subsidy, however, a plan sponsor

 21MMA sec. 101, § 1860D-21, 117 Stat. 2122 (to be codified at 42 U.S.C. § 1395w-131). 

Medicare Advantage plans will be required to offer basic drug coverage starting in 2006. 

They may also offer additional drug benefits for an increased cost. A beneficiary enrolled in

a Medicare Advantage plan generally will receive prescription drug coverage through that

plan and may not enroll in a part D prescription drug plan. 

22Specifically, when applying for the subsidy, the plan sponsor will have to provide an

attestation that the actuarial value of its prescription drug benefits available to Medicareeligible retirees is at least equivalent to the actuarial value of the standard part D benefit.

MMA sec. 101, § 1822D-12(a)(2)(A), 117 Stat. 2125, (to be codified at 42 U.S.C. § 1395w132(a)(2)(A)). 

2370 Fed. Reg. 4,194, 4,462 (Jan. 28, 2005). For a plan sponsor in the 35 percent tax bracket,

this would be the equivalent of receiving taxable income of $1,028. In the case of a private

employer, this amount would be in addition to the employer’s savings resulting from the 

deductibility of qualified plan contributions from taxable income. 26 U.S.C. § 419 (2000). 

However, CMS estimated that at least 60 percent of retirees receiving employment-based

prescription drug coverage do so through plan sponsors that are exempt from federal 

income taxes—for example, state and local governments or not-for-profit corporations. 

Page 11 GAO-05-205 Retiree Health Benefits
must attest that the actuarial value of prescription drug coverage under 

the plan is at least equal to the actuarial value of standard Medicare part D 

prescription drug coverage.24 Furthermore, a plan sponsor will receive a 

subsidy only for those Medicare beneficiaries who do not enroll in the 

Medicare part D benefit.

• Offer prescription drug coverage that supplements (“wraps around”) the 

part D benefit, as health plans commonly do for hospital and physician 

services under Medicare parts A and B. 

• Pay all or part of the monthly premium for any of the prescription drug 

plans or Medicare Advantage plans in which Medicare-eligible retirees

(and dependents) choose to enroll.

• Contract with a prescription drug plan or Medicare Advantage plan to 

provide the standard part D prescription drug benefit or enhanced benefits

to the plan sponsor’s retirees who are Medicare-eligible (equivalent to 

offering a fully insured benefit) or become a prescription drug plan or 

Medicare Advantage plan (equivalent to offering a self-insured benefit).

25

Plan sponsors also have other options. As has always been the case, plan 

sponsors could stop providing any type of subsidized health care coverage, 

including prescription drugs, to Medicare-eligible retirees and their 

dependents. While they are not available for current Medicare 

beneficiaries, the MMA also authorized the use of health savings accounts 

(HSA) to which employers and active workers and retirees not eligible for 

Medicare can contribute to cover future health care costs.26 This option 

could provide a means for employees who are not offered employmentbased retiree health coverage to save money for health coverage when 

they retire. 

On August 3, 2004, CMS published a proposed rule for implementing the 

Medicare part D prescription drug provisions of the MMA, and the 

comment period closed October 4, 2004.27 The proposed rule provided a 

preliminary overview of how CMS intended to implement the MMA, 

including the subsidy and other options. On January 28, 2005, CMS 

 2470 Fed. Reg. 4,407. 

25MMA sec. 101, § 1822D-22(b), 117 Stat. 2127 (to be codified at 42 U.S.C. § 1395w-132(b)).

26MMA sec. 1201, § 223, 117 Stat. 2469-79 (to be codified at 26 U.S.C. § 223). Amounts

contributed to HSAs will receive preferential income tax treatment. 

2769 Fed. Reg. 46,632. 

Page 12 GAO-05-205 Retiree Health Benefits
published a final rule implementing the MMA.28 CMS also indicated that it

will provide further guidance relating to the subsidy for plan sponsors 

providing retiree drug coverage. 

The percentage of employers offering health benefits to retirees, including 

those who are Medicare-eligible, has decreased since the early 1990s, 

according to employer benefit surveys, but offer rates have leveled off in 

recent years. At about the same time, the percentage of Medicare-eligible

retirees aged 65 and older with employment-based coverage has remained 

relatively consistent. Meanwhile, employment-based retiree health plans 

experienced increased costs to provide coverage, with one employer 

benefit survey citing double-digit annual average increases from 2000 

through 2003. Financial statements we reviewed for a random sample of 50

Fortune 500 employers showed that over 90 percent of the employers that

offered retiree health coverage had increased postretirement benefit 

obligations from 2001 through 2003. Private and public plan sponsors, 

including those that provide coverage for Medicare-eligible retirees, have

responded to increasing costs by implementing strategies that require 

these retirees to pay more for coverage and thus contribute to a gradual 

erosion of the value and availability of benefits. 

Employer benefit surveys reported that the percentage of employers 

offering health benefits to retirees has decreased since the early 1990s;

however, these offer rates have remained relatively stable in recent years. 

A series of surveys conducted by Mercer Human Resource Consulting 

indicated that the portion of employers with 500 or more employees

offering health insurance to Medicare-eligible retirees declined from 44 

percent in 1993 to 27 percent in 2001, and leveled off from 2001 through

2004, with approximately 28 percent offering the benefits to Medicareeligible retirees in 2004 (see fig. 2).

29 A second series of surveys conducted 

by the Kaiser Family Foundation and Health Research and Educational

Trust (Kaiser/HRET) estimated that the percentage of employers with 200 

or more employees offering retiree health coverage—for those MedicareLong-term Decline in 

Employment-Based 

Retiree Health 

Coverage Has Leveled 

Off, with Retirees 

Paying an Increasing 

Share of the Costs 

Employer Benefit Surveys 

Show Decrease in Share of 

Employers Offering Health 

Benefits to Retirees, but 

Trend Has Leveled Off in

Recent Years 

 2870 Fed. Reg. 4,194. In its written comments, CMS indicted that it released this final rule on

January 21, 2005. 

29See, for example, Mercer Human Resource Consulting, National Survey of EmployerSponsored Health Plans 2004 (forthcoming). 

Page 13 GAO-05-205 Retiree Health Benefits
eligible or those under age 65 or both30—decreased from 46 percent in 

1991 to 36 percent in 1993 and then leveled off from 1993 through 2004, 

with approximately 36 percent of employers with 200 or more employees

offering retiree health benefits to these groups in 2004 (see fig. 3).

31 For 

Medicare-eligible retirees specifically, the percentage of employers in the 

Kaiser/HRET survey offering coverage fluctuated from 1995 to 2004, but 

differed by only 1 percentage point in 1995 (the earliest data available) and 

2004, with 28 and 27 percent of employers, respectively, offering coverage 

in these 2 years. Coverage for early retirees, those under age 65, has also 

been significantly affected since the early 1990s. For example, the Mercer 

surveys showed a steady decline in employers with 500 or more employees

offering coverage to this population from 50 percent in 1993 to 34 percent 

in 2001, although this percentage has generally leveled off since 2001. 

 30Unless otherwise specified, the percentage of employers in the Kaiser/HRET study that

offer retiree health benefits may include employers that offer health benefits to Medicareeligible retirees, retirees under age 65, or both. 

31Gary Claxton and others, The Kaiser Family Foundation; and Jon Gabel and others, 

Health Research and Educational Trust, Employer Health Benefits 2004 Annual Survey

(Menlo Park, Calif., and Chicago, Ill.: The Henry J. Kaiser Family Foundation, 2004), 

http://www.kff.org/insurance/7148/index.cfm (downloaded Dec. 8, 2004). 

Page 14 GAO-05-205 Retiree Health Benefits
Figure 2: Mercer Survey Results—Percentage of Employers with 500 or More

Employees Offering Health Benefits to Medicare-Eligible Retirees, 1993-2004 

Notes: Based on employer benefit surveys from 1993 through 2004. The Mercer data include

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

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

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

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

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

2003 survey, we have excluded data for 2002. Although Mercer provided us with the 2004 data, the 

comprehensive 2004 annual report will not be available until March 2005.

0

10

20

30

40

50

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

Percentage

Sources: Mercer Human Resource Consulting; William M. Mercer, Incorporated; and Foster Higgins.

44

28

Not available

Page 15 GAO-05-205 Retiree Health Benefits
Figure 3: Kaiser/HRET Survey Results—Percentage of Employers with 200 or More

Employees Offering Health Benefits to All Retirees and to Medicare-Eligible

Retirees, 1991-2004 

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

from 1999 through 2004. The data for “all” retirees may include employers that offer health benefits to

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

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

1996.

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

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

the retiree health benefits data were not statistically different.

Employer benefit consultants and the 15 private and public sector plan 

sponsors that we interviewed consistently cited a general erosion in health

benefits for all retirees, including those who are Medicare-eligible, but

some officials we interviewed also told us that plan sponsors that could 

eliminate benefits had already done so, which is consistent with the period

of leveling off shown in the Mercer and Kaiser/HRET surveys. For 

example, although the provision of health benefits for all retirees by 

employers is generally voluntary, officials we interviewed noted that

employers that continue to offer retiree health benefits may be limited in

their ability to decrease benefits further because of existing contracts with 

unions, which are generally negotiated every 3 to 5 years. According to the 

15 private and public sector plan sponsors and employer benefit

consultants that we interviewed, many plan sponsors have restricted 

coverage for future retirees—including those who are Medicare-eligible—

0

10

20

30

40

50

All

Medicare-eligible

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

Percentage

Sources: Kaiser/HRET and KPMG Peat Marwick.

46

36

27

Not available

28

Page 16 GAO-05-205 Retiree Health Benefits
but have continued to offer benefits to existing retirees, which would also

contribute to a leveling off of these rates. 

Large employers are more likely than small employers to offer retiree 

health coverage, including coverage for Medicare-eligible retirees. For 

example, Kaiser/HRET data for 2004 showed that 36 percent of employers 

with 200 or more employees offered health benefits to retirees compared 

to approximately 5 percent of employers with 3 to 199 employees. Within 

the Mercer and Kaiser/HRET definitions of large employers (at least 500 

and at least 200 employees, respectively), those with the greatest numbers 

of employees were the most likely to sponsor health benefits for retirees. 

For example, Kaiser/HRET reported that approximately 60 percent of

employers with 5,000 or more employees offered health benefits in 2004 to

retirees compared to about 31 percent of employers with 200 to 999 

employees. Based on the 2003 Mercer survey, 63 percent of employers 

with 20,000 or more employees offered coverage specifically to Medicareeligible retirees compared to 23 percent of employers with 500 to 999 

employees.32

In addition, employers with a union presence were more likely to offer 

retiree health coverage than those employers without a union presence. 

According to the 2004 Kaiser/HRET survey, among employers with 200 or 

more employees, 60 percent of these employers with union employees 

offered health coverage to retirees compared to 22 percent of these 

employers without union employees. 

The provision of retiree health coverage also varies between the private 

and public sector and by industry type. For example, employers in the 

public sector were more likely than employers in the private sector to 

offer coverage to retirees, including those who are Medicare-eligible. All 

federal government retirees—Medicare-eligible and those under age 65—

are generally eligible for FEHBP health benefits and pay the same 

premiums as active federal workers for the same benefits, including 

 32Mercer Human Resource Consulting, National Survey of Employer-Sponsored Health

Plans: 2003 Survey Report (New York, N.Y.: Mercer Human Resource Consulting, Inc.,

2004). 

Page 17 GAO-05-205 Retiree Health Benefits
prescription drugs.33 State plan sponsors also typically have higher offer 

rates than private sector employers for retirees. For example, the 2004 

Kaiser/HRET study showed that 77 percent of state and local government 

employers with 200 or more employees offered coverage to retirees 

compared with the average offer rate of 36 percent across all employer 

industries. For retirees aged 65 and older, Medical Expenditure Panel

Survey (MEPS) data for 2002 indicated that approximately 86 percent of 

state entities offered health insurance to this group of retirees.34 After 

government employers, according to the 2004 Kaiser/HRET study, the

industry sector with the next highest percentage offering retiree coverage 

was transportation/communication/utility, with 53 percent of all

employers in this industry sector (200 or more employees) offering health

benefits to their retirees in 2004. The industry sectors in this survey least 

likely to offer coverage were health care and retail, with 22 percent and 

10 percent, respectively, of employers (200 or more employees) in these 

industry sectors offering retiree health benefits. 

The overall percentage of Medicare-eligible retirees and their insured 

dependents aged 65 and older obtaining employment-based health benefits

through a former employer has remained relatively consistent from 1995 

through 2003, based on data from the U.S. Census Bureau’s Current

Population Survey (CPS). According to our analysis of CPS data, the 

percentage of Medicare-eligible retirees aged 65 and older with 

employment-based health coverage and their insured dependents was 

Percentage of MedicareEligible Retirees with 

Employment-Based Health 

Coverage Remained 

Consistent 

 33To qualify, a federal retiree must have been continuously enrolled (or covered as a family 

member) in any FEHBP plan(s) for the 5 years of service immediately before retirement

begins, or for the full period(s) of service since the first opportunity to enroll (if less than 5 

years). 5 U.S.C. § 8905(b) (2000). When a federal retiree covered by Medicare uses health

care, the bill for the care is sent first to Medicare, which pays for covered care according to

its payment rules and then the bill is sent to the FEHBP plan, as secondary payer, which 

pays for care covered under its policy that is not covered by Medicare. In 2003, OPM

reported that about 2.6 million people (including spouses, dependents, and survivors)

received benefits through retirees who were enrolled in FEHBP. Of this group, 

approximately 1.7 million were Medicare beneficiaries. 

34This percentage had increased from about 69 percent in 1998. MEPS also reported for

both 1998 and 2000 that about 80 percent of full-time employees at large public sector

employers (1,000 or more employees) worked where health insurance was offered to 

retirees aged 65 and older.

Page 18 GAO-05-205 Retiree Health Benefits
approximately 32 percent in 1995 and 31 percent in 2003.35 Among 

Medicare-eligible retirees and their insured dependents aged 65 through 69

and aged 70 through 79, there was a modest decline in the percentage with 

employment-based health coverage from 1995 through 2003, but a modest

increase among Medicare-eligible retirees and their insured dependents 

aged 80 and over (see fig. 4). The modest decline among those aged 65 

through 69 and aged 70 through 79 relative to all Medicare-eligible retirees

aged 65 and over may be because plan sponsors are more likely to reduce 

benefits for future or recent retirees than for all retirees. Thus, the effect 

of changes that plan sponsors have made to their retiree health benefits

may take additional time to be evident in the percentage of current retirees

receiving employment-based health benefits. 

 35These percentages include retirees aged 65 or over with employment-based health

coverage from a former employer or union as well as the insured dependents of these

individuals who are also Medicare-eligible retirees aged 65 or over and who have

employment-based health coverage, such as spouses. 

Page 19 GAO-05-205 Retiree Health Benefits
Figure 4: Percentage of Medicare-Eligible Retirees and Their Insured Dependents 

with Employment-Based Health Benefits, by Age Group, 1995-2003 

Notes: Based on the March CPS Supplement from 1996 through 2002 and the Annual Social and 

Economic Supplement to the CPS from 2003 through 2004. The age categories for insured 

dependents are based on the age of the actual individual, not the primary policyholder. For example,

an 80-year-old insured dependent is counted as 80 years of age regardless of the age of the primary

policyholder. All differences by age group comparing 1995 to 2003 CPS data are statistically

significant. 

Retiree health costs continue to increase for many plan sponsors of retiree 

health coverage, including those that provide coverage to Medicareeligible retirees. Our analysis of financial statements filed with the SEC by 

a sample of 50 Fortune 500 employers pointed to increases—some 50

percent or higher—in employers’ obligations for postretirement benefit

obligations from 2001 through 2003. Employer benefit surveys and our 

interviews with officials from 15 private and public plan sponsors have 

also cited increased retiree health costs. These increases often have

prompted plan sponsors to attempt to contain cost growth to provide 

coverage in a variety of ways, including requiring greater cost sharing from

retirees. 

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003

65 to 69 

70 to 79

80 and older

Source: GAO analysis of March CPS Supplement and Annual Social and Economic Supplement to the CPS.

Percentage

39

33 35

31

21

27

Age in years

Faced with Increasing 

Costs, Plan Sponsors Have 

Implemented Various CostCutting Strategies, Which 

Often Require Retirees to 

Pay More for Coverage 

Page 20 GAO-05-205 Retiree Health Benefits
The cost of providing retiree health coverage—and prescription drug costs

in particular—is increasing for many plan sponsors. Financial statements 

filed with the SEC by 50 randomly selected Fortune 500 employers showed

that over 90 percent of the 38 employers that reported postretirement 

benefit obligations from 2001 through 2003 had an increase in these 

obligations during this period.36 About 20 percent of these 38—8 

employers—had an increase in their obligations above 50 percent, while 

one-third of these 38—13 employers—had an increase of between 25 and 

50 percent from 2001 through 2003. During this same period, the Bureau of 

Labor Statistics estimated that the Consumer Price Index, which reports 

prices for all consumer items, increased 5.3 percent, a 1.8 percent average 

annual rate of increase. Over 80 percent of the 38 employers that reported 

postretirement benefit obligations from 2001 through 2003 had a change in

their postretirement benefit obligations that exceeded the Consumer Price

Index increase of 5.3 percent for all consumer items from 2001 through 

2003.37

Data from employer benefit surveys also showed increased costs for plan

sponsors for roughly the same period. For example, a survey conducted in

2004 by the Kaiser Family Foundation and Hewitt Associates reported that 

the total cost of providing health benefits to all retirees for employers 

surveyed (1,000 or more employees) rose rapidly between 2003 and 2004, 

with an estimated average annual increase of nearly 13 percent.

38 Mercer

data projections by employers for 2003 also showed an average annual 

cost increase of approximately 11 percent from 2002 for Medicare-eligible 

retirees from—$2,702 to $3,003—the fourth straight year of double digit 

increases. (For active employees, employers in the Mercer survey reported 

Increasing Cost of Providing 

Retiree Health and Prescription 

Drug Coverage 

 36The postretirement benefit obligations included retiree health benefits and other

postretirement benefits, but not pensions. One employer in our sample of 50 Fortune 500 

employers that sponsor health coverage for retirees is not included in this analysis because 

it did not report postretirement benefit obligations for 2001 and 2003. 

37The Consumer Price Index for medical care increased by 13.1 percent from 2001 through 

2003, an average annual increase of 4.3 percent. 

38Kaiser/Hewitt 2004 Survey on Retiree Health Benefits. The data in this report reflect the

responses of 333 private sector employers with 1,000 or more employees that offered 

health benefits to retirees at the time of the survey. Because the sample in this study is

nonrandom, its results cannot be compared to data from prior Kaiser/Hewitt surveys. 

Page 21 GAO-05-205 Retiree Health Benefits
a 10 percent increase in 2003 in the average total health benefit cost from

2002.39) 

The cost for public sector plan sponsors to provide retiree health

coverage, both for Medicare-eligible retirees and those under age 65, is 

also increasing. For example, one public sector plan sponsor we

interviewed reported that retiree health care costs had doubled in a 6-year 

period, from $440 million in 1998 to over $900 million in 2003, with an 

average annual cost in 2004 of $3,542 per Medicare-eligible retiree,

compared to $1,822 per Medicare-eligible retiree in 1998. For FEHBP, as 

set in statute, the federal government pays 72 percent of the weighted 

average premium of all health benefit plans participating in FEHBP but no 

more than 75 percent of any health benefit plan’s premium.40 Thus, retirees

and active workers pay approximately 28 percent of their plan 

premiums—a share that has not changed since it became effective in 

January 1999.41 While the percentage of plan premiums contributed by the 

government has remained constant in recent years, the actual rates have 

increased over time. In December 2002, we reported that health insurance 

premiums for FEHBP plans had increased on average about 6 percent per 

year from 1991 through 2002.42 According to OPM, average FEHBP 

premiums increased by 11 percent in 2003, about 11 percent in 2004, and 

about 8 percent for 2005.

Prescription drug benefits represent a large share of plan sponsors’ retiree 

health costs, particularly for Medicare-eligible retirees. In 2002,

prescription drug costs were cited as a key driver of increases in 

employment-based retiree health costs and were estimated to be typically 

50 to 80 percent of an employer’s total health care costs for Medicare-

 39Mercer noted that the 10 percent increase in the average total health benefit cost for 

active employees was less than the previous annual increase of 14.7 percent that occurred 

between 2001 and 2002 and likely reflected steps taken by employers to cut costs, such as

changing plan design to increase employee out-of-pocket costs, reducing covered services, 

and dropping costly plans. Costs reported for active employees and retirees include both

employer and employee/retiree shares. 

405 U.S.C. § 8906(b)(1) and (2) (2000). 

41The Balanced Budget Act of 1997 authorized the current formula for calculating the 

federal government’s share of FEHBP premiums, effective January 1999. Pub. L. No. 105-33, 

§ 7002, 111 Stat. 251, 662. 

42See GAO, Federal Employees’ Health Plans: Premium Growth and OPM’s Role in

Negotiating Benefits, GAO-03-236 (Washington, D.C.: Dec. 31, 2002). 

Page 22 GAO-05-205 Retiree Health Benefits
eligible retirees.43 According to 2001 MCBS data, prescription drug 

expenditures for retired Medicare beneficiaries that were paid by 

employment-based insurance accounted for 45 percent of all health care 

expenditures for these beneficiaries. Three Fortune 500 employers we

interviewed reported that prescription drug costs for Medicare-eligible 

retirees and their dependents ranged from approximately 56 to 64 percent 

of their total estimated annual cost of providing health benefits for this

same population. 

Faced with increasing costs, private sector plan sponsors have

implemented certain strategies to reduce these obligations that often 

require retirees to pay more for coverage and contribute to a general

erosion in the value and availability of health coverage for retirees. For 

example, many plan sponsors have increased cost sharing through 

increased copayments, coinsurance, and premium shares; restricted

eligibility for benefits based on retirement or hiring date; implemented 

financial caps or other limits on plan sponsors’ contributions to coverage; 

and made changes to prescription drug benefits, such as creating tiered 

benefit structures and increasing retiree out-of-pocket contributions. 

These cost-cutting strategies are not new—in 2001 we reported that

employers had implemented similar mechanisms designed to control 

retiree health care expenditures.44 However, according to private plan 

sponsors we interviewed, the share of costs paid by retirees is increasingly 

affected as the plan sponsors reach and enforce financial caps and other 

limits they had set. While these strategies are intended to limit the increase

in plan sponsor obligations, the information provided by employer benefit

surveys and the plan sponsors and consultants we interviewed did not 

specify the magnitude of any decrease in plan sponsors’ costs for retiree 

health benefits that could be attributed to these changes. 

Increasing Retirees’ Cost Sharing. One strategy that plan sponsors 

have adopted to limit their obligations for retiree health costs is increasing

the share of costs for which the retiree is responsible. For example, 

employers have increased retiree copayments and coinsurance. When 

asked about changes made “in the past year,” Kaiser/Hewitt reported that

Private Sector Plan Sponsors’ 

Cost-Cutting Strategies

 43Anna Rappaport and Derek Guyton, Mercer Human Resource Consulting, Retirees and 

Focused Prescription Drug Programs (New York, N.Y.: Apr. 18, 2002), 

http://www.mercerhr.com/knowledgecenter/reportsummary.jhtml?idContent=1011310

(downloaded Dec. 29, 2004). 

44GAO-01-374. 

Page 23 GAO-05-205 Retiree Health Benefits
nearly half of its surveyed private employers (1,000 employees or more)

had increased cost sharing.45 The majority of employers in the 

Kaiser/Hewitt study reported that they expected to make similar increases 

“for the 2005 plan year,” with 51 percent indicating they were very or 

somewhat likely to increase retiree coinsurance or copayments. These 

increases are consistent with the changes cited in our interviews with 

private employers and with officials we interviewed at other organizations, 

including benefit consulting firms and an organization representing 

unions. For example, 

• one employer we interviewed reported cost sharing increases for all 

retirees every year since 1993; 

• another employer we interviewed introduced a mix of coinsurance and 

copayment requirements in January 2004 to address rising health care 

costs and make retirees more aware of the cost of the benefits they 

received; and 

• a third employer we interviewed that had historically paid approximately

90 percent of total retiree health care costs was planning to increase the 

share of costs borne by retirees who had retired prior to 1994 from

approximately 10 percent to 20 percent of health care costs by 

January 1, 2006. 

Increasing Premiums. Increased contributions by retirees to health care 

premiums is another area where plan sponsors have continued to make 

changes to control their health care expenditures. Kaiser/Hewitt data

showed that 79 percent of surveyed employers had increased retiree 

contributions to premiums in the past year, and 85 percent reported that

they were very or somewhat likely to increase these contributions for the 

2005 plan year. Retiree contributions for new retirees aged 65 and over

increased, on average, 24 percent from 2003 to 2004, according to the 

Kaiser/Hewitt study. The Mercer 2003 study reported that employers 

varied retiree premium contributions, with Medicare-eligible retirees 

paying on average about 38 percent of plan premiums when the cost was 

shared between the employer and the retiree, an increase of

approximately 4 percentage points since 1999.46 Four of the 12 Fortune 500 

 45The survey was conducted from May through September 2004. Unless specifically noted,

the data reported by Kaiser/Hewitt regarding the changes made by employers “in the past

year” and the changes that employers expect to make “for the 2005 plan year” were not

specific to Medicare-eligible retirees or retirees under age 65.

46Data reported for retiree-only coverage. The Mercer survey sample also included some

government agencies. 

Page 24 GAO-05-205 Retiree Health Benefits
plan sponsors we interviewed also reported changes to premiums. For

example, one plan sponsor made a change in 2004 to increase premiums 

for all individuals retiring after January 1, 2004, consistent with increases 

in premiums for active workers, whereas previously retirees kept the same 

premiums for life. Officials we interviewed representing unions and their 

members also cited increased premiums for many retired union workers. 

Some employers are also beginning to offer access-only coverage to some 

or all retirees, in which employers allow retirees to buy into a health plan 

at the group rate, but without any financial assistance from the employer. 

For example, according to 2003 Mercer data, about 37 percent of retiree 

health plans for employers with 500 or more employees required 

Medicare-eligible retirees to pay the full cost of the employment-based 

plan. Thirteen percent of the Kaiser/Hewitt employers reported making a 

change in the past year to provide access-only coverage to retirees, with 

retirees paying 100 percent of the costs. A supplement to the 2004 

Kaiser/HRET survey examined the percentage of Medicare-eligible retirees

with access-only coverage and found that 5 percent of Medicare-eligible 

individuals who are retired from employers with 200 or more employees

that offer retiree health benefits had such coverage.

47 While 5 of the 12 

Fortune 500 plan sponsors we interviewed had implemented access-only 

coverage, 1 of these plan sponsors had implemented this level of coverage 

for all of its retirees in the early 1990s in response to health care costs. The 

other 4 plan sponsors had implemented the access-only change at a later 

date, implementing it for some or all employees ranging from those hired 

after January 1, 1995, to those retiring on or after January 1, 2007. 

Reducing Benefits for Future Retirees. Implementing access-only 

coverage is often part of a broader movement by plan sponsors to restrict

eligibility or offer reduced benefits for employees who are hired or retire 

after a certain date. In December 2004, Kaiser/Hewitt reported that 

8 percent of surveyed employers (with 1,000 or more employees) said they 

had made a change “in the past year” to eliminate their subsidized health 

benefits for future retirees, typically for those hired after a specific date. 

Of the 12 Fortune 500 plan sponsors we interviewed, 5 plan sponsors had 

eliminated retiree health coverage for some or all individuals hired after a 

certain date, ranging from January 1, 1993, to January 1, 2003, while 4 of

 47“Retiree Health Benefits, 2004: The Medicare Payment Advisory Commission’s

Supplement to the Kaiser/HRET Survey of Employer-Sponsored Health Benefits” (public

meeting sponsored by the Medicare Payment Advisory Commission, Ronald Reagan 

Building, Washington, D.C., Nov. 16, 2004). 

Page 25 GAO-05-205 Retiree Health Benefits
the 5 plan sponsors that had switched to providing access-only coverage 

did so for some or all of their future retirees. Some plan sponsors said that

they generally avoided making changes for current retirees rather than for 

future retirees, who may be in a position to make other arrangements. In

addition, plan sponsors generally tried to minimize the disruption when 

making changes for those already in retirement. For example, one Fortune 

500 plan sponsor we interviewed carried 15 separate health plans for 

several years that had accumulated as the result of grandfathering in 

current coverage levels for existing retirees. It was only in 2003 that the

company consolidated the 15 plans into 3 plans and instituted changes 

affecting both existing and some future retirees. Plan sponsors that have

either eliminated coverage or created access-only plans for some or all 

retirees generally reported that recruitment had not been affected. One 

plan sponsor we interviewed, however, noted that current employees’ 

retirement planning could be affected, as some employees might stay 

longer with the company because they could not afford to retire. This 

sentiment is consistent with data reported in Mercer’s 2003 annual survey

of employer-sponsored health plans showing that retirees tended to delay 

retirement when their employers did not sponsor retiree medical plans. 

Introducing and Enforcing Financial Caps. In 2001, we reported that

some employers had established caps and other limits on expenditures for 

retiree health benefits, but it was not clear at that time how employers 

would ensure that spending did not exceed the caps and how coverage 

would be affected.48 Employers began to implement caps in response to

rising retiree health costs and to accounting changes introduced in the 

early 1990s when the Financial Accounting Standards Board (FASB) 

adopted Financial Accounting Standards (FAS) 106, requiring employers 

to report annually on the obligation represented by the promise to provide 

retiree health benefits to current and future retirees.

49 The 2003 annual 

survey of employer-sponsored health plans conducted by Mercer shows 

 48GAO-01-374. 

49FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, 

required employers to report accrued retiree medical obligations beginning with plan years

starting after December 15, 1992 (implementation for some employers began after

December 15, 1994). By capping employer premium contributions above the then-current

levels, employers could substantially reduce their obligations and still shield retirees from

large premium increases. Some employers have said that FAS 106 requirements were a

reason for reducing retiree health benefits. While FAS 106 did not affect an employer’s cash

flow, there was concern that listing this future obligation could affect companies’ stock 

prices because the reporting of projected retiree health care costs affects the overall

statement of financial profitability. 

Page 26 GAO-05-205 Retiree Health Benefits
that 18 percent of employers with 500 or more employees have 

implemented caps, while an additional 10 percent of such employers were 

considering them. Caps were most common among the employers with the 

largest number of employees in the Mercer study (20,000 or more 

employees); 33 percent of such employers had implemented these limits

on overall spending and 9 percent were considering them. Similarly, 

54 percent of employers with 1,000 or more employees offering retiree 

coverage in the 2004 Kaiser/Hewitt employer survey reported having 

capped contributions. Ninety percent of employers in the Kaiser/Hewitt

study that have hit caps or anticipated hitting caps in the next year 

reported that they intended to enforce them or already had. 

Of the 12 Fortune 500 plan sponsors we interviewed, 8 had implemented 

capped contributions or other limits on retiree health spending. For 

example, 1 plan sponsor reported monthly caps of $217 per person for 

nonunionized retirees under age 65 and $51 per person for nonunionized

Medicare-eligible retirees. Another plan sponsor provided fixed company 

health care credits for its retirees under age 65 (unionized and 

nonunionized) in which an individual could receive up to $3,750 to apply

to the plan sponsor’s estimate for health care costs for a retiree under age 

65. While many plan sponsors had implemented these types of limits, they

varied as to whether all groups of retirees were affected and whether the 

caps had been reached and thus enforced. For example, 2 of the 12

Fortune 500 plan sponsors we interviewed had capped benefits for some 

individuals depending on the individual’s date of retirement (typically

more recent retirees were affected), and in some cases the caps varied by 

whether retirees were part of a union or former employees of an acquired

company. The plan sponsors we interviewed whose retiree health benefit

costs had reached the caps generally were enforcing them. For example, 

one plan sponsor required some retirees—both Medicare-eligible and 

those under age 65—to pay a portion of premiums for the first time after

the plan’s costs reached the cap in 2002. However, implementing and 

enforcing caps can be an issue in union negotiations. One plan sponsor we

interviewed had opted in the past to negotiate benefit changes with unions 

to delay hitting the caps, but now expects to hit and enforce the caps by 

2007. Another plan sponsor, while enforcing the financial caps for retiree

health benefits, has agreed in some union negotiations to give retirees an 

additional contribution toward health care expenses that effectively

offsets the premium increases triggered by reaching the caps. A few plan 

sponsors and benefit consultants we interviewed noted that employers are

more likely today to enforce caps than to raise them. For example, the 

2003 Kaiser/Hewitt study stated that there is some concern that auditors 

Page 27 GAO-05-205 Retiree Health Benefits
will question the effectiveness of a cap if there is a pattern of continually 

raising it once costs approach the set limit. 

Implementing Changes to Prescription Drug Benefit Design. Given 

the sensitivity of retiree health benefits to prescription drug costs, many 

plan sponsors have made changes to prescription drug benefits. The 

primary mechanisms cited by the 2004 Kaiser/Hewitt employer benefit 

survey and benefit consultants and the 12 Fortune 500 plan sponsors we

interviewed included increasing copayments; switching from copayments

to coinsurance; and implementing tiered benefit structures in which

generic drugs, formulary/preferred drugs, and nonformulary/nonpreferred 

drugs are subject to different retiree copayment and coinsurance rates. 

Over half of the employers in the 2004 Kaiser/Hewitt study reported having 

increased copayments or coinsurance for prescription drugs in the past 

year, and 15 percent had replaced fixed-dollar copayments with 

coinsurance in the past year. Over half of the plan sponsors offered a 

three-tiered benefit structure, and among plans with this design, about

two-thirds require copayments and nearly one-fourth required coinsurance 

for retail pharmacy purchases. In addition, about one-fourth of the

Kaiser/Hewitt-surveyed employers had instituted a three-tiered drug plan 

in the past year to save money. 

The 12 Fortune 500 plan sponsors we interviewed echoed these types of

changes in their prescription drug benefit for retirees within the last 5 

years. For example, 3 plan sponsors had instituted retiree coinsurance 

requirements, which can make retirees more price conscious because the

retiree out-of-pocket cost is higher for more expensive drugs than for less 

expensive drugs. One plan sponsor reported it had increased drug

copayments for retirees. Several of the 12 Fortune 500 plan sponsors we

interviewed already had tiered benefits in place. One plan sponsor had

implemented a three-tiered structure as well as mandatory use of a mailorder pharmacy for some prescription drugs. Another plan sponsor

reported it planned to implement “step-therapy” in January 2005, in which 

retirees would have to demonstrate the ineffectiveness of a lower-cost

generic drug before receiving coverage for a higher cost brand-name drug. 

Officials we interviewed representing unions and their members noted 

similar prescription drug trends for many former union workers. 

While public sector plan sponsors generally offer more coverage than 

those in the private sector, these plan sponsors are also starting to

implement cost-cutting mechanisms similar to those implemented in the 

private sector, with one major exception—they generally are not 

eliminating retiree health benefits for future retirees. For example, in

Public Sector Plan Sponsors’

Cost-Cutting Strategies

Page 28 GAO-05-205 Retiree Health Benefits
December 2002, we reported that FEHBP plans had implemented some 

benefit reductions for all enrollees—mostly by increasing enrollee cost

sharing.50 We reported that three large fee-for-service plans had increased 

or introduced cost sharing features such as copayments or coinsurance for

prescription drugs and deductibles for other services.51 OPM officials

informed us that FEHBP plans have implemented cost-containment 

strategies relating to prescription drugs, such as three-tiered cost sharing, 

comparable to private sector employers. However, OPM does not 

implement cost-containment strategies for retirees that do not also affect 

active workers. 

Similarly, other public sector plan sponsors, such as state governments, 

are starting to reduce benefit levels and implement cost-cutting 

mechanisms, including changes to prescription drug benefits. However, 

eliminating retiree health benefits entirely for current or future retirees 

does not appear to be as prevalent in the public sector as the private 

sector. For example, a 2003 survey conducted by the Segal Company, a 

benefit consulting firm specializing in the public sector, reported that no 

state plan sponsor in its survey was considering eliminating retiree health 

coverage as a cost-containment strategy.

52 A 2003 study prepared by 

Georgetown University for the Kaiser Family Foundation that collected 

survey data from 43 states and the District of Columbia also found that no

state government had terminated subsidized health benefits for current or 

future retirees and no state government was planning to do so.53 However,

the Georgetown study found that 24 of these states reported increased 

cost sharing in the past 2 years, while 13 had increased retiree premium 

shares in the past 2 years. A study released by AARP in July 2004 on state 

government retiree health benefits found that 11 states required Medicare-

 50GAO-03-236. 

51In 1990, OPM required all FEHBP plans to provide prescription drug coverage. 

52The Segal Company, 2003 Segal State Health Benefits Survey: Medical Benefits for

Employees and Retirees (n.p.: The Segal Group, Inc., 2003), 

http://www.segalco.com/government/pub-govt.cfm?ID=458 (downloaded Dec. 2, 2004).

Segal surveyed all 50 states after collecting information available on state Web sites and 

requesting enrollment packages from each state. Thirty-nine states provided their

enrollment packages and 34 states completed all or portions of the survey questionnaire.

According to the report, the survey covers more than 80 percent of total state health plan 

enrollment, representing more than 3 million employees and retirees. 

53Jack Hoadley, Health Policy Institute, Georgetown University, How States Are 

Responding to the Challenge of Financing Health Care for Retirees (Menlo Park, Calif.: 

The Henry J. Kaiser Family Foundation, September 2003). 

Page 29 GAO-05-205 Retiree Health Benefits
eligible retirees to pay the full amount of the premium.

54 Almost all of the 

states in the Georgetown study cited prescription drugs as the most

important driver behind the growth in state retiree health spending and, as

a result, have taken specific steps to manage these costs, such as

increasing cost sharing and implementing tiered benefit structures. The 

majority of states in the AARP study had three-tiered copayment benefits. 

One public sector plan sponsor we interviewed is proposing significant

changes to keep its retiree health benefits fund solvent that would vary the 

employer’s contribution toward retiree health care costs on the basis of 

the retiree’s age and years of service, rather than paying the full cost of 

coverage for those meeting the minimum age and service requirements. 

Benefit consultants and officials from other organizations we interviewed 

noted new pressures on public sector funding of retiree health care 

benefits as a result of standards adopted in 2004 by the Governmental

Accounting Standards Board (GASB) that affect the reporting of

postretirement benefit obligations for many public sector sponsors of

employment-based retiree health coverage.55 Similar to FAS 106 for private 

sector employers, the new standards require public sector plan sponsors, 

including state governments, to accrue the costs of postretirement health 

care benefits during the years of service as opposed to reporting these 

costs on a pay-as-you-go basis. However, the GASB standards are not

identical to those in the private sector, and the July 2004 AARP study 

noted that it is unclear whether the experience of FAS 106—and its 

frequently cited impact on the decrease in employment-based retiree 

health coverage—would directly translate to the public sector. While the

study stated that the new GASB standards might encourage state 

governments to reduce retiree health benefit programs in order to reduce 

 54Stan Wisniewski and Lorel Wisniewski, State Government Retiree Health Benefits: 

Current Status and Potential Impact of New Accounting Standards (Workplace 

Economics, Inc., commissioned by the AARP Public Policy Institute) (Washington D.C.: 

AARP, July 2004), http://research.aarp.org/health/2004_08_benefits.html (downloaded July

29, 2004). 

55Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than 

Pension Plans, and Statement No. 45, Accounting and Financial Reporting by Employers 

for Postemployment Benefits Other Than Pensions. The requirements apply to all public

sector plans that cover postemployment benefits (other than pensions) and the sponsoring 

entities, such as public employee retirement systems, public colleges, and hospitals. The 

standards are effective in three phases based on a public sector entity’s total annual

revenues. For Statement No. 43, the largest employers begin in the first period after

December 15, 2005, and the smallest employers begin 2 years later. For Statement No. 45, 

the largest employers begin in the first period after December 15, 2006, and the smallest

employers begin 2 years later.

Page 30 GAO-05-205 Retiree Health Benefits
obligations, it also noted that these standards alone were not likely to 

cause major program changes. Regardless, benefit consultants and other 

officials we interviewed cited notable implications for public sector 

employers. For example, large unfunded obligations can affect bond 

ratings in the public sector, which affect these public sector entities’

ability to borrow money. One benefit consultant told us that its public

sector clients are raising issues such as plan design, cost, financing, and 

the possible reduction of retiree health benefits in light of the new GASB 

standards. The provision of retiree health benefits in the public sector may 

also be affected by other factors, such as state budget deficits and state

political pressures. 

At the time of our review, many employers and plan sponsors said they

had not decided which MMA options they would implement for their 

Medicare-eligible retirees, but the primary option many sponsors were 

considering was the subsidy. Ten of the 15 plan sponsors we interviewed 

said that while undecided, they were considering the federal subsidy 

option for some or all of their Medicare-eligible retirees, while 2 other plan 

sponsors had chosen the subsidy option for all their Medicare-eligible 

retirees. Four plan sponsors we interviewed were concerned that because

their benefits already had reached or soon would reach the caps they had 

set on their retiree health benefit obligations, they would be ineligible for 

the subsidy and therefore said that redesigning their benefits to wrap

around Medicare would be prudent. In our random sample of 50 Fortune 

500 employers, most that reported obligations for retiree health benefits 

indicated that they would choose the federal subsidy or other options, but

others had not reported their final MMA decisions on their financial

statements filed with the SEC as of November 2004. In addition, 2 plan 

sponsors we interviewed were considering Medicare Advantage plans, but

these plan sponsors were waiting to see how the market for these 

developed. While plan sponsors generally expected to continue to 

maintain coverage levels for their retirees as they considered their MMA 

options, they acknowledged that cost pressures could cause them to

reevaluate their benefits. If employers were not already providing 

prescription drug benefits to retirees, most benefit consultants and other 

experts we interviewed said that the MMA was not likely to prompt

employers to begin providing coverage or supplementing the Medicare 

benefits. 

Employers and Plan 

Sponsors Considering 

MMA Options for 

Prescription Drug 

Coverage, Often

Considering Subsidy 

as Primary Option for

Some or All MedicareEligible Retirees 

Page 31 GAO-05-205 Retiree Health Benefits
The 15 private and public sector sponsors of retiree health benefit plans 

we interviewed were considering their MMA options for prescription drug 

coverage, but few had decided which MMA options they would choose for 

all their Medicare-eligible retirees. Of the 15 plan sponsors we interviewed, 

12 were Fortune 500 private sector employers. Two of the 12 had made a 

decision for all of their Medicare-eligible retirees, and 10 said they had not 

yet made their final decisions for some or all of their retirees and were 

assessing the implications associated with the MMA options. Officials from

the three public sector sponsors of health benefit plans we interviewed—

the federal government and two state retirement systems—said they were 

considering their options. Both private and public sector plan sponsors 

told us they anticipated making their final decisions by early 2005. In

addition, officials we interviewed representing multiemployer plans told

us that most multiemployer plans had not focused on the MMA options to

the same extent as single-employer private sector plan sponsors, and 

therefore most were undecided about the options they would implement.

As part of their deliberations, plan sponsors were considering several 

MMA options, including the federal subsidy option if they decided to

provide their own prescription drug benefits for Medicare-eligible retirees; 

coordinating with part D by wrapping their prescription drug benefits

around the Medicare part D benefit, thus providing secondary coverage; 

and several other options. In some cases, plan sponsors were considering 

implementing a combination of options for different groups of Medicareeligible retirees. 

Ten of the 15 private and public sector sponsors of employment-based 

retiree health benefits that we interviewed were considering the 

28 percent federal subsidy for prescription drug costs for some, if not all,

Medicare-eligible retirees, although they were in different stages of the 

decision-making process at the time of our interviews. Two private sector 

sponsors had chosen the subsidy option for all of their Medicare-eligible

retirees. Three of the private and public sector sponsors, including OPM 

for FEHBP, said they would not or did not expect to choose the subsidy

option.56 (See table 1.) 

Plan Sponsors We

Interviewed Were 

Considering MMA Options 

for Prescription Drug 

Coverage, but Few Had 

Made Final Decisions 

The Federal Subsidy

 56Several recent surveys have also found that the subsidy is the primary option employers

are considering. Kaiser/Hewitt reported that 58 percent of employers said they expected to

choose the subsidy option for prescription drug benefits in their largest plans; Kaiser/HRET

reported that about half of employers surveyed in early 2004 were likely to choose the 

subsidy option; and Mercer reported that about 40 percent of plan sponsors would apply 

for the subsidy. Each of the surveys also found that some employers remained undecided 

about which MMA option they would select for prescription drug coverage. 

Page 32 GAO-05-205 Retiree Health Benefits
Table 1: Status of Decisions by 15 Private and Public Sector Plan Sponsors

Interviewed regarding the MMA Subsidy Option for Prescription Drug Coverage 

Number choosing or

considering MMA subsidy 

option 

MMA subsidy option 

Private sector

Fortune 500 

sponsors

Public 

sector

sponsors

Subsidy 

Choosing the subsidy option for all Medicare-eligible 

retirees 2 0

Choosing the subsidy option for some Medicare-eligible

retirees and considering other options for other Medicareeligible retirees 3 0

Considering the subsidy option 5 2

No subsidy 

Not choosing the subsidy option for any Medicare-eligible 

retirees 2 1a

Total 12 3

Source: GAO. 

Note: Based on information from 15 sponsors of retiree health benefit plans in the private and public

sectors.

a

OPM said it did not expect to choose the subsidy option for FEHBP.

Retiree health benefit plan designs and other circumstances affected plan 

sponsors’ decisions regarding the subsidy. In particular, whether a plan 

sponsor had implemented financial caps on retiree health benefit

expenditures played a major role in the decision-making process.57 In

addition, plan sponsors that negotiated retiree health benefits with unions 

said that they did not have as much flexibility to change these benefits 

prior to negotiations. Three of the private sector plan sponsors we 

interviewed said they would choose the subsidy option only for some of

their Medicare-eligible retirees because of capped benefits, the role of

unions, or both, as described in the following: 

• One of the three plan sponsors capped health benefits for workers who

retired after a specific date, so it offered richer uncapped benefits to those

who retired before that date. This sponsor determined that the uncapped 

 57Caps on benefits could cause an employer’s prescription drug plan to have less value on

an actuarial basis than the standard part D benefit and not qualify for the subsidy option. 

Page 33 GAO-05-205 Retiree Health Benefits
benefits would be actuarially equivalent. Therefore, this plan sponsor said

it would choose the subsidy option for the uncapped benefits but was not

certain that the capped benefits would be actuarially equivalent for 

purposes of the subsidy.

• Another of these sponsors offered many different prescription drug plan 

designs to retirees with collectively bargained benefits (union retirees) 

and those without collectively bargained benefits.

58 This sponsor chose the

subsidy option for all plans that met the actuarial equivalence test. The 

sponsor’s plans that were not likely to meet the actuarial equivalence test

typically had financial caps. 

• The third sponsor said it was fairly certain it would choose the subsidy 

option for its collectively bargained retiree prescription drug benefits. 

While both the collectively bargained and noncollectively bargained 

retiree benefits were capped, the unions had renegotiated higher capped 

amounts for the collectively bargained benefits. The next negotiation 

session with the primary union was scheduled for July 2006, thereby 

making it difficult to make changes to these benefits other than accepting

the subsidy in the interim. The caps for the retirees with noncollectively 

bargained benefits would be reached sooner and were less likely to be

actuarially equivalent. Therefore, this sponsor said it was considering 

other options for the retirees with noncollectively bargained benefits. 

Although they had not made any final decisions on the MMA options at the

time of our interviews, 5 of the 12 private sector Fortune 500 sponsors of

employment-based health benefit plans we interviewed were considering 

the subsidy option. Two of these 5 plan sponsors said they were likely to 

apply for the subsidy for their Medicare retirees. Of the 2, 1—whose 

employees were partially unionized and that had not capped any of its 

retiree health benefits—said it did not “strongly consider” any other 

options during its deliberations. The other of the 2 sponsors expected to

apply for the subsidy for all of the prescription drug plans for Medicareeligible retirees that met the actuarial equivalence test. At the time of our 

interviews, 3 of these 5 plan sponsors said they either needed additional

information from CMS regarding actuarial equivalence or needed more 

time before they could make their final decisions about the subsidy option.

 58This plan sponsor obtained different plans through acquisitions. Also, the plan sponsor

negotiated about 80 to 90 contracts with about 20 different unions. However, not all the 

plans provide retiree health benefits. In most cases, the plan sponsor could not change the

retiree health benefits without renegotiating with the unions. Taking collectively bargained 

and noncollectively bargained retiree health benefits together, the plan sponsor had about

100 different prescription drug plans. Some of the retiree prescription drug plans had 

capped benefits amounts. 

Page 34 GAO-05-205 Retiree Health Benefits
Two large state sponsors of health benefits for Medicare-eligible retirees 

were considering the subsidy option along with others. OPM had not made

any decisions at the time of our interview, but in written comments on a 

draft of this report it indicated that it did not expect to choose the federal

subsidy for FEHBP. 

The subsidy option offers plan sponsors several advantages. Cost savings 

associated with the subsidy played a major role in the plan sponsors’ 

decision-making process. Several benefit consultants and plan sponsors 

we interviewed stressed the importance of cost savings when considering 

the MMA options. Most of the plan sponsors we interviewed considered 

the savings associated with the subsidy to be an advantage. For example, 

one plan sponsor estimated that it would reduce its accumulated 

postretirement benefit obligations by about $161 million just by choosing 

the subsidy option for one group of its Medicare-eligible retirees. 

Some plan sponsors and benefit consultants we interviewed said that most

of the prescription drug expenditures for Medicare-eligible retirees would 

be eligible for the subsidy because most retirees incurred costs from $251 

through $5,000, the range eligible for the subsidy as defined in the MMA. 

While Medicare-eligible retirees’ prescription drug expenditures could be

paid by several different sources, employment-based coverage accounted 

for about 27 percent of total expenditures in 2001, while out-of-pocket

payments accounted for about 37 percent, according to our analysis of 

MCBS. According to our projections of the estimated amount of Medicareeligible retirees’ total prescription drug expenditures that employmentbased plans would pay for and that beneficiaries would pay out-of-pocket

in 2006, most of the expenditures from employment-based coverage and

from out-of-pocket—about 75 percent—could be eligible for the subsidy 

(see fig. 5).59

 59Also, when only considering Medicare-eligible retirees’ prescription drug costs covered by

employment-based plans, our analysis showed that about 76 percent of these expenditures

are projected to be $251 through $5,000, the range eligible for the subsidy in 2006. 

Page 35 GAO-05-205 Retiree Health Benefits
Figure 5: Under the MMA Subsidy Option, the Portion of Retired Medicare 

Beneficiaries’ Prescription Drug Expenditures Paid by Employment-Based 

Coverage and Paid Out-of-Pocket Eligible for Subsidy, Estimate for 2006 

Note: MCBS data for 2001 inflated to 2006 using CMS’s National Health Care Expenditures

Projections.

Preserving the benefits the plan sponsors currently provide and retaining 

the control over and flexibility of the benefits were also cited as 

advantages to choosing the subsidy option. Benefit consultants, plan 

sponsors, and others we interviewed said that it would be easier for 

beneficiaries if the benefits offered did not change. Choosing the subsidy 

option also gave plan sponsors the ability to maintain control over the 

benefits and their costs. In addition, preserving their current benefits

allowed plan sponsors time to see how other MMA options would play out

in the marketplace. For some plan sponsors, these advantages made the 

subsidy the easiest, most seamless, and least risky option to pursue. 

Several benefit consultants we interviewed said that to receive the 

subsidy, sponsors of employment-based retiree health plans would have to

fulfill certain administrative reporting and record keeping requirements, as

identified by CMS. For example, sponsors will have to apply for the 

subsidy no later than 90 days prior to the start of the calendar year,60

including providing an attestation regarding actuarial equivalence. Each 

0% 20% 40% 60% 80% 100%

Source: GAO analysis of MCBS data.

Paid by all other sources

Paid by employment-based coverage

Paid out-of-pocket

27%

37%

36%

13.1% 12.2% 74.7%

Expenditures 

of $250 or less 

are not eligible 

for subsidy

Expenditures of 

$251 to $5,000 are 

eligible for subsidy

Expenditures 

of $5,001 or 

greater are 

not eligible 

for subsidy

 6070 Fed. Reg. 4,410. A plan sponsor would have to apply by September 30, 2005, to receive 

the subsidy for 2006. 

Page 36 GAO-05-205 Retiree Health Benefits
application must include the names of all people enrolled in the sponsor’s 

drug plan to ensure that a sponsor is not receiving a subsidy for an 

individual who is enrolled in a part D prescription drug plan or a Medicare 

Advantage plan. The plan sponsor must also notify Medicare-eligible 

retirees and their spouses and dependents whether their retiree health

plan provides “creditable coverage”—that is, generally whether the 

expected amount of paid claims under the plan sponsor’s prescription 

drug coverage is at least equal to that of the expected amount of paid

claims under the standard part D coverage. This notice is important 

because retirees who do not enroll in part D when first eligible will be

charged a penalty for late enrollment if they enroll after finding that their 

previous employment-based coverage did not meet CMS’s creditable 

coverage criteria.61 A special enrollment period will be provided, however, 

without a late enrollment penalty, when there is an involuntary loss of

creditable coverage because, for example, an employer eliminates or 

reduces coverage.62 All plan sponsors choosing the subsidy will have to 

document prescription drug costs that fall within the MMA’s eligibility 

criteria. 

Although several benefit consultants saw the potential administrative 

requirements as a disadvantage of the subsidy, most of the plan sponsors 

we interviewed were not concerned about the subsidy’s proposed 

administrative requirements. For example, one plan sponsor told us it was 

less concerned about how it would manage the subsidy’s administrative

requirements than about how it would manage relations with retirees if it

changed prescription drug benefits under other MMA options. At the time

of our interviews, however, some plan sponsors said they were not fully

aware of or had not considered all of the administrative requirements. 

Besides cost savings, ease for retirees, and administrative requirements, 

plan sponsors we interviewed said they also considered other factors 

when making decisions about the subsidy. For example, plan sponsors 

considered as part of their decision-making process possible negative 

press, potential for lawsuits, relations and communications with Medicareeligible retirees, benefit equity between Medicare-eligible retirees and

retirees not yet eligible for Medicare, future union negotiations, hiring and

 61MMA sec. 101, §1860D-13(b), 117 Stat. 2104-06 (to be codified at 42 U.S.C. § 1395w113(b)). 

62MMA sec. 101, § 1860D-1(b)(3) and (6), 117 Stat. 2073-74 and 2374-75 (to be codified at 42

U.S.C. §§ 1395w-101(b)(3) and (6)).

Page 37 GAO-05-205 Retiree Health Benefits
retention of workers, marketplace competition, and uncertainty about

CMS rules.

One alternative to choosing the federal subsidy option for plan sponsors 

that provide prescription drug coverage to Medicare-eligible retirees is the

option of coordinating with part D by wrapping their benefits around the 

new Medicare part D benefit by covering some drug costs not paid by 

Medicare. Plan sponsors would offer coverage wrapping around Medicare 

part D rather than providing their own comprehensive prescription drug 

coverage. Prescription drug costs not covered by Medicare part D that 

plan sponsors could cover might include the $250 deductible or the 

retirees’ costs within the coverage gap (i.e., the doughnut hole) until the 

Medicare catastrophic coverage begins paying for most drug costs. Several 

plan sponsors we interviewed said they were considering this option for 

Medicare-eligible retirees along with the subsidy and other options as part

of their overall MMA deliberations. For example, one plan sponsor said it

was considering wrapping its drug benefits around the part D benefit as its

primary option for all its Medicare-eligible retirees because it had set

financial caps on its retiree health benefit obligations that would 

eventually render it ineligible for the subsidy. Three other plan sponsors 

told us they were considering wrapping their prescription drug benefits

around the part D benefit for those Medicare-eligible retirees for whom

they could not qualify to receive the federal subsidy. Furthermore, OPM

officials said that wrapping prescription drug benefits around the part D 

benefit could be more complex for the federal government than for 

employers in the private sector because, in contrast to many large private 

sector employers, FEHBP does not provide different benefits for active

workers and for retirees.

Some plan sponsors and benefit consultants we interviewed expected that

wrapping prescription drug benefits offered to Medicare-eligible retirees 

around the new Medicare part D benefit would provide several

advantages. For example, some benefit consultants said that this option

could save more money than the subsidy. However, they said plan 

sponsors would have to do a cost/benefit analysis to make this 

determination. Also, plan sponsors could continue to provide the same

level of benefits to Medicare-eligible retirees in coordination with the 

Medicare part D coverage, thereby maintaining benefit continuity. 

Conceptually, sponsors of employment-based health benefit plans and 

benefit consultants generally viewed the option to wrap prescription drug 

benefits around the part D benefit as being similar to how most now

coordinate other benefits with Medicare parts A and B. Some sponsors we

interviewed planned to rely on their pharmacy benefit managers, benefit 

Wrapping Retiree Drug Benefits

around Medicare Part D

Page 38 GAO-05-205 Retiree Health Benefits
consultants, and others for assistance in administering the benefit.

However, plan sponsors and benefit consultants we interviewed were

waiting to learn more from CMS about how the benefit coordination would

operate. As a result, at the time of our interviews, employers and others 

had questions about how prescription drug benefit designs would wrap 

around the Medicare part D benefit.

Wrapping benefits around the Medicare part D benefit also could present

some administrative and other challenges for plan sponsors. Two benefit

consultants we interviewed told us that wrapping benefits around the 

different Medicare part D plans, such as Medicare Advantage or a private 

prescription drug plan, in which retirees might enroll could add to the 

administrative complexity. Also, according to one benefit consultant and

CMS officials, while coordinating with the Medicare program can be a 

fairly straightforward task for part A and B services, part D coordination 

might be more difficult because each Medicare-eligible retiree’s true outof-pocket costs must be determined. Part D requires that Medicare 

beneficiaries must have $3,600 in out-of-pocket expenses for covered 

drugs in 2006 before federal catastrophic coverage begins.63 Generally, 

beneficiaries’ expenses reimbursed by other sources such as employmentbased plans are not counted. This can become complicated for plan

sponsors that have different copayment and coinsurance requirements for 

different groups of retirees. 

Another possible challenge for plan sponsors in wrapping around 

Medicare part D coverage is financial. Plans sponsors that supplement the 

Medicare part D benefit could spend thousands of dollars for each retiree 

before the Medicare catastrophic coverage begins. Two plan sponsors and 

several benefit consultants were concerned about how employment-based 

drug benefits that wrap around the Medicare part D benefit would affect

the out-of-pocket payment requirements for beneficiaries. For example, if 

a plan sponsor covered 75 percent of a Medicare-eligible retiree’s 

expenditures within the coverage gap (i.e., the doughnut hole) the plan

sponsor would have to spend $8,550 before the retiree reached $3,600 in 

out-of-pocket expenditures as required by the MMA. Specifically, under 

this wraparound scenario, 

 63MMA sec. 101, § 1860D-2(b)(4)(B), 117 Stat. 2077-78 (to be codified at 42 U.S.C. § 1394w102(b)(4)(B)).

Page 39 GAO-05-205 Retiree Health Benefits
• the Medicare-eligible retiree would spend $3,600 out-of-pocket—$250 for 

the part D deductible, $500 in coinsurance for the next $2,000 in 

expenditures, and $2,850 for the expenses not covered by Medicare; 

• Medicare would spend $1,500—75 percent of the next $2,000 in 

expenditures after the deductible is met; and 

• the plan sponsor would spend $8,550. 

This would require a total of $13,650 in expenditures from all sources 

before the retiree would reach the amount—that is, combined Medicare 

and beneficiary expenditures equal to $5,100—at which Medicare part D 

catastrophic coverage would begin. 

Under the MMA, sponsors of employment-based health benefit plans for 

Medicare-eligible retirees have several other options. For example, plan 

sponsors could contract with privately marketed prescription drug plans 

and Medicare Advantage plans to cover the part D benefit, or they could 

become prescription drug plans or Medicare Advantage plans.64 In

addition, while not allowed for current Medicare-eligible retirees, plan 

sponsors could establish HSAs for their active workers, who could use 

these benefits when they retire. 

Several benefit consultants told us their clients might consider these other 

MMA options, and some plan sponsors we interviewed were doing so. For 

example, four benefit consultants we interviewed said that Medicare 

Advantage plans could offer advantages to plan sponsors. Two of these 

benefit consultants said that having Medicare-eligible retirees enroll in

Medicare Advantage plans would shift the financial risk away from the 

plan sponsor to the Medicare Advantage plan. The other two said that

Medicare Advantage plans could help to reduce costs, and they also

believed that having Medicare-eligible retirees enroll in these plans could 

help reduce administrative burdens associated with the Medicare part D 

benefit. Two benefit consultants noted that these plans might not be 

available in all parts of the country, but others said that increased federal 

reimbursement rates established as part of the MMA might cause more 

private plans to enter this market in the future. In addition, two benefit 

consultants commented that their clients might be more interested in

Medicare Advantage once the market for these plans is established. During

our interviews, some Fortune 500 plan sponsors generally discussed 

Medicare Advantage plans as an option they might consider. While several

Other Options

 64MMA sec. 101, § 1860D-22(b), 117 Stat. 2125 (to be codified at 42. U.S.C. § 1395w–132(b)).

Page 40 GAO-05-205 Retiree Health Benefits
plan sponsors said that none of their Medicare retirees were enrolled in a 

health maintenance organization (HMO), two said that HMOs might be a 

viable option in the future as long as managed care plans continued to 

participate in the Medicare program. One plan sponsor considered 

Medicare Advantage plans as an option during its deliberations but

determined that based on its past experience with Medicare+Choice, it did 

not provide many savings.

One benefit consultant we interviewed said that plan sponsors might be 

reluctant to form their own Medicare Advantage plans because many 

HMOs left the Medicare+Choice program in the past. However, new

options that had not yet been offered under the Medicare Advantage 

program might also be attractive to employers with retirees living all 

across the country. CMS officials said that they are currently developing 

the waivers that plan sponsors would need to form their own Medicare 

Advantage plans. 

The MMA also established HSAs, which receive preferential tax treatment, 

that are used in conjunction with high deductible health insurance plans.65

The HSA can be used to pay for qualified medical expenses not covered by 

insurance or other reimbursements. Although HSAs cannot be set up to

fund health benefits for current Medicare-eligible retirees, they can be a 

savings vehicle for workers to pay the cost of their health care coverage 

when they retire. However, some benefit experts said it is unlikely that 

enough money would accumulate in these accounts for retirees, especially

for older workers, to benefit substantially from them.66 Six of the 15 plan 

sponsors we interviewed said they were exploring how HSAs would 

integrate into their overall benefit programs or were considering them for 

the future. 

 65MMA § 1201, § 223, 117 Stat. 2469-79 (to be codified at 26 U.S.C. § 223). While employers,

employees, or both can set up and contribute to these accounts, employees own the 

accounts. In general, individuals making contributions can deduct the lesser of the

deductible or up to $2,650 for self-only coverage or $5,250 for family coverage from federal

taxes in 2005. Any funds remaining in an HSA at the end of the year can be carried over to

the next year. 

66According to the Employee Benefit Research Institute, HSAs will be of limited benefit to

people who are already 55 years of age or older because they would not produce enough 

savings to substantially offset retiree health expenses. See Paul Fronstin and Dallas

Salisbury, Health Care Expenses in Retirement and the Use of Health Savings Accounts, 

Issue Brief No. 271 (Washington, D.C.: Employee Benefit Research Institute, July 2004). 

Page 41 GAO-05-205 Retiree Health Benefits
According to financial statements filed with the SEC as of November 2004,

most of the Fortune 500 employers we reviewed that reported 

postretirement benefit obligations67 (27 of 39) reflected the effect of the 

MMA options on these obligations.68 For example, 3 of these plan sponsors 

each reported reductions in accumulated obligations of over $100 million. 

The other 12 employers did not report on their MMA decisions in these 

financial statements. (See table 2.) 

Table 2: Actions Taken in Response to the MMA by 50 Randomly Selected Fortune 

500 Employers, Most as of the Quarter Ending September 30, 2004 

Most Plan Sponsors in Our 

Sample Reported MMARelated Changes on 

Recent Financial

Statements, While a Third 

Were Considering MMA

Options 

Action 

Number of 

employers

Employers reporting postretirement benefits

Addressed impact of the MMA on postretirement benefit obligations 27

Did not address impact of the MMA on postretirement benefit obligations 12a

Subtotal 39

Employers not reporting postretirement benefits or not filing statements 

Did not report postretirement benefits on annual or quarterly financial

statements 8

Did not file annual or quarterly financial statements with the SEC 3b

Subtotal 11

Total 50

Source: GAO. 

Notes: Based on analysis of annual (10-K) and quarterly (10-Q) financial statements Fortune 500

employers filed with the SEC. The 50 employers represent a randomly selected group of employers

from the Fortune 500 list for 2003. Most of these employers’ fiscal years ended in December 2003, so

their most recent quarterly financial statement covered the period ending September 30, 2004.

a

One of the 39 employers that sponsored retiree health benefit plans addressed the MMA but did not

provide complete information on postretirement benefit obligation amounts.

b

Three of the 50 randomly selected employers were private, not publicly traded, employers and were 

not required to file annual 10-K or quarterly 10-Q financial statements with the SEC.

 67Publicly traded companies account for their postretirement benefit obligations in their

financial statements. The postretirement benefit obligations we refer to here include 

obligations for retiree health benefits and other retiree benefits, such as life insurance, but 

not for pensions (which are separately reported). This information is included in the annual 

(10-K) and quarterly (10-Q) financial statements they file with the SEC.

68At the time of our analysis, most of these employers’ fiscal years ended in December 2003, 

so their most recent quarterly financial statement covered the period ending in September

2004, which most filed in November 2004. A few employers had already reflected changes

in obligations as a result of the MMA in prior annual or quarterly filings with the SEC. 

Page 42 GAO-05-205 Retiree Health Benefits
Thirteen of the 27 plan sponsors that reflected the effect of the MMA 

options reported they would be choosing the subsidy option, which 

reduces their postretirement benefit obligations and other expenditures.

However, even among these 13 plan sponsors, 3 reported that they would 

be choosing the subsidy option for some but not all of their retirees. They 

had not reported what options they would pursue for the remaining 

retirees. While the remaining 14 plan sponsors addressed the MMA options

in their financial statements, their MMA decisions for Medicare-eligible 

retirees were not as clear. These plan sponsors generally reported that the 

MMA options either reduced their postretirement benefit obligations or 

that the changes they made because of the MMA were not expected to 

have a material impact on their postretirement benefit obligations.

69

Twelve of the 39 employers that reported sponsoring retiree health benefit

plans and having postretirement benefit obligations did not report on their 

MMA decisions in financial statements filed as of November 2004. One of

these 12 plan sponsors reported that it had determined that its 

prescription drug benefits were not actuarially equivalent to the Medicare 

part D benefit and could not take advantage of the subsidy option. This

plan sponsor reported that it was evaluating the impact of other MMA 

options. The remaining 11 plan sponsors did not report on the impact of

the MMA on their postretirement obligations; 4 of these 11 plan sponsors 

did not expect any changes they made to be material. 

 69In May 2004, FASB issued guidance regarding how employers that sponsor postretirement

health benefit plans were to account for the effects of the MMA—FASB Staff Position FAS 

106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription

Drug, Improvement and Modernization Act of 2003. Under this guidance, employers were

required to report the effect of the MMA on their retiree health benefit obligations for the

first interim or annual period that began after June 15, 2004. However, if employers could 

not determine the effect of the MMA, they could reconsider the impact periodically. 

Page 43 GAO-05-205 Retiree Health Benefits
In interviews, sponsors of health plans that included prescription drug 

benefits for Medicare-eligible retirees told us they did not expect to reduce

these benefits in response to the new Medicare part D benefit and the 

MMA options. Although one benefit consultant said that some of his

clients might consider reducing benefits in response to the MMA, plan

sponsors we interviewed that were considering choosing the subsidy 

option said they did not expect to reduce their benefits in response to the 

MMA, even though some could do so and still qualify for the subsidy.70 Plan 

sponsors considering wrapping their benefits around the Medicare part D 

benefit were focused on wrapping benefits in a way that would maintain, 

not restrict, the current level of benefits. According to a benefit consultant,

many employers who sponsored retiree health benefit plans supplemented 

Medicare parts A and B with additional benefits and might also do so for 

Medicare part D. However, plan sponsors change benefits for different

reasons. Even though they said they were not considering a reduction in

prescription drug benefits in response to the MMA, some plan sponsors 

and benefit consultants said that ongoing cost pressures prompt plan 

sponsors to constantly review and, if necessary, adjust their benefits for 

future retirees. 

Two of the 12 private sector employers that sponsored retiree health

benefits told us that during their deliberations on the MMA options they 

had considered, but dismissed, elimination of some or all retiree 

prescription drug benefits as one of several options. One of these plan 

sponsors said eliminating prescription drug coverage would not be

realistic, especially with collectively bargained benefits. The other plan 

sponsor said it was easier to continue to provide the benefits to this

declining population—it no longer offered retiree health benefits to new

hires—than to contend with the negative press and relations with current 

retirees and active workers. 

None of the three public sector sponsors of health benefits for Medicareeligible retirees we interviewed expected to reduce or eliminate 

prescription drug benefits in response to the MMA options. OPM officials 

said that they did not plan to decrease or eliminate any prescription drug 

coverage for Medicare-eligible retirees in response to the MMA. These 

officials, who administer health benefits for federal employees and 

Sponsors of Retiree Health 

Benefit Plans We

Interviewed Unlikely to 

Reduce Current Drug 

Benefits for Medicare 

Retirees in Response to 

the MMA 

 70In the Kaiser/Hewitt 2004 Survey on Retiree Health Benefits, 85 percent of the

employers who planned to choose the subsidy said they would likely retain current benefit

levels, 7 percent would modify benefits to match the standard part D benefit, and 8 percent

did not know about possible changes in their benefits. 

Page 44 GAO-05-205 Retiree Health Benefits
retirees, noted that eliminating prescription drug benefits would not be a 

politically realistic option. An official at a public sector plan that provides 

health benefits to Medicare-eligible retirees in one state said that the state 

also was not planning to reduce its benefits in response to the MMA. 

However, the state had already planned to make extensive changes to its 

benefits in response to rising health care costs about a year before 

Congress passed the MMA, and eliminating or further reducing benefits for 

public sector retirees was not an option currently being considered. 

Few employers, if any, that were not sponsoring retiree prescription drug

benefits were expected to begin sponsoring them in response to the MMA. 

Benefit consultants and experts we interviewed consistently agreed that it

was doubtful that an employer would want to assume new benefit

obligations for retiree health or prescription drugs if it did not already do 

so, regardless of the MMA options. Furthermore, the availability of

Medicare’s prescription drug benefits in 2006 might give employers more 

of an incentive not to start to provide these benefits because prescription 

drug benefits would be available without the employer’s participation. 

Ultimately, benefit consultants and experts told us this decision would 

vary by employer. An employer’s particular financial, business, and 

competitive situation could affect the employer’s decision to provide any 

new benefits or to provide supplemental coverage—pay the part D 

premium, cover out-of-pocket expenses, or consider a Medicare 

Advantage plan as an option—to Medicare-eligible retirees in response to 

the MMA.

According to officials at organizations representing small and midsized 

employers and other experts, the MMA is not likely to encourage such 

employers to add to their operating costs by beginning to offer retiree 

health benefits or supplementing the prescription drug benefits available

through Medicare part D. These employers are more concerned about 

providing health benefits to active workers rather than to retirees.

However, as with large employers, employers’ specific circumstances 

drive their business and benefit decisions. Therefore, according to these 

officials, while there may be isolated individual employers that might 

begin to provide retiree health benefits or prescription drug coverage 

supplementing the benefits established by the MMA, they would likely be

the exception rather than the rule. 

The MMA Is Not Likely to 

Induce Employers Not 

Already Offering Retiree 

Health Coverage to Begin 

Doing So 

Page 45 GAO-05-205 Retiree Health Benefits
The provision of employment-based retiree health benefits for Medicare

beneficiaries continues to be an issue for evaluation and change with

employers and other plan sponsors even as they begin to choose options 

available as a result of the Medicare drug benefit enacted as part of the 

MMA. The long-term decline in the percentage of employers offering

retiree health benefits to Medicare-eligible individuals has leveled off in 

recent years. Plan sponsors have continued to modify their requirements 

for eligibility, benefits, and cost sharing in an effort to contain cost growth.

As employers and other plan sponsors choose options as provided under

the MMA, they likely will continue to face rising health care costs,

particularly for prescription drugs, that will increase their obligations for 

retiree health benefits. The Medicare drug benefit is expected to provide 

some insulation from these cost increases for plans that qualify and 

employers that receive a subsidy for a portion of their drug expenditures 

or that choose to allow Medicare to bear primary responsibility for these 

costs for Medicare-eligible retirees. Nonetheless, even after employers

select a particular option in response to the Medicare drug benefit, it is

likely that they will continue to reshape their retiree health benefits in 

response to cost pressures, as they have for the last decade. However, few

employers not already offering retiree health or prescription drug 

coverage are likely to begin doing so as a result of the options available 

under the MMA. 

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

health benefits at the Employee Benefits Research Institute, Health 

Research and Educational Trust, Hewitt Associates, and Mercer Human

Resource Consulting. 

In its written comments, CMS generally agreed with our findings. CMS 

stated that the new Medicare drug benefit and the subsidy can help plan

sponsors continue to provide drug coverage to Medicare-eligible retirees. 

Consistent with our finding that plan sponsors intend to continue offering

prescription drug benefits, CMS cited a survey released in January 2005

that indicated that most plan sponsors intended to continue offering 

prescription drug coverage after the Medicare part D benefit begins. CMS 

confirmed that many plan sponsors are still considering their options 

under the MMA. CMS also indicated that some employers may reevaluate

their retiree benefits and that some plan sponsors may begin to offer 

prescription drug benefits. In its comments, CMS noted that it had recently

released its final rule implementing the Medicare part D benefit and plan 

sponsor options. CMS also noted that it plans to provide additional

guidance to respond to issues raised by comments on the proposed rule, 

Concluding

Observations 

Agency and Other 

External Comments 

Page 46 GAO-05-205 Retiree Health Benefits
including guidance on actuarial equivalence. CMS acknowledged that plan 

sponsors need to have timely guidance because of the complexity of the 

process, and CMS intends to continue to conduct outreach and education 

efforts on the options for retirees’ prescription drug coverage available to 

plan sponsors. (CMS’s comments are reprinted in app. II.) 

In its written comments, OPM highlighted its role in limiting premium 

increases while continuing to provide the same level of health insurance 

coverage at the same premium rates for retirees that it provides to active 

federal employees. While at the time of our interviews OPM officials 

indicated that OPM was considering the federal subsidy for FEHBP, in its 

written comments the agency said that it does not expect to choose the 

federal subsidy option. We revised the report to reflect that OPM does not

expect to choose the subsidy option. (OPM’s comments are reprinted in

app. III.) 

The experts who reviewed the draft report generally indicated that the 

report provided a comprehensive and accurate portrayal of employmentbased retiree health benefits and prescription drug benefits under the 

MMA. Two of the experts noted that while they concurred that the 

percentage of employers offering retiree health benefits has leveled off in 

recent years, this finding may understate the impact of other changes that

reduce the extent of retiree health benefits. They highlighted other 

changes, as we cited in the draft report, such as reduced eligibility for 

future retirees, increased cost sharing and premium contributions, and 

financial caps. We agree that as noted in the report, these changes 

contribute to an overall erosion in the value and availability of retiree 

health benefits.

CMS and several of these experts also provided technical comments, 

which we incorporated as appropriate. 

We are sending copies of this report to the Administrator of CMS, the 

Director of OPM, and interested congressional committees. We will also 

provide copies to others on request. In addition, this report is available at

no charge on the GAO Web site at http://www.gao.gov. 

Page 47 GAO-05-205 Retiree Health Benefits
If you or your staffs have any questions about this report, please contact

me at (202) 512-7118. Another contact and staff acknowledgments are 

listed in appendix IV. 

Kathryn G. Allen 

Director, Health Care—Medicaid 

 and Private Health Insurance Issues 

Page 48 GAO-05-205 Retiree Health Benefits
List of Committees 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member

Committee on Finance 

United States Senate 

The Honorable Michael B. Enzi

Chairman 

The Honorable Edward M. Kennedy 

Ranking Minority Member

Committee on Health, Education, Labor, 

 and Pensions 

United States Senate 

The Honorable John A. Boehner 

Chairman 

The Honorable George Miller 

Ranking Minority Member

Committee on Education and 

 the Workforce 

House of Representatives 

The Honorable Joe Barton

Chairman 

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means 

House of Representatives 

Page 49 GAO-05-205 Retiree Health Benefits
Ap

Me

pendix I: Scope and 

thodology 

Page 50 GAO-05-205 

Appendix I: Scope and Methodology 

To identify trends in employment-based retiree health benefits, we

analyzed data from (1) two annual private sector surveys of employer 

health benefits conducted since the early 1990s through 2004, (2) one 

private sector survey on retiree health benefits conducted in 2004, and (3) 

three surveys conducted by the federal government that included 

information on Medicare beneficiaries and employment-based health

benefits. We also reviewed financial data for fiscal years 2001 through 2003

that a sample of Fortune 500 employers submitted to the Securities and 

Exchange Commission (SEC) to identify changes in large employers’

retiree health benefit obligations. To supplement the trend and financial

data and to identify which options for prescription drug coverage provided

under the Medicare Prescription Drug, Improvement, and Modernization 

Act of 2003 (MMA) sponsors of employment-based retiree health benefits

said they planned to implement, we interviewed benefit consultants,

private and public sector sponsors of employment-based retiree health

benefits, officials at associations and groups representing large and small

employers and others. In addition, we reviewed studies and literature

addressing retiree health benefits. We conducted our work from April 2004 

through February 2005 in accordance with generally accepted government 

auditing standards. 

We relied on data from two annual surveys of employment-based health 

benefit plans. The Kaiser Family Foundation and the Health Research and 

Educational Trust (Kaiser/HRET) and Mercer Human Resource Consulting

each conduct an annual survey of employment-based health benefits, 

including a section on retiree health benefits. Each survey has been 

conducted for at least the past decade, including 2004.1

 We also used data 

from a survey focused solely on 2004 retiree health benefits that the Kaiser

Family Foundation and Hewitt Associates (Kaiser/Hewitt) conducted in

2004. For each of these surveys of employment-based benefits, we

reviewed the survey instruments and discussed the data’s reliability with 

the sponsors’ researchers and determined that the data were sufficiently

reliable for our purposes.

Surveys of 

Employment-Based 

Health Benefits

 1

Year-to-year fluctuations or gradual changes in these employer benefit survey results need

to be interpreted with caution. These surveys are based on random samples designed to be 

representative of a broader employer population and are used widely but may not have the 

precision needed to distinguish small changes in coverage from year to year because of

their response rates and the number of firms surveyed. 

 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

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

private and public sector employers with three or more employees,

stratified by industry and employer size. It attempts to repeat interviews

with some of the same employers that responded in prior years. For the 

most recently completed annual survey, conducted from January to May

2004, 1,925 employers completed the full survey, giving the survey a 

50 percent response rate. In addition, Kaiser/HRET asked at least one

question of all employers it contacted—“Does your company offer or

contribute to a health insurance program as a benefit to your 

employees?”—to which an additional 1,092 employers, or cumulatively 

about 78 percent of the sample, responded. By using statistical weights, 

Kaiser/HRET is able to project its results nationwide. Kaiser/HRET uses

the following definitions for employer size: (1) small—3 to 199 

employees—and (2) large—200 and more employees. In some cases, 

Kaiser/HRET reported information for additional categories of small and 

large employer sizes. 

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. Mercer conducts the survey by telephone for 

employers with from 10 to 499 employees and mails questionnaires to 

employers with 500 or more employees. Mercer’s database contains 

information from 2,981 employers who sponsor health plans. By using 

statistical weights, Mercer projects its results nationwide and for four

Kaiser/HRET

Mercer

 2

Kaiser/HRET has been conducting the survey of small and large employers since 1999. 

From 1991 through 1998, KPMG Peat Marwick conducted the survey using the same

instrument. However, data for all sizes of employers are not available for all years. For

example, KPMG Peat Marwick only sampled large employers in 1991, 1992, 1994, and 1997

and sampled both large and small employers in 1993, 1995, 1996, and 1998. 

3

Foster Higgins, which later merged with Mercer Human Resource Consulting, began 

conducting the survey in 1986. 

Page 51 GAO-05-205 Retiree Health Benefits
Appendix I: 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 Kaiser/Hewitt study—Current Trends and Future Outlook for Retiree

Health Benefits: Findings from the Kaiser/Hewitt 2004 Survey on 

Retiree Health Benefits—is based on a nonrandom sample of employers 

because there is no database that identifies all private sector employers 

offering retiree health benefits from which a random sample could be 

drawn. Kaiser/Hewitt used previous Hewitt survey respondents and its 

proprietary client database—a list of private sector employers potentially 

offering retiree health benefits. Kaiser/Hewitt conducted the survey online 

from May 2004 through September 2004 and obtained data from 333 large 

(1,000 or more employees) employers. According to information provided 

by Hewitt, these employers included about one-third of the 100 Fortune 

500 companies with the largest retiree health obligations in 2003. Because 

the sample is nonrandom and does not include the same sample of

companies and plans each year, survey results for 2004 cannot be 

compared to results from prior years. 

We analyzed three federal surveys containing information either on 

Medicare beneficiaries or on the percentage of public sector employers 

that offer retiree health benefits. We obtained information on retired

Medicare beneficiaries’ sources of health benefits coverage, including

former employers and unions, from the Current Population Survey (CPS),

conducted by the U.S. Census Bureau. We obtained data on the sources of

coverage for all health care expenditures and for prescription drug

expenditures for retired Medicare beneficiaries from the Medicare Current

Kaiser/Hewitt 

Federal Surveys

 4

However, the 2003 Mercer report states that the average annual cost increase data cited 

for Medicare-eligible retirees are not projectable beyond a group of 158 total employers

that were able to provide cost information for both 2002 and 2003. 

Page 52 GAO-05-205 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

Beneficiary Survey (MCBS), sponsored by the Centers for Medicare & 

Medicaid Services (CMS). We obtained data on the percentage of public 

sector employers that offer retiree health benefits from the Medical

Expenditure Panel Survey (MEPS), sponsored by the Agency for 

Healthcare Research and Quality. Each of these federal surveys is widely 

used for policy research, and we reviewed documentation on the surveys 

to determine that they were sufficiently reliable for our purposes. 

We analyzed the Annual Supplement of the CPS for information on the 

demographic characteristics of Medicare-eligible retirees and their access 

to insurance.5

 The survey is based on a sample designed to represent a 

cross section of the nation’s civilian noninstitutionalized population. In

2004, about 84,500 households were included in the sample for the survey, 

a significant increase in sample size from about 60,000 households prior to 

2002. The total response rate for the 2004 CPS Annual Supplement was 

about 84 percent. Because the CPS is based on a sample, any estimates 

derived from the survey are subject to sampling errors. A sampling error 

indicates how closely the results from a particular sample would be

reproduced if a complete count of the population were taken with the 

same measurement methods. To minimize the chances of citing 

differences that could be attributable to sampling errors, we present only 

those differences that were statistically significant at the 95 percent 

confidence level. 

The CPS asked whether a respondent was covered by employer- or 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 

Current Population Survey 

 5

See http://www.census.gov/hhes/www/hlthins/hlthin03.html (downloaded Dec. 22, 2004)

for additional information. We analyzed data from the March CPS Supplement from 1996 

through 2002 and the Annual Social and Economic Supplement to the CPS from 2003

through 2004. 

Page 53 GAO-05-205 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

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.”

MCBS is a nationally representative sample of Medicare beneficiaries 

sponsored by CMS.6

 The survey is designed to determine for Medicare 

beneficiaries (1) expenditures and payment sources for all health care 

services, including noncovered services, and (2) all types of health 

insurance coverage. The survey also relates coverage to payment sources. 

The sample represents 16,315 Medicare beneficiaries from CMS’s 

enrollment files who are interviewed three times a year at 4-month 

intervals. The complete interview cycle for a respondent consists of 12 

interviews over 4 years. Response rates for initial interviews ranged from

about 85 to 89 percent. After completing a first interview, individuals had a 

response rate of 95 percent or more in subsequent interviews. Interview

data are linked to Medicare claims and other administrative data, and

sample data are weighted so that results can be projected to the entire

Medicare population. 

The MCBS Cost and Use file links Medicare claims to survey-reported 

events and provides expenditure and payment source data on all health

care services, including those not covered by Medicare. Therefore, this file

contains data on Medicare beneficiaries’ expenditures and sources of

coverage for prescription drugs. Among other items, the prescription drug 

data include the following payment source categories: Medicare, Medicaid,

health maintenance organizations (HMO), Medicare HMO, employmentbased insurance, individually purchased insurance, unknown, out-ofpocket, discounts, and other. 

We analyzed prescription drug expenditure data for retired Medicare 

beneficiaries aged 65 and older who had employment-based health 

coverage in 2001, the most current data available at the time we did our 

Medicare Current 

Beneficiary Survey 

 6

See http://www.cms.hhs.gov/MCBS/Overview.asp (downloaded Dec. 22, 2004) for

additional information.

Page 54 GAO-05-205 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

analysis. We extrapolated these data to 2006—when the Medicare part D 

benefit begins—using projections based on National Health Care

Expenditures per capita data developed by CMS to provide estimates of

prescription drug expenditures paid by employment-based insurance or 

paid out-of-pocket for retired Medicare beneficiaries with employmentbased insurance. We did not make adjustments to reflect significant

changes in payment sources for prescription drug coverage once the 

Medicare part D benefit begins in 2006. For employers that elect to 

continue covering prescription drugs, these projections provide an 

estimate of the share of these prescription drug expenditures covered that

could be eligible for the MMA subsidy. 

MEPS, sponsored by the Agency for Healthcare Research and Quality,

consists of four surveys and is designed to provide nationally 

representative data on health care use and expenditures for U.S. civilian

noninstitutionalized individuals.

7

 We used data from the MEPS Insurance 

Component, one of the four surveys, to identify the percentage of state 

entities that offered retiree health benefits in 1998 and 2002. Insurance 

Component data are collected through two samples. The first, known as

the “household sample,” is a sample of employers and other insurance 

providers (such as unions and insurance companies) that were identified

by respondents in the MEPS Household Component, another of the four 

surveys, as their source of health insurance. The second sample, known as 

the “list sample,” is drawn from separate lists of private and public

employers. The combined surveys provide a nationally representative 

sample of employers. The target size of the list sample is approximately

40,000 employers each year. The response rate for the public sector MEPS 

Insurance Component was about 88 percent in 2002. 

We reviewed selected financial data for a stratified random sample of 2003

Fortune 500 employers, which is a list of the U.S. corporations with the 

highest annual revenues. First, we stratified the Fortune 500 list into five 

groups of 100 in descending order of revenues.8

 We then randomly 

selected 10 Fortune 500 employers from each of the five groups, for a total 

of 50 employers. To identify the 50 employers’ postretirement benefit 

Medical Expenditure Panel 

Survey 

Financial Data from 

Fortune 500

Employers 

 7

See http://www.meps.ahrq.gov/default.htm (downloaded Dec. 22, 2004) for additional

information.

8

See “The 500 Largest U.S. Corporations,” Fortune, vol. 149, no. 7 (2004). 

Page 55 GAO-05-205 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

obligations,

9

 we reviewed the annual financial statements (Form 10-K) that

these employers submitted to the SEC.10 We reviewed the Form 10-K that 

each employer submitted for its most recent fiscal year, ending in 2003 or

early in 2004.11 Then, to identify each employer’s postretirement benefit 

obligations for the two previous fiscal years, we reviewed the Form 10-K 

filed in either 2002 or 2003. To identify the types of changes these 

employers planned to make to their postretirement benefits in light of the

MMA, we reviewed the latest quarterly financial statements (Form 10-Q) 

that employers submitted to the SEC, most as of November 2004.12

We interviewed representatives of six large employer benefit consulting 

firms. Benefit consultants help their clients, which include private sector 

employers, public sector employers, or both, develop and implement

human resource programs, including retiree health benefit plans. While 

most of these benefit consulting firms’ clients were large Fortune 500 or

Fortune 1,000 employers, some also had smaller employers as clients. One 

benefit consulting firm that we interviewed, in particular, provided 

actuarial, employee benefit, and other services to a range of public sector

clients, including state and local governments, statewide retirement

systems and health plans, and federal government agencies. It also 

provided human resources services to multiemployer plans. 

To learn more about retiree health benefit trends and MMA options from

large private sector plan sponsors, we interviewed 12 Fortune 500 

employers that provided retiree health benefits. From the stratified 

random sample of 50 Fortune 500 employers selected for a financial data 

review, we judgmentally selected 10 employers for interviews. We

Interviews with 

Benefit Consultants, 

Plan Sponsors, and 

Others

 9

Postretirement benefit obligations included retiree health and other postretirement 

benefits, but not pensions. 

10See http://www.sec.gov/edgar.shtml (downloaded Dec. 22, 2004) for additional 

information. Information, including revenues and obligations, reported to the SEC reflect

employers’ worldwide operations. 

11Forty-seven of the 50 employers we reviewed submitted Forms 10-K to the SEC. Thirtyeight of these employers had fiscal years that ended in December 2003. Of the remaining

employers, 5 employers had fiscal years that ended earlier in 2003 and 4 had fiscal years

that ended in either January or February 2004. 

12Generally, companies had to file their Forms 10-Q 45 days after the end of each quarter

for fiscal years that ended on or after December 15, 2002, and before December 15, 2004. 

Most of the quarterly statements we reviewed covered the quarter ending in September

2004. 

Page 56 GAO-05-205 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

interviewed at least 1 employer from each of the five groups of 100

Fortune 500 employers that were stratified on the basis of annual

revenues. In addition to considering revenues, where data were available, 

we considered each employer’s industry, number of employees, 

postretirement benefit obligations, preliminary MMA option decision as 

reported on its annual Form 10-K, and union presence when making our

selection. We also interviewed officials at two additional Fortune 500 

employers at the recommendation of a benefit consultant. 

While small and midsized employers are less likely than large employers to 

offer retiree health benefits, we also assessed small and midsized 

employers’ preliminary reactions to the MMA options. We relied primarily 

on discussions with officials at two organizations representing the 

interests of small and midsized employers—the National Federation of

Independent Business and the United States Chamber of Commerce—and 

benefit consultants.

To learn more about retiree health benefit trends and MMA options at

public sector plan sponsors, we interviewed officials at the Office of

Personnel Management (OPM), two state retirement systems, and one 

association. OPM administers the Federal Employees Health Benefits 

Program—the country’s largest employment-based health plan. We 

judgmentally selected two large states’ retiree health benefits systems on 

the basis of a review of selected state data and referrals from a benefit 

consultant that works with public sector clients. We also interviewed 

officials at the National Conference on Public Employee Retirement

Systems and reviewed available studies on retiree health benefits in the 

public sector.

13

 13See Jack Hoadley, Health Policy Institute, Georgetown University, How States Are 

Responding to the Challenge of Financing Health Care for Retirees (Menlo Park, Calif.: 

The Henry J. Kaiser Family Foundation, September 2003). Responses to this study were

provided by 43 states and the District of Columbia. These state retirement systems had 

about 1.8 million retirees and dependents, approximately three-fourths of whom were

Medicare-eligible. See also Stan Wisniewski and Lorel Wisniewski, State Government 

Retiree Health Benefits: Current Status and Potential Impact of New Accounting 

Standards (Workplace Economics, Inc., commissioned by the AARP Public Policy

Institute) (Washington, D.C.: AARP, July 2004). The AARP Public Policy Institute

commissioned Workplace Economics to conduct research on retiree health benefits in 

state governments. Workplace Economics analyzed information in its proprietary database

on benefits provided to state government employees in all 50 states (excluding the District 

of Columbia, which is not part of the state government database). Workplace Economics

also analyzed state governments’ annual financial reports as part of this study. 

Page 57 GAO-05-205 Retiree Health Benefits
Appendix I: Scope and 

Methodology 

To obtain broader-based information about retiree health benefit trends 

and MMA options, we interviewed officials at several other groups and 

associations. Specifically, we interviewed the President of the National 

Business Group on Health and the Director of the Health Research and 

Education Program of the Employee Benefit Research Institute to obtain

more information about large private sector employers. We also 

interviewed officials from the American Academy of Actuaries, the Kaiser

Family Foundation, the American Federation of Labor and Congress of

Industrial Organizations, and the National Coordinating Committee for 

Multiemployer Plans. Finally, we reviewed other available literature on 

retiree health benefit trends, cost-containment strategies, and plan 

sponsors’ likely responses to MMA options. 

Page 58 GAO-05-205 Retiree Health Benefits
Appendix II: Comments from the Centers for

Appendix II: Comments from the Centers for Medicare & Medicaid Services

Medicare & Medicaid Services 

Page 59 GAO-05-205 Retiree Health Benefits
Appendix II: Comments from the Centers for

Medicare & Medicaid Services

Page 60 GAO-05-205 Retiree Health Benefits
Appendix III: Comments from the Office of

Appendix III: Comments from the Office of Personnel Management

Personnel Management 

Page 61 GAO-05-205 Retiree Health Benefits
A

Ac

ppendix IV: GAO Contact and Staff 

knowledgments

Page 62 GAO-05-205

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact John E. Dicken, (202) 512-7043 

Laura Sutton Elsberg, Joseph A. Petko, Kevin Dietz, Elizabeth T. Morrison, 

and Suzanne Worth made key contributions to this report.

Retiree Health Benefits

Acknowledgments 

(290360)
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