Private Health Insurance: Employer Coverage Trends Signal Possible Decline in Access for 55- to 64-Year-Olds
Published: 1998-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO discussed access to health insurance by near-elderly Americans aged 55 to 64, focusing on the near elderly's: (1) health, employment, income, and health insurance status; (2) ability to obtain employer-based health insurance if they retire before they are eligible for Medicare; and (3) access to individually purchased coverage or employer-based continuation insurance and the associated costs.
section_title: What GAO Found
paragraphs: GAO noted that: (1) the overall insurance picture of the near elderly is no worse than that of other segments of the under-65 population and is better than that of some younger age groups; (2) the current insurance status of the near elderly is largely due to: (a) the fact that many current retirees still have access to employer-based health benefits; (b) the willingness of near-elderly Americans to devote a significant portion of their income to health insurance purchased through the individual market; and (c) the availability of public programs to disabled 55- to 64-year-olds; (3) the individual market and Medicare and Medicaid for the disabled often mitigate declining access to employer-based coverage for near-elderly Americans and may prevent a larger portion of this age group from becoming uninsured; (4) the steady decline in the proportion of large employers who offer health benefits to early retirees, however, clouds the outlook for future retirees; (5) in the absence of countervailing trends, it is less likely that future 55- to 64-year-olds will be offered health insurance as a retirement benefit, and those who are will bear an increased share of the cost; (6) access and affordability problems may prevent future early retirees who lose employer-based health benefits from obtaining comprehensive private insurance; (7) the two principal private insurance alternatives are continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the individual market; (8) although 55- to 64-year-olds who become eligible for COBRA are more likely than younger age groups to enroll, the use of continuation coverage by early retirees is relatively low; (9) with respect to individual insurance, the cost may put it out of reach of some 55- to 64-year-olds; (10) some states have taken steps to make individual insurance products more accessible; (11) for eligible individuals leaving group coverage who exhaust any available COBRA or other conversion coverage, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) guarantees access to the individual market, regardless of health status and without coverage exclusions; (12) since the new federal protections under HIPAA hinge on exhausting COBRA, the incentives for enrolling and the length of time enrolled could change; and (13) the premiums faced by some individuals eligible for a HIPAA guaranteed-access product, however, may be substantially higher than the prices charged to those in the individual market who are healthy.

section_title: Letter
paragraphs: We are pleased to be here today as you explore access to health insurance by near-elderly Americans aged 55 to 64. Increasingly, public attention has focused on the health insurance status of the near elderly. A series of age-related transitions heightens the importance of health insurance to 55- to 64-year-olds and could place them at greater risk of losing coverage or paying considerably more than younger age groups. Too young to qualify for Medicare, many near elderly are considering retirement or gradually moving out of the workforce. These events may be related to worsening health, job displacement, or simply the desire for more leisure time. Since health insurance for most Americans is an employment-related benefit, disengagement from the labor force may necessitate looking for another source of coverage. The alternatives to employer-based coverage for the near elderly are (1) individually purchased insurance, (2) temporary continuation coverage through an employer, (3) public programs such as Medicare and Medicaid, and (4) becoming uninsured. Among those aged 55 to 64, Medicare and Medicaid are available only to disabled or some very poor persons.
My comments today are based on our report, prepared at your request, that examined the evidence on the near elderly’s health, employment, income, and health insurance status; ability to obtain employer-based health insurance if they retire before they are eligible for Medicare; and access to individually purchased coverage or employer-based continuation insurance and the associated costs.
In preparing that report, we analyzed the March 1997 Current Population Survey (CPS); reviewed the literature on employer-based health benefits for early retirees; interviewed employers, benefit consultants, insurers, and other experts knowledgeable about retiree health issues and the individual insurance market; and updated information provided in our previous reports. access to employer-based health benefits, (2) the willingness of near-elderly Americans to devote a significant portion of their income to health insurance purchased through the individual market, and (3) the availability of public programs to disabled 55- to 64-year-olds. Today, the individual market and Medicare and Medicaid for the disabled often mitigate declining access to employer-based coverage for near-elderly Americans and may prevent a larger portion of this age group from becoming uninsured. The steady decline in the proportion of large employers who offer health benefits to early retirees, however, clouds the outlook for future retirees. In the absence of countervailing trends, it is less likely that future 55- to 64-year-olds will be offered health insurance as a retirement benefit, and those who are will bear an increased share of the cost.
Moreover, access and affordability problems may prevent future early retirees who lose employer-based health benefits from obtaining comprehensive private insurance. The two principal private insurance alternatives are continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the individual market. From a retiree perspective, COBRA, which allows a former worker to continue employer-based health coverage, has certain limitations. It is only available to retirees whose employers offer health benefits to active workers, and coverage is temporary, ranging from 18 to 36 months. Because employers generally do not contribute toward the premium, the cost of COBRA may be a factor in the low enrollment, even though similar coverage in the individual market may be more expensive. Although 55- to 64-year-olds who become eligible for COBRA are more likely than younger age groups to enroll, the use of continuation coverage by early retirees is relatively low.
Portability and Accountability Act of 1996 (HIPAA) guarantees access to the individual market, regardless of health status and without coverage exclusions. Since the new federal protections under HIPAA hinge on exhausting COBRA, the incentives for enrolling and the length of time enrolled could change. The premiums faced by some individuals eligible for a HIPAA guaranteed-access product, however, may be substantially higher than the prices charged to those in the individual market who are healthy.
subsections: section_title: Changes in Employment, Health, Income, and Insurance Status Typify the Near Elderly
paragraphs: About 14 percent of the near elderly are uninsured—a rate comparable to that of 45- to 54-year-olds and lower than that among the entire nonelderly population. Differences in labor force attachment, health status, and family income, however, distinguish the near elderly from younger Americans and foreshadow some of the difficulties this age cohort could have in accessing health insurance other than that offered by an employer.
The near elderly are a group in transition from the active workforce to retirement. Almost three-quarters of those between the ages of 55 and 61 were employed in 1996, and about half worked full time. In contrast, however, less than one-half of those between the ages of 62 and 64 were employed at all during 1996, with only about one-quarter working full time. Concurrent with leaving the workforce, both the health and income of this group are beginning to decline (see app. I). Compared with individuals between the ages of 45 and 54, the near elderly are more likely to experience health conditions such as diabetes, hypertension, and heart disease. In addition, the near elderly are the most frequent users of many health care services. Their hospital discharge rates and days of hospital care were 51 percent and 66 percent higher, respectively, than those of 45- to 54-year-olds. Furthermore, their expenditures on health care services are estimated to be about 45 percent higher than those of the younger group, while their median family income is about 25 percent less. through the individual market and Medicare. It is not surprising that the near elderly are among the most likely age groups to have insurance and the least likely to be uninsured. Because aging is associated with greater use of health care services, the importance attached to having health insurance should increase with age. In fact, the extent to which the near-elderly purchase individual insurance suggests that this is the case.
Whether the near elderly obtained their health insurance through the individual market or through public sources was related to their employment, health, and income status. For example, a relatively high percentage of the near elderly with individual insurance reported that they worked (67 percent) and had excellent or good health (85 percent). In contrast, those with public sources of coverage were more likely to report that they were unemployed (87 percent) or in poor health (69 percent). And compared with those who purchased individual insurance, twice as many with public coverage had incomes under $20,000. The relationship between insurance status and income is not entirely predictable, however, since about 20 percent of the uninsured near elderly had family incomes of $50,000 or more, while almost one-third of those with individual insurance earned less than $20,000. Despite their limited resources, about the same share of the near elderly with low incomes purchased individual insurance as did those with higher incomes. Given the cost of comprehensive coverage in the individual market, those with lower incomes may be purchasing less expensive, limited-benefit products. At the same time, however, income alone may not be the only resource available to individuals. a higher percentage of both groups had low incomes, were minorities, were not working, or were in poor health. Again, however, there were important differences, as the uninsured were more likely to work, be married, have better health, and have higher incomes than those with public insurance.
section_title: Future Decline Expected in Employer-Based Health Insurance for 55- to 64-Year-Olds
paragraphs: While an estimated 60 to 70 percent of large employers offered retiree health coverage during the 1980s, fewer than 40 percent do so today, and that number is continuing to decline despite the recent period of strong economic growth. Surveys from two benefit consulting firms show that the number of employers offering coverage to early retirees dropped by 8 to 9 percentage points between 1991 and 1997 (see fig. 2). Concurrently, employment has shifted away from firms more likely to offer coverage, that is, from manufacturing to service industries. The decision by some large employers not to offer retiree health benefits will primarily affect future retirees. In fact, one survey sponsored by the Department of Labor suggests that very few of those who were retired in 1994—only about 2 percent—had lost coverage as a result of an employer’s subsequent decision to terminate retiree coverage. income in 1994 on health care—an amount that includes not only insurance premiums or employer-required cost sharing but also out-of-pocket expenses for copayments, deductibles, and services not covered by health insurance. (App. II compares the affordability of employer-based early retiree health insurance with that purchased in the individual market.) At the same time employers have increased retiree cost sharing, they have also tightened the eligibility requirements for participation in postemployment health benefits. Most firms now have a minimum service and age requirement, and some tie their own contribution to these minimums. For example, one employer we interviewed required retirees to have 35 years of service to qualify for the maximum employer contribution of 75 percent. In contrast, retirees with 19 years of service are eligible for only a 30-percent employer contribution. Furthermore, if workers change jobs frequently, especially as they become older, they may not qualify for retiree health benefits in the future.
According to surveys sponsored by the Labor Department in 1988 and 1994, higher costs for individuals could result in fewer participating in employer-based retiree health plans when such coverage is available. Between 1988 and 1994, the proportion of workers who continued coverage into retirement declined by 8 percentage points. Among those already retired, the proportion covered also declined, falling 10 percentage points over the same 6-year period. Of the approximately 5.3 million retirees who discontinued employer-based benefits in 1994, an estimated 27 percent cited the expense as a factor—up by over one-fifth from the earlier survey. For some retirees, coverage with lower cost sharing through a working or retired spouse may have influenced their decision to decline health benefits from a former employer.
section_title: COBRA Provides Temporary Access for Some Near Elderly
paragraphs: are eligible to elect continuation coverage if their former employer had 20 or more workers and offered health insurance.
Because the employer is not required to pay any portion of the premium, COBRA may be an expensive alternative for the near elderly—especially since the loss in employer-based coverage is probably accompanied by a decrease in earnings. In 1997, the annual per-employee cost of health insurance for employer-based coverage was about $3,800. However, there is significant variation in premiums as a result of differences in firm size, benefit structure, locale, demographics, or aggressiveness in negotiating rates. For early retirees in one company, annual premiums in 1996 for family coverage ranged, depending on the plan, from about $5,600 to almost $8,000. Since this firm paid the total cost of practically all of the health plans it offered to current workers, the COBRA cost would have come as a rude awakening to retirees.
The limited information available on eligibility for and use of COBRA by Americans in general and the near elderly in particular leaves many important questions unanswered. On the one hand, the data suggest that relatively few near elderly use COBRA; on the other hand, compared with younger age groups, 55- to 64-year-olds are more likely to elect continuation coverage. One database suggests that, on average, 61- to 64-year-olds only keep continuation coverage for a year.
The fact that it makes sense for the near elderly who lack an alternate source of coverage and can afford the premium to elect COBRA raises concerns among employers about the impact on overall employer health insurance costs. Employers contend that COBRA’s voluntary nature and high costs that result from the lack of an employer subsidy or contribution could result in the enrollment of only those individuals who expect their health care costs to exceed the premium. The costs of near-elderly COBRA enrollees in excess of the premium would, in turn, push up the employer’s overall health care expenditures. However, there is no systematically collected evidence on the extent to which such elections affect employer costs. The election of COBRA coverage by some near elderly as well as younger individuals may simply reflect an antipathy to living without health insurance. On the other hand, since COBRA election is associated with job turnover, the demographics of a firm or industry will also affect an employer’s insurance costs. For example, a firm with an older workforce that does not offer retiree health benefits may indeed experience higher insurance costs as a result of COBRA elections.
section_title: Age and Health Status May Limit Access of Near Elderly to Individual Coverage
paragraphs: In the majority of states, some individuals aged 55 to 64 may be denied coverage in the individual insurance market, may have certain conditions or body parts excluded from coverage, or may pay premiums that are significantly higher than the standard rate. Unlike employer-sponsored coverage, in which risk is spread over the entire group, premiums in the individual markets of many states reflect each enrollee’s demographic characteristics and health status. For example, on the basis of experience, carriers anticipate that the likelihood of requiring medical care increases with age. Thus, a 60-year-old in the individual market of most states pays more than a 30-year-old for the same coverage. Likewise, a carrier may also adjust premiums on the basis of its assessment of the applicant’s health status. This latter process is called medical underwriting.
Since health tends to decline with age, some near elderly may face serious obstacles in their efforts to obtain needed coverage through the individual market. On the basis of the underwriting results, a carrier may deny coverage to an applicant determined to be in poorer health. Individuals with serious health conditions such as heart disease and diabetes are frequently denied coverage, as are those with such non-life-threatening conditions as chronic back pain and migraine headaches. The most recent denial rates for carriers with whom we spoke in February 1998 ranged from zero in states where guaranteed issue is required to about 23 percent, with carriers typically denying coverage to about 15 percent of all applicants. Carriers may also offer coverage that excludes a certain condition or part of the body. A person with asthma or glaucoma, for example, may have all costs associated with treatment of those conditions excluded from coverage. products available in the individual markets of Colorado and Vermont are at least 10 percent and 8.4 percent, respectively, of the 1996 median family income of married near-elderly couples. In contrast, the average retiree contribution for employer-subsidized family coverage is about one-half of these percentages. While at least 27 states have high-risk insurance pools that act as a safety net to help ensure that individuals with health problems can obtain coverage, the cost is generally 125 to 200 percent of the average or standard rate charged to healthy individuals in the individual market for a comparable plan. Individuals who have been rejected for coverage by at least one carrier generally qualify for their state’s high-risk pool. However, participation in some state pools is limited by enrollment caps.
In addition to state initiatives, federal standards established by HIPAA guarantee some people leaving group coverage access to the individual market—a guarantee referred to as group-to-individual portability. Each state establishes a mechanism so that these “HIPAA eligibles” have access to coverage regardless of their health status, and insurance carriers may not impose coverage exclusions. To be eligible for a portability product, however, an individual must have had at least 18 months of coverage under a group plan without a break of more than 63 days, and have exhausted any COBRA or other conversion coverage available. One survey estimates that 61- to 64-year-olds typically remain enrolled in COBRA for only 12 months—6 to 24 months short of exhausting COBRA coverage. Since HIPAA changes the incentives for electing and exhausting COBRA coverage, past evidence may not be a guide to future use. However, depending on their state’s mechanism, the premiums faced by unhealthy individuals who are eligible for a HIPAA product, like those faced by unhealthy individuals who have always relied on the individual market for coverage, may be very expensive.
section_title: Conclusion
paragraphs: baby-boom generation. Experts are divided about the impact on employer-based coverage of actions that increase costs for the private sector, such as increasing the eligibility age for Medicare. In responding to Medicare’s financial crisis, policymakers need to be aware of the potential for the unintended consequences of their actions.
In addition to events that could affect the erosion in employer-based retiree coverage, use of the HIPAA guaranteed-access provision by eligible individuals may improve entry into the individual market for those with preexisting health conditions who lack an alternative way to obtain a comprehensive benefits package. Depending on the manner in which each state has chosen to implement HIPAA, however, cost may remain an impediment to such entry. Since group-to-individual portability is only available to qualified individuals who exhaust available COBRA or other conversion coverage, HIPAA may lead to an increased use of employer-based continuation coverage. Moreover, additional state reforms of the individual market may improve access and affordability for those who have never had group coverage or who fail to qualify for portability under HIPAA rules.
Mr. Chairman, this concludes my statement. I will be happy to answer your questions.
section_title: Comparison of the Health Status and Expenditures of 55- to 64-Year-Olds With the Experience of Younger Americans
paragraphs: Rate per 1,000 people per year Rate per 1,000 people per year Average length of stay (days)
section_title: Affordability of Health Insurance for the Near Elderly
paragraphs: Using data from the March 1997 CPS and 1995 and 1996 information on insurance premiums, we estimated the percentage of median income that a 55-to 64-year-old would have to commit to health insurance under a number of possible scenarios, including purchasing coverage through the individual market in a community-rated state (Vermont) as well as one that had no restrictions on the premiums that could be charged (Colorado), using 1996 rates for a commonly purchased health insurance product; and cost sharing under employer-based coverage using 1995 Peat Marwick estimates of the lowest, highest, and average retiree contribution.
While no official affordability standard exists, research suggests that older Americans commit a much higher percentage of their income to health insurance than do younger age groups. Congressional Budget Office calculations based on data from the Bureau of Labor Statistics’ Consumer Expenditure Survey indicate that between 1984 and 1994, spending by elderly Americans aged 65 and older on health care ranged from 10.2 percent to 12.9 percent of household income. In 1994, elderly Americans spent 11.2 percent of household income, about three times as much as younger age groups. These estimates include costs other than premiums or employer-imposed cost sharing—for example, copayments, deductibles, and expenditures for medical services not covered by insurance.
Table II.1 compares the cost of health insurance purchased in the individual market and employer-imposed cost sharing for early retirees with the median income for the near elderly in 1996.
As demonstrated by table II.1, the near elderly’s share of employer-subsidized coverage is generally lower than that for coverage purchased through the individual market. For example, on average, employer-based family coverage for retirees at $2,340 annually represents 4.7 percent of median family income. In contrast, costs in the individual market can be significantly higher—in part because they lack an employer subsidy. In Colorado, the annual premium for a commonly purchased individual insurance product in 1996 was about $2,500 for single coverage and $5,000 for a couple—representing about 12 percent and 10 percent, respectively, of median income for 55- to 64-year-olds. While less expensive than the Colorado example, premiums for health insurance through the individual market in Vermont—a community-rated state—would represent 9.9 percent of median income for single coverage and 8.4 percent of median income for a couple. For more than one-half of the near elderly, these individual market costs typically exceed average health care spending for Americans under age 65—in some cases significantly. In April 1998, the Center for Studying Health System Change reported that older adults who purchased individual coverage typically spent a considerably higher proportion of their income on premiums than other adult age groups—about 9 percent for the 60- to 64-year-old group.
section_title: Selected Carriers’ Monthly Premium Variations Attributable to Age and Specified Health Characteristics
paragraphs: Preferred provider organization/$250 Preferred provider organization/$500 Preferred provider organization/$500 $214-$602 (low end and high end)$160-$309 (rural/urban)
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