Retiree Health Benefits: Majority of Sponsors Continued to Offer Prescription Drug Coverage and Chose the Retiree Drug Subsidy
Published: 2007-05-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a prescription drug benefit for beneficiaries, called Medicare Part D, beginning in January 2006. The MMA resulted in options for sponsors of employment-based prescription drug benefits, such as a federal subsidy payment--the retiree drug subsidy (RDS)--when sponsors provide benefits meeting certain MMA requirements to Medicare-eligible retirees. The MMA required GAO to conduct two studies on trends in employment-based retiree health coverage and the MMA options available to sponsors. The first study, Retiree Health Benefits: Options for Employment-Based Prescription Drug Benefits under the Medicare Modernization Act (GAO-05-205), was published February 14, 2005. In this second study, GAO determined which MMA prescription drug coverage options sponsors selected, the factors they considered in selecting these options, and the effect these decisions may have on the provision of employment-based health benefits for retirees. GAO identified options that sponsors selected using data from employer benefit surveys and the Centers for Medicare & Medicaid Services (CMS), the federal agency that administers Medicare. To obtain sponsors' views about the factors they considered and the effects of their decisions, GAO also interviewed private and public sector sponsors and experts.
section_title: What GAO Found
paragraphs: According to survey data GAO reviewed, a majority of retiree health benefit sponsors reported that for 2006 they continued to offer prescription drug coverage and accepted the RDS. However, the size of the reported majority differed across the surveys. For example, one survey of private sector sponsors with 1,000 or more employees found that 82 percent of these sponsors accepted the RDS for 2006. Another survey of private and public sponsors found that 51 percent of surveyed sponsors with 500 or more employees accepted the RDS for 2006. Data from CMS showed that more than 3,900 sponsors, representing about 7 million retirees, were approved for the RDS for 2006. According to the surveys GAO reviewed, much smaller percentages of sponsors reported selecting other MMA options for 2006. For 2007, according to one survey, 78 percent of surveyed employers reported that they planned to apply for the RDS for that year. CMS data showed that about 3,600 sponsors were approved for the RDS for 2007. Public and private sponsors GAO interviewed reported considering a variety of factors when selecting MMA prescription drug coverage options, including whether they could offer the same retiree health benefits they offered prior to the MMA and their ability to save on costs. In general, in order to implement most MMA options, sponsors would likely have to change the prescription drug benefits they offer. For example, sponsors that offer their own Medicare Part D plan must generally meet all CMS requirements for Part D plans, such as providing coverage for specific categories of prescription drugs. In contrast, sponsors that select the RDS option can offer the same retiree health benefits they offered prior to the MMA, as long as a sponsor's coverage remains at least actuarially equivalent to the standard Part D benefit. When deciding which, if any, options to pursue, public sponsors were affected by some factors that did not affect private sponsors. In the short term, sponsors' decisions regarding the MMA options appear to have resulted in benefits remaining relatively unchanged, in part because a majority of surveyed sponsors reported that they continued to offer prescription drug benefits and accepted the RDS the first 2 years the RDS was offered. Over the longer term, the effect of sponsors' decisions about the MMA options is unclear. For example, some experts GAO interviewed indicated that the MMA may extend the amount of time that sponsors offer benefits without reducing coverage, while other experts said the availability of the Medicare Part D benefit may make it more likely that sponsors will stop offering prescription drug benefits for retirees. In addition, it is unclear to what extent sponsors will continue to select the same MMA option in the future. To the extent that sponsors that have accepted the RDS select other MMA options, sponsors' provision of retiree health benefits may change. In commenting on a draft of this report, CMS and four experts agreed with the report's findings.

section_title: Letter
paragraphs: Before 2006, Medicare, the federal program that finances health care  benefits for nearly 43 million elderly and disabled beneficiaries, did not  generally provide coverage for outpatient prescription drugs. If Medicare  beneficiaries had such coverage at all, it was typically obtained outside of  the program—for example, through policies with drug coverage that  supplemented Medicare or through Medicaid. In particular, Medicare  beneficiaries who were retired could enroll in health plans with  prescription drug coverage offered through former employers or other  employment-based groups, such as unions. To help Medicare beneficiaries  with increasing prescription drug costs and encourage employment-based  health care coverage, especially for prescription drug coverage for  retirees, Congress passed the Medicare Prescription Drug, Improvement,  and Modernization Act of 2003 (MMA). Among its provisions, the MMA  established an outpatient prescription drug benefit, known as Medicare  Part D, beginning January 1, 2006. The MMA also resulted in various  options to encourage retiree health benefit sponsors to offer prescription  drug benefits to retired Medicare beneficiaries.
Specifically, among the options resulting from the MMA, which in this  report we refer to as MMA options, sponsors can    offer health plans for retirees that provide comprehensive prescription  drug coverage, which retirees can use in lieu of Medicare Part D; sponsors  with plans that offer prescription drug benefits meeting certain MMA  requirements will receive a federal subsidy payment, known as the retiree  drug subsidy (RDS);   offer health plans for retirees that supplement—or “wrap around”— retirees’ Part D prescription drug benefit;   offer their own Medicare Part D plan;    contract with private plans that provide Medicare Part D benefits; or    pay for some or all of the Part D premiums for their eligible retirees.
The MMA required that we conduct two studies on trends in employment- based retiree health coverage and the MMA options sponsors selected for  providing employment-based prescription drug coverage for retirees. In  our first study, published in 2005, we reported that the percentage of  employers offering retiree health coverage had declined beginning in the  early 1990s but had leveled off by the early 2000s. We also reported that  many sponsors had not made final decisions about which MMA  prescription drug options they would choose for their Medicare-eligible  retirees, although many sponsors were considering accepting the RDS as  a primary option. In this study, we are reporting on (1) which MMA  prescription drug coverage options sponsors selected, (2) the factors they  considered in selecting these options, and (3) the effect these decisions  may have on sponsors’ provision of employment-based health benefits for  retirees. The MMA also required us to report information on employment- based retiree health coverage, including information updated since our  first study. We are including this information in appendix I. In addition, the  MMA required us to describe alternative approaches for the provision of  employment-based retiree health coverage that sponsors and others say  may help maintain, expand, or improve upon retiree health coverage. We  are including this information in appendix II.
To determine which MMA prescription drug coverage options sponsors  selected, we reviewed survey data collected by benefit consulting firms on  the options that sponsors reported selecting for 2006 and the options that  sponsors reported that they planned to select for 2007. The surveys we  reviewed included a survey conducted by Mercer Health & Benefits of  employers—including large employers, defined as those with at least 500  employees—that offered employment-based health benefits. The Mercer  survey, which was based on a random sample of private and public  employers, can be projected nationwide. We also reviewed data from a  survey conducted by the Kaiser Family Foundation and Hewitt Associates  for a nonrandom sample of large private sector employers—those with  1,000 or more employees. We also reviewed one survey of multiemployer  plans and one survey of state and local public sector sponsors conducted  by The Segal Company. The data from the surveys provided us with  information on sponsors’ reported selections for 2006 and their plans  pertaining to the MMA options for 2007. In addition, we obtained and  analyzed data on the number and characteristics of sponsors that were  approved for the RDS for these 2 years. We obtained these data from the  Centers for Medicare & Medicaid Services (CMS), the federal agency that  administers Medicare and that is responsible for implementing and  administering the RDS program.
To describe both the factors that sponsors considered in selecting the  MMA options and the effect that sponsors’ decisions about the MMA  options may have on the provision of health benefits for retirees, we relied  on the Mercer and Kaiser/Hewitt surveys of private and public sector  employers. We reviewed documents from the literature, including CMS  documents, on the factors that sponsors may consider in selecting the  MMA options. We also interviewed officials from 13 of the 15 private and  public sponsors of retiree health benefits that we reported on in 2005,  including the Office of Personnel Management (OPM), which administers  the Federal Employees Health Benefits Program (FEHBP). We also  interviewed 2 sponsors that chose to offer their own Medicare Part D plan  in 2006 instead of implementing the RDS or another MMA option. We did  not interview these sponsors for our 2005 report. In addition, we  interviewed several experts on sponsors’ decisions regarding the MMA  options, including experts from five firms providing benefit consulting  services primarily for large public and private sector sponsors; six  organizations, including one representing unions, one representing  multiemployer plans, two representing large employers, and two  representing health plans; one professional organization for actuaries; and  other research organizations. In our interviews with sponsor officials and  experts, we asked open-ended questions about the factors sponsors  considered in making decisions about the MMA options for 2006 and  future years, as well as the effect of these decisions on the provision of  health benefits for retirees. Because we asked the officials and experts we  interviewed open-ended questions, the frequency of our interviewees’  responses is not comparable. Therefore, we report interviewees’ responses  without reporting the total number of officials or experts associated with  each response.
We assessed the reliability of the data from the employer benefit surveys,  CMS, and three large federal surveys and determined that the data were  sufficiently reliable for the purposes of our study. (App. III provides more  detailed information on our methodology.) We performed our work from  April 2006 through May 2007 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: For retirees aged 65 and older, Medicare is typically the primary source of  health insurance coverage. Medicare covers nearly 43 million  beneficiaries. The program covers hospital care as well as physician office  visits and outpatient services and, effective January 1, 2006, prescription  drugs.
subsections: section_title: Private Supplemental Insurance for Medicare Beneficiaries
paragraphs: Medicare beneficiaries may rely on private retiree health coverage through  former employment or through individually purchased Medicare  supplemental insurance (known as Medigap) to cover some or all of the  costs Medicare does not cover, such as deductibles, copayments, and  coinsurance. For 2004, the most recent data available, the Medicare  Current Beneficiary Survey (MCBS) found that about one-third of  Medicare-eligible beneficiaries obtained supplemental coverage from a  former employer or union. Employment-based retiree health benefits are  typically offered as a voluntary benefit to retirees, thereby giving sponsors  of these benefits the option of decreasing or eliminating benefits.  However, some sponsors may be prevented from making immediate  changes to coverage because of union contracts, for example. Benefit  surveys have found that the percentage of employers offering retiree  health benefits has decreased, beginning in the early 1990s. For example,  according to a series of surveys conducted by Mercer, the percentage of  employers with 500 or more employees offering health insurance to  Medicare-eligible retirees declined from 44 percent in 1993 to 29 percent in  2006, although this trend had leveled off from 2001 through 2006. (See  app. I for more information on employment-based retiree health  coverage.)
Sponsors typically integrate their retiree health benefits with Medicare  once retirees reach age 65, with Medicare as the primary payer and the  sponsor as the secondary payer. Several types of integration occur  between sponsors and Medicare. For example, some sponsors coordinate  through a carve out approach, in which the sponsor calculates its normal  benefit and then subtracts (or carves out) the Medicare benefit, generally  leaving the retiree with out-of-pocket costs comparable to having the  employment-based plan without Medicare. Another approach used by  sponsors is full coordination of benefits, in which the plan pays the  difference between the total health care charges and the Medicare  reimbursement amount, often providing retirees complete coverage and  protection from out-of-pocket costs.
The provision of employment-based retiree health benefits may vary  depending on a variety of factors, including whether the sponsor is in the  private or public sector, and by industry type. The 2006 Kaiser Family  Foundation and Health Research and Educational Trust (HRET) survey,  for example, showed that 82 percent of state and local government  employers with 200 or more employees offered coverage to retirees,  compared with 35 percent of employers with 200 or more employees  across all employer industries that offered coverage to retirees. Coverage  can also differ between retirees under age 65 and those eligible for  Medicare, although sponsors often cover both groups of retirees. For  example, some sponsors offer retirees under age 65 a preferred provider  organization plan but offer a fee-for-service plan for retirees eligible for  Medicare. While the provision of employment-based retiree health benefits  varies by employer size, plan type, industry, and whether retirees are  Medicare-eligible, these benefits almost always include coverage of  prescription drugs.
section_title: The MMA Prescription Drug Benefit
paragraphs: MMA created a prescription drug benefit for beneficiaries, called Medicare  Part D, which became effective January 1, 2006. This voluntary benefit is  available to all Medicare beneficiaries and is the first comprehensive  prescription drug benefit ever offered under the Medicare program. In  January 2007 (the most recent data available) CMS reported that  approximately 39 million beneficiaries were receiving prescription drug  coverage from a combination of Medicare Part D, employment-based  coverage, and other sources, such as the Department of Veterans Affairs.
The drug benefit is offered primarily through two types of private plans  created as a result of the MMA: stand-alone prescription drug plans (PDP)  that supplement fee-for-service Medicare, and Medicare Advantage  prescription drug (MA-PD) plans, such as coordinated care plans, that  cover drugs and other Medicare benefits. To be in operation for 2006,  prospective PDPs and MA-PD plans had to apply by March 2005 and were  approved in September 2005. At a minimum, these plans were required to  offer the standard Medicare Part D benefit or alternative coverage that  was at least equal in value. According to the Kaiser Family Foundation,  plans approved for 2006 often varied from the standard Part D benefit in  benefit design and covered drugs. For example, although the standard   Part D benefit had a $250 deductible for 2006, Kaiser reported that   58 percent of PDPs and 79 percent of MA-PD plans approved for 2006 had  no deductible requirement. In 2007, a total of 1,875 PDPs are offered  nationally across 34 PDP regions.
The standard Medicare Part D benefit in 2007 has a $265 deductible (up  from $250 in 2006) and 25 percent coinsurance up to an initial coverage  limit of $2,400 in total drug costs ($2,250 in 2006), followed by a coverage  gap in which enrollees pay 100 percent of their drug costs until they have  spent $3,850 out of pocket ($3,600 in 2006). Thereafter, the plan pays  approximately 95 percent of total drug costs. The standard benefit  amounts are set to increase annually by the rate of per capita Part D  spending growth. Assistance with drug benefit premiums and cost-sharing  is available for certain low-income beneficiaries.
section_title: Options Available to Sponsors under Medicare Part D
paragraphs: The MMA resulted in several options for sponsors of employment-based  retiree health plans to provide prescription drug coverage to Medicare- eligible retirees. These options are as follows:  Retiree Drug Subsidy (RDS). Sponsors with plans ending in 2007 that  offer prescription drug coverage that is actuarially equivalent to that under  Part D can receive a federal tax-free subsidy equal to 28 percent of the  allowable gross retiree prescription drug costs over $265 (up from $250  for plans ending in 2006) through $5,350 (up from $5,000 for plans ending  in 2006), with a maximum subsidy of $1,423 per beneficiary for each  individual eligible for Part D who is enrolled in the employment-based plan  instead of Part D. Actuarial equivalence, which is attested to by a qualified  actuary, is intended to certify that a retiree health benefit sponsor’s  coverage is at least as generous as the standard Part D coverage.  Sponsors must demonstrate actuarial equivalence to qualify for the RDS,  and sponsors will only receive the RDS for those Medicare beneficiaries  who do not enroll in the Part D benefit. Sponsors may opt to receive RDS  payments on a monthly, quarterly, or annual basis.
In order to receive the RDS, sponsors must apply to and receive approval  from CMS. For 2007 and subsequent years, sponsors are required to apply  for the RDS no later than 90 days prior to the beginning of the plan year.  For example, sponsors that applied for a calendar year 2007 plan would  have had to apply no later than midnight on October 2, 2006. Additional  steps involved in applying for and receiving the RDS include    submitting a qualified actuary’s attestation that the plan meets the RDS  actuarial equivalence standard;   certifying that the creditable coverage status of the plan has been or will  be disclosed to plan participants and CMS;   electronically submitting and periodically updating enrollment information  about retirees and dependents; and   electronically submitting aggregate data about drug costs incurred and  reconciling costs at year-end.
Provide Supplemental Coverage. Sponsors can set up their own separate  plans that supplement, or wrap around, Part D coverage.
Apply to Offer Own PDP or MA-PD Plan. Sponsors can apply to CMS to  offer their own PDP or MA-PD plan for retirees. CMS has waived or  modified Part D requirements added by the MMA that hinder the design of,  the offering of, or the enrollment in a Part D plan offered by a sponsor. For  example, CMS has issued guidance that allows sponsors to limit coverage  to retirees only, whereas other Part D plans must offer coverage to all  eligible individuals residing within a certain location.
Contract with a PDP or MA-PD Plan. Sponsors can contract with a PDP  or MA-PD plan to offer the standard Part D prescription drug benefits or  enhanced benefits to the sponsors’ retirees who are eligible for Medicare.  For example, an enhanced benefit could allow retirees to pay a lower  deductible or lower copayment than the standard Part D benefit requires.  As with the previous MMA option, CMS has waived or modified Part D  requirements that hinder the design of, the offering of, or the enrollment in  these types of arrangements.
Payment of Part D Premiums. Sponsors can pay for some or all of the  Part D premiums for their eligible retirees.
section_title: Majority of Sponsors Reported Continuing to Offer Prescription Drug Coverage and Accepting the RDS
paragraphs: According to survey data we reviewed, the majority of surveyed retiree  health benefit sponsors reported that they continued to offer prescription  drug coverage and accepted the RDS for 2006. Survey data also indicated  that much smaller percentages of sponsors took other MMA options— such as offering supplemental, or wrap-around, prescription drug coverage  or contracting with a PDP or MA-PD plan.
subsections: section_title: Majority of Sponsors Reported Accepting the RDS
paragraphs: According to survey data we reviewed, the majority of surveyed sponsors  reported that they continued to offer prescription drug coverage and  accepted the RDS for plans ending in 2006. However, the size of the  reported majority differed across the surveys. For example, the 2006  Kaiser/Hewitt survey, which surveyed private sector employers that  offered retiree health benefits and had 1,000 or more employees, found  that 82 percent of these employers accepted the RDS for 2006. In  contrast, the 2006 Mercer survey found that 51 percent of surveyed private  and public employers that offered retiree health benefits and had 500 or  more employees continued to offer prescription drug coverage and  accepted the RDS for 2006. Another survey of state and local public  sector sponsors that offered retiree health benefits found that 79 percent  reported accepting the RDS for 2006. Similarly, a survey of multiemployer  plan sponsors that offered retiree health benefits found that 71 percent  reported accepting the RDS for 2006.
According to representatives from both Kaiser/Hewitt and Mercer, the  percentages of surveyed employers that reported accepting the RDS—  82 percent and 51 percent, respectively—may be different because the  employers surveyed differed in size between the two surveys. According to  the 2005 Mercer survey, smaller employers may have such a limited  number of Medicare-eligible retirees that they do not believe the RDS  would be worth the cost and administrative burden associated with  applying for the RDS. Furthermore, experts we interviewed told us that a  minimum of 50 to 100 retirees is needed to make it worthwhile for  employers to apply for the RDS.
Data from CMS show that more than 3,900 sponsors, representing  approximately 7 million retirees, were approved for the RDS for 2006.  The number of retirees represented by sponsors that year ranged widely,  from 1 to 444,818, with a median of 174 retirees. According to CMS data,  commercial and government sponsors made up approximately 70 percent  of sponsors approved for the RDS and represented approximately   90 percent of retirees covered by the RDS for 2006. Nonprofit, religious,  and union sponsors made up the remaining approximately 30 percent of  sponsors and approximately 10 percent of retirees covered by the RDS for  2006.
For 2007, the Kaiser/Hewitt survey reported that the majority of surveyed  employers planned to take the RDS. Specifically, 78 percent of surveyed  private sector employers that offered retiree health benefits and had 1,000  or more employees planned to take the RDS for 2007—compared with   82 percent that took the RDS for 2006. CMS preliminary data for 2007  showed that the number of sponsors approved for the RDS decreased  somewhat from 2006, to about 3,600 sponsors. CMS officials indicated  that the decrease in the number of sponsors between 2006 and 2007 could  be explained by a combination of several factors, including mergers by  sponsors offering retiree health benefits, differences in the time of year  when data were extracted, and the movement of some sponsors from the  RDS to other MMA options. According to CMS data, in 2007 the number of  retirees represented by sponsors approved for the RDS continued to show  a wide range as in 2006, from 1 to 196,840, with a median of 169 retirees.  The percentage of sponsors approved for the RDS by sponsor type, such  as commercial or government, remained relatively consistent from 2006 to  2007. (See table 1.)
section_title: Smaller Percentages of Sponsors Reported Selecting MMA Options Other than the RDS
paragraphs: All of the surveys we reviewed reported much smaller percentages of  sponsors taking MMA options other than the RDS for 2006. In these  surveys, the percentage of sponsors that reported offering supplemental,  or “wrap-around,” prescription drug coverage in 2006 ranged from 0 to   13 percent. For example, the Mercer survey of private and public  employers that offered retiree health benefits and had 500 or more  employees reported that 13 percent offered supplemental coverage in  2006. Similarly, among the surveys we reviewed, the percentage of  sponsors that reported contracting with a PDP or MA-PD plan ranged from  3 percent to 7 percent. For example, the Kaiser/Hewitt survey reported  that 3 percent of surveyed private sector employers that offered retiree  health benefits and had 1,000 or more employees contracted with a PDP or  MA-PD plan in 2006. In addition, CMS reported that few sponsors applied  to offer their own PDP or MA-PD plan for 2006 and 2007. Specifically, CMS  reported that for the 2006 and 2007 contract years, there were 10 approved  sponsors that offered their own PDP and none that offered their own MA- PD plan.
section_title: Sponsors Considered a Variety of Factors When Selecting MMA Prescription Drug Coverage Options
paragraphs: Public and private sponsors we interviewed reported considering a variety  of factors when selecting MMA prescription drug coverage options.  Sponsors cited factors such as whether they could offer the same retiree  health benefits they offered prior to the MMA, their ability to save on  costs, the ease of explaining the option to retirees, the administrative  requirements associated with each option, and the extent of information  available on the options. When making decisions about which, if any, MMA  option to pursue, public sponsors we interviewed were affected by some  factors that private sponsors did not face.
subsections: section_title: Sponsors Considered Ability to Offer the Same Retiree Health Benefits
paragraphs: Sponsors we interviewed told us that when selecting an MMA prescription  drug coverage option, they considered the extent to which they would be  able to continue to offer the same retiree health benefits they had offered  before implementing the MMA option. In general, in order to implement  most MMA options other than the RDS, sponsors would likely have to  change the prescription drug benefits they offer. For example, sponsors  that offer their own PDP or MA-PD plan must generally meet all CMS  requirements for Part D plans, such as including specific categories of  prescription drugs on their formularies. One sponsor we interviewed also  told us that it did not consider the option of paying Part D premiums  because that option alone would result in a reduction in the level of  prescription drug coverage offered to retirees, compared with coverage  offered through the sponsor. In contrast, sponsors that select the RDS  option are able to offer the same retiree health benefits they offered prior  to the MMA, as long as a sponsor’s coverage remains at least as generous  as the standard Part D benefit, thus meeting the actuarial equivalence  standard to qualify for the RDS. In addition, the final rule implementing  the MMA prescription drug benefit that was published in January 2005  gave sponsors flexibility in terms of how they could meet the actuarial  equivalence standard. Some of the sponsors and experts we interviewed  credited this flexibility with allowing sponsors to meet actuarial  equivalence without having to change the retiree health benefits they  offered. For example, one sponsor told us that it was able to combine  multiple benefit options to meet actuarial equivalence, which allowed the  sponsor to collect the RDS for most retirees—including those paying the  full cost of their coverage—without making changes to the benefits  offered. Prior to the final rule, this sponsor did not plan on collecting the  RDS for the group of retirees paying the full cost of coverage because the  coverage would not have met the actuarial equivalence standard on its  own. Most sponsors we interviewed told us that the ability to offer the  same retiree health benefits they offered prior to the MMA was an  advantage of the RDS. In addition, experts we interviewed reported that  some sponsors are unable to change the benefits they offer in the short  term because union contracts prevent them from doing so, thus making  the RDS the only MMA option for which they likely would qualify.
section_title: Sponsors Considered Their Ability to Save on Costs
paragraphs: Sponsors reported that when selecting an MMA option, they considered  how the various options would affect their ability to save on costs. While  all of the MMA prescription drug coverage options may provide sponsors  with an opportunity for cost savings, the amount of savings may vary  based on a sponsor’s tax status. For example, in guidance to employers,  CMS estimated that the average cost savings to a sponsor that offers its  own PDP or MA-PD plan for 2006 would be close to $900 per participating  retiree, and the average tax-free payment for sponsors that took the RDS  would be $668 per participating retiree. Because RDS payments are tax- exempt, CMS estimates indicate that the relative value of savings from the  RDS as compared with savings from offering a PDP or MA-PD plan would  be greater for private, tax-paying sponsors than it would be for public,  non-tax-paying sponsors.
In addition, some sponsors said they considered the trade-off between the  cost savings associated with the different MMA options and the effect the  options would have on the prescription drug benefits sponsors would be  able to offer. For example, depending on their tax status, some sponsors  might save more money by taking the RDS, while others might save more  by offering or contracting with a PDP or MA-PD plan. However, as  previously discussed, while most MMA options likely require a change of  benefits, the RDS allows sponsors to continue offering the benefits they  offered prior to the implementation of the MMA as long as the benefit is at  least actuarially equivalent to the Part D benefit. In one case, a sponsor we  interviewed reported that it chose the RDS, even though the sponsor could  have reduced costs by choosing one of the other MMA options. As one  expert explained, the RDS allows sponsors to save money without  significantly changing their retiree health plans.
section_title: Sponsors Considered the Ease of Explaining MMA Options to Retirees
paragraphs: Sponsors also reported considering how easy it would be to explain an  option to retirees. In particular, sponsors we interviewed told us that they  considered how benefit changes made as a result of implementing the  various MMA options would complicate communications with retirees.  For example, one sponsor we interviewed indicated that a disadvantage of  some MMA options was that they would require a great effort to  communicate changes to retirees, who range in age from 50 to 105 and  who might find benefit changes difficult to understand. Conversely,  sponsors that take the RDS are able to preserve their benefit structure and  may find it easier to communicate this option to retirees, according to  CMS.
In addition, depending on the option they choose, sponsors have to meet  different MMA requirements for communicating information about the  options to retirees. For example, sponsors that take the RDS are required  to explain how their prescription drug coverage compares to the Medicare  Part D benefit. In contrast, sponsors that offer their own PDP or MA-PD  plan are required to meet more strict CMS communication requirements  on Part D plans—such as developing and sending more detailed  information about prescription drug coverage to retirees.
section_title: Sponsors Considered the Administrative Requirements Associated with Each MMA Option
paragraphs: According to CMS and the experts and sponsors we interviewed, each  option has different administrative requirements—some of which take up  a considerable amount of time and resources, so sponsors also considered  these requirements when selecting an option. For example, according to  CMS, sponsors that offer their own PDP or MA-PD plan are required to  calculate “true out-of-pocket” costs and adjust premiums for low-income  retirees, among other administrative requirements. One sponsor we  interviewed that offered its own PDP for 2006 indicated that it took 11 full- time employees and 13 part-time employees over 15,000 hours to  implement the PDP. Conversely, according to CMS, sponsors that take  the RDS are not required to calculate true out-of-pocket costs, adjust  premiums for low-income retirees, or meet many of the other  administrative requirements required of other options. Some sponsors we  interviewed told us that the RDS would be administratively easy or easier  than other MMA options, although many reported some first-year  implementation issues, such as issues in submitting a list of eligible  retirees to CMS, which made administration of the RDS more difficult than  originally anticipated.
section_title: Sponsors Considered the Extent of Available Information Regarding MMA Options
paragraphs: Sponsors also reported that the extent of available information regarding  the MMA options at the time they needed to make decisions was a factor  they considered in selecting an option. CMS did not approve PDP and MA- PD plans until September 2005—the same month in which sponsors had to  apply for the RDS for plans ending in 2006. Some sponsors we  interviewed reported that they did not have enough information about the  PDP and MA-PD plan options at the time they had to make their decision  for 2006. For example, one sponsor we interviewed that took the RDS told  us that there were too many unknowns at the time it had to make its  decision for 2006 and that if the sponsor wanted to make changes to its  retiree health benefits, it would need to provide a transition period for  retirees in order to prepare them for plan changes. In addition, according  to the 2005 Mercer survey, the timing of the plan and rate information  available from health plans in the Medicare market was a key factor that  led many employers to seek the RDS or to delay taking any action for 2006.
When selecting an option for 2007, sponsors we interviewed continued to  have concerns about the extent of the information available about the PDP  and MA-PD plans. For example, one sponsor we interviewed told us that  while there was better information available when it had to make its  decision for 2007 compared with 2006, the sponsor still did not have a full  year’s worth of data on PDPs when it had to make its decision. As the  markets for PDPs and MA-PD plans mature and more detailed information  becomes available, the availability of information on the various MMA  prescription drug coverage options may become less of a factor in future  years. According to one expert we interviewed, when employers are  making their decisions for 2008, there should be a full year of information  on the MMA prescription drug coverage options so that sponsors will be  able to make more fully informed decisions.
section_title: Public Sponsors May Have to Consider Unique Factors
paragraphs: When making decisions about which, if any, MMA option to pursue, public  sponsors may have to consider some factors that private sponsors do not.  For example, some public sponsors may be influenced at the state level to  either offer health insurance or choose a certain MMA option. One public  sponsor we interviewed was directed by the budget committee of its state  legislature to take the RDS in 2007 even though the sponsor—a state  retirement system—had concluded that contracting with a PDP would  allow the sponsor to decrease premiums for the state, contracting  agencies, and some enrollees; decrease prescription drug copayments for  enrollees; or both. As we stated earlier in this report, CMS estimates  indicate that the relative value of savings from the tax-free RDS, as  compared with savings from offering a PDP or MA-PD plan, for example,  would be greater for private, tax-paying sponsors than it would be for  public, non-tax-paying sponsors. In addition, OPM, which administers  FEHBP, opted to continue offering prescription drug coverage to retirees  without taking the RDS or any of the other MMA options. We reported  previously that OPM officials told us OPM did not apply for the RDS for  FEHBP because they said the intent of the RDS was to encourage  sponsors to continue offering prescription drug coverage to enrolled  Medicare beneficiaries, which all FEHBP plans were already doing. As  such, OPM officials told us, the government would be subsidizing itself to  provide coverage for prescription drugs to Medicare-eligible federal  employees and retirees.
section_title: In the Short Term, Sponsors’ Decisions Regarding MMA Options Resulted in Benefits Remaining Relatively Unchanged, but over the Longer Term the Effect Is Unclear
paragraphs: Sponsors’ decisions regarding the various MMA options appear to have  resulted in the provision of retiree health benefits remaining relatively  unchanged in the short term, although the effect over the longer term on  the provision of health benefits to retirees is unclear. The short-term effect  of sponsors’ decisions appears to have resulted in benefits remaining  relatively unchanged, in part because the majority of sponsors continued  to offer prescription drug benefits and accepted the RDS during the first   2 years this option was offered. In addition, according to the 2005 Mercer  survey, 72 percent of employers with 500 or more employees reported that  the MMA options would have no effect on their ability to provide retiree  health coverage. Similarly, many sponsors we interviewed told us that they  did not make changes to their retiree health benefits—including  decreasing coverage—in direct response to the MMA. Only one of the  sponsors we interviewed that selected the RDS for 2006 reported making  any changes to its benefits to meet the RDS actuarial equivalence  standard. This sponsor told us it eliminated one of its plans that did not  meet CMS’s actuarial equivalence standard for the RDS, but the sponsor  said it moved all affected Medicare-eligible retirees into coverage that did  qualify for the RDS. In addition, some sponsors we interviewed told us  that they shared part of the subsidy they received from accepting the RDS  with retirees by reducing retiree premiums. Furthermore, the 2005 Mercer  survey reported that only 3 percent of employers with 500 or more  employees indicated they were likely to terminate drug coverage for  Medicare-eligible retirees—rather than choosing one of the MMA  options—in response to the availability of the Part D prescription drug  benefit.
While, in the short term, sponsors’ decisions regarding the MMA options  resulted in benefits remaining relatively unchanged, the effect over the  longer term of sponsors’ decisions on the provision of employment-based  retiree health benefits is unclear. Experts we interviewed differed in their  assessments of what the effect is likely to be over the longer term. In  particular, some experts we interviewed indicated that the MMA may  extend the amount of time that sponsors offer benefits without reducing  coverage. Furthermore, one sponsor we interviewed indicated that the  RDS increased the number of years that its retiree health benefits program  would be solvent. On the other hand, other experts said that it was  possible that the availability of the Medicare Part D benefit may make it  more likely that sponsors will stop offering prescription drug benefits for  retirees. Nearly all experts we interviewed told us that it was unlikely that  an employer or other potential sponsor that did not offer retiree  prescription drug coverage prior to the MMA would begin sponsoring  these benefits in response to the new options resulting from the MMA.
According to experts, employers are not planning to improve or expand  retiree health coverage and do not want the additional financial liability of  providing these benefits.
Furthermore, it is unclear to what extent sponsors will continue to select  the same MMA option in the future. For example, the 2006 Kaiser/Hewitt  survey reported that of those respondents that accepted the RDS for 2006,  only 54 percent said they were very or somewhat likely to accept the RDS  for 2010. Furthermore, 25 percent said they did not know whether they  would accept the RDS for 2010. Most of the sponsors that we interviewed  that took the RDS for 2006 and planned to take the RDS for 2007 said they  were unsure which option they would be taking for 2008. The 2006  Kaiser/Hewitt survey also reported that employers that are unlikely to take  the RDS in the future are considering a number of other MMA options,  including contracting with a PDP to offer enhanced coverage. To the  extent that sponsors that have accepted the RDS select other MMA  options in subsequent years, sponsors’ provision of retiree health benefits  may change.
In addition to the MMA options, a host of other long-standing factors may  affect a sponsor’s provision of health benefits to retirees. These include  the existence of union contracts that may require the provision of certain  health benefits, increasing costs for health care, the degree of industry  competition, and the strength of sponsors’ financial conditions. For  example, in 2005 we reported that sponsors that negotiated retiree health  benefits with unions might not have as much flexibility to change these  benefits prior to negotiations. Sponsors we interviewed also cited the  competitiveness of the industry as another factor that affected retiree  coverage, with one sponsor stating that it strove to have benefit packages  that were in line with the overall market as well as the specific industry.
section_title: Agency and Other External Comments
paragraphs: We provided a draft of this report to CMS and experts on retiree health  benefits at the Employee Benefit Research Institute, Hewitt Associates,  Mercer Health & Benefits, and the National Opinion Research Center.
In its written comments on a draft of this report, CMS stated that the  report provided an excellent summary of available information concerning  the choices sponsors made among MMA options. (CMS’s comments are  included in app. IV.)
CMS agreed with the finding that the majority of sponsors reported  continuing to offer prescription drug coverage and accepting the RDS for  2006, with smaller percentages of sponsors reporting selecting other MMA  options. In commenting on the draft report’s identification of several  factors that may have contributed to the differences in the surveys’  reported percentages of employers accepting the RDS for 2006, CMS  suggested an additional factor that may have contributed to the  differences in the survey finding. Specifically, CMS said that some of the  surveys reported what sponsors said they intended to do or were  considering doing at the time of the survey, and it was possible that a  portion ultimately decided not to pursue those options. However, both the  2006 Kaiser/Hewitt survey—which reported that 82 percent of surveyed  employers accepted the RDS for 2006—and the 2006 Mercer survey— which reported that 51 percent of surveyed employers accepted the RDS  for 2006—were reporting decisions surveyed employers said they had  already made, not what they planned to do. Therefore, it is not likely this  factor would explain the difference in the survey results. CMS also agreed  with the draft report’s related finding regarding the number of sponsors  participating in the RDS program. CMS suggested that we identify the 2007  data as preliminary, since it was compiled in February. We have made this  clarification to the final report.
CMS stated that it agreed with the report’s second finding, that sponsors  considered a variety of factors when selecting which MMA prescription  drug coverage options to pursue, with one clarification. The draft report  stated that, in general, in order to implement most MMA options other  than the RDS, sponsors would likely have to change the prescription drug  benefits they offer. CMS stated that the report did not fully acknowledge  that CMS has used its statutory waiver authority for several MMA options  to afford flexibility in benefit design, and as a result, MMA options may  require minimal (if any) adjustments to premiums, cost-sharing, and other  primary elements of benefit design. The draft report did describe CMS’s  authority to waive or modify Part D requirements added by the MMA that  hinder the design of, offering of, or enrollment in certain employer- or  union-sponsored Part D retiree plans. In response to CMS’s comments, we  have included additional information clarifying that CMS has waived or  modified Part D requirements for multiple MMA options. However, while  CMS has used this waiver authority, our report notes that sponsors may  still need to make changes to benefits—such as changing the drugs  included on their formularies—and, according to sponsors we  interviewed, any changes to benefits can complicate communications with  retirees.
CMS also agreed with the draft report’s finding that in the short term  sponsors’ decisions regarding MMA options resulted in benefits remaining  relatively unchanged, but over the longer term the effect is unclear.  However, CMS stated that the examples of differing experts’ assessments  of the likely effect over the longer term lacked sufficient context to be  included in the findings. CMS also stated that there was no indication in  the finding of the preponderance of expert opinion in favor of one or the  other point of view. Our report states that the effect over the longer term  is unclear and that experts we interviewed differed in their assessments of  what the effect was likely to be. The report describes both the opinions of  experts who said the MMA may extend the amount of time that sponsors  offer benefits without reducing coverage and those who said the Medicare   Part D benefit may make it more likely that sponsors will stop offering  prescription drug benefits for retirees, and there was not a preponderance  of opinion for either perspective.
The experts who reviewed the draft report generally indicated that the  report provided an accurate portrayal of employment-based retiree health  benefits and sponsors’ decisions about the options available under the  MMA.
CMS and several of these experts also provided technical comments,  which we incorporated into the report as appropriate.
We will send copies of this report to the Administrator of CMS and  interested congressional committees. We will also provide copies to others  on request. In addition, the report is available at no charge on GAO’s Web  site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix V.
section_title: Appendix I: Information on Employment- Based Retiree Health Coverage, Updated since GAO’s 2005 Report
paragraphs: This appendix describes information on employment-based retiree health  coverage since the initial mandated GAO study, published in 2005. We  reported in 2005 that the long-term decline in employment-based retiree  health coverage had leveled off, and retirees were paying an increasing  share of the costs. We reported that the percentage of employers offering  health benefits to retirees, including those who are Medicare-eligible, had  decreased beginning in the early 1990s, but had leveled off by the early  2000s. This leveling off has continued since the initial mandated study. We  also reported in 2005 that the percentage of Medicare-eligible retirees aged  65 and older with employment-based coverage remained relatively  consistent from 1995 through 2003. Since issuance of our 2005 report, we  received data for 2004 and 2005 showing that the overall percentage  remained relatively consistent from 2003 through 2005 at about 31 percent,  although some modest changes occurred within specific age cohorts.  Sponsors continued to respond to increasing costs by implementing  strategies that required retirees to pay more for coverage and thus  contributed to a gradual erosion of the value and availability of benefits.  For example, one employer benefit survey reported that over half of  surveyed employers reported increases in retiree contributions to  premiums between 2005 and 2006.
subsections: section_title: Employer Benefit Surveys Showed a Decline, then a Leveling Off, in Share of Employers Offering Health Benefits to Retirees; New Data Showed Continuation of Leveling-Off Trend
paragraphs: According to surveys of sponsors of retiree health benefits, the percentage  of employers offering health benefits to retirees declined beginning in the  early 1990s and then remained relatively stable by the early 2000s through  2005. In our 2005 report, we reported that a series of surveys conducted by  Mercer Human Resource Consulting indicated that the percentage of  employers with 500 or more employees offering health insurance to  retirees who are eligible for Medicare declined from 1993 to 2001,  although this decline had leveled off from 2001 through 2004. Data  obtained after the publication of our 2005 report showed that this leveling- off trend continued, with approximately 29 percent of employers with 500  or more employees offering the benefits to Medicare-eligible retirees in  2006. (See fig. 1.)
We also reported in our 2005 report that a series of surveys conducted by  the Kaiser Family Foundation and Health Research and Educational Trust  (HRET) estimated that the percentage of employers with 200 or more  employees offering retiree health coverage decreased from 46 percent in  1991 to 36 percent in 1993. This decline leveled off from 1993 through  2004, with approximately 36 percent of employers with 200 or more  employees offering coverage to these groups in 2004. Data obtained after  our 2005 report showed that this trend continued. According to the  Kaiser/HRET survey, approximately 33 percent and 35 percent of  employers with 200 or more employees offered retiree health benefits in  2005 and 2006, respectively. For Medicare-eligible retirees specifically, the  percentage of employers reporting that they offered health benefits to this  group has generally not changed since our 2005 report, in which we  reported that 27 percent of employers with 200 or more employees offered  coverage, according to Kaiser/HRET. (See fig. 2.)
For retirees under age 65, we reported in our 2005 report that coverage  showed a steady decline from 1993, when 50 percent of employers with  500 or more employees offered coverage to this group of retirees, to 2001,  although this percentage generally leveled off from 2001 through 2004.  New data reported by Mercer showed that 39 percent of employers with  500 or more employees offered coverage to these retirees in 2006.
The survey data we reviewed for our current report indicated that some  types of employers are more likely to provide health benefits to retirees  than others. Data on retiree health coverage showed that larger employers,  for example, are more likely than smaller employers to offer coverage to  retirees, including Medicare-eligible retirees. The 2006 Mercer survey  reported that 56 percent of employers with 20,000 or more employees  offered coverage to Medicare-eligible retirees, compared with about   22 percent of employers with 500 to 999 employees. The 2006 Kaiser/HRET  survey also showed that 54 percent of employers with 5,000 or more  employees offered health benefits to retirees, while 35 percent of  employers with 200 or more employees offered health benefits to retirees.  For smaller employers in the Kaiser/HRET survey—those with 3 to 199  employees—approximately 9 percent offered retiree health benefits. These  data are similar to the data reported in our 2005 report, although the  percentage of employers with 5,000 or more employees offering health  benefits to retirees is slightly lower than in previous surveys.
In addition, employers with a union presence continued to be more likely  to offer retiree health coverage than employers without a union presence.  For example, in the 2006 Kaiser/HRET survey, among employers with 200  or more employees, 50 percent of those employers that had union  employees offered health coverage to retirees, compared with 27 percent  without union employees.
According to federal and employer benefit surveys, certain industries  continued to be more likely to offer retiree health coverage than others.  For example, the most recent Agency for Healthcare Research and  Quality’s Medical Expenditure Panel Survey (MEPS) data showed that  approximately 88 percent of state entities offered health insurance for  retirees aged 65 and older. In addition, new data released from  Kaiser/HRET in 2006 showed that 82 percent of state and local government  employers with 200 or more employees offered coverage to retirees.  Furthermore, these data are similar to the data reported in our 2005 report.  Recent data released by Kaiser/HRET continued to list the  transportation/communication/utility industry as the second likeliest  industry, after government, to offer health benefits to its retirees, with   52 percent of all employers with 200 or more employees in this industry  sector offering health benefits to their retirees. This survey also continued  to show, as we reported in 2005, that the industries least likely to offer  coverage were health care and retail, with 15 percent and 11 percent,  respectively, of employers with 200 or more employees in these industry  sectors offering retiree health benefits.
section_title: Percentage of Medicare-Eligible Retirees with Employment-Based Health Coverage Remained Consistent
paragraphs: In our 2005 report, we stated that the overall percentage of Medicare- eligible retirees and their insured dependents aged 65 and older obtaining  employment-based health benefits through a former employer remained  relatively consistent from 1995 through 2003, based on data from the U.S.  Census Bureau’s Current Population Survey (CPS). Since issuance of that  report, we received subsequent data for 2004 and 2005 showing that the  overall percentage remained relatively consistent from 2003 through 2005,  although some modest changes occurred within specific age cohorts (see  fig. 3).
According to our analysis of CPS data, for those aged 65 and older,  approximately 32 percent had coverage in 1995 and approximately   31 percent had coverage in 2005 (no change from last report). Medicare- eligible retirees and their insured dependents for two groups—those aged  65 through 69 and those aged 80 and older—continued to show  approximately the same modest decline and increase, respectively, in the  percentage with employment-based health coverage. For those aged   70 through 79, the modest decline reported in our initial report was no  longer statistically significant.
section_title: Employer Strategies Implemented to Mitigate Increased Costs of Providing Coverage Continued to Require Greater Retiree Contribution
paragraphs: According to employer benefit surveys and our interviews with sponsors  and experts, sponsors have continued to rely on various strategies, as we  noted in our 2005 report, for mitigating the increasing costs of providing  health benefits to retirees that have contributed to a gradual erosion of the  value and availability of health benefits. These strategies included the  same strategies identified in our 2005 report: restricting retirees’ eligibility  for health benefits; limiting sponsors’ contributions to retirees’ health  benefits; and increasing retirees’ copayments, coinsurance, and premiums.
subsections: section_title: Sponsors Have Limited Retirees’ Eligibility for Benefits
paragraphs: Employers participating in the 2006 Kaiser/Hewitt Associates survey  reported that between 2005 and 2006 they limited retiree eligibility for  health benefits by restricting eligibility to certain groups of retirees and by  increasing age, years of service, or both, needed to be eligible for such  benefits. For example, according to 2006 Kaiser/Hewitt survey data,   11 percent of employers that currently offer retiree health benefits  reported that they would not provide future employer-subsidized health  benefits to a particular group of individuals, such as those hired after  January 1, 2006, if they retire under the age of 65. Nine percent of the  surveyed employers reported that they would not provide future employer- subsidized health benefits to a particular group of individuals if they retire  at age 65 or older. In addition, 4 percent of surveyed employers reported  that they raised the age requirements, years of service requirements, or  both, for retiree health benefit eligibility for retirees under the age of 65,  and 2 percent made such changes for retirees at age 65 or older. Similarly,  one sponsor we interviewed told us about changes the sponsor had made  to coverage for future retirees since our 2005 report. This sponsor told us  about coverage beginning January 1, 2007, in which future retirees will  have the option to receive a lump sum of money that can then be used to  purchase coverage in the individual market at the time of retirement.
section_title: Sponsors Have Limited Their Contributions to Retirees’ Health Benefits
paragraphs: Data from the 2006 Mercer survey showed that 20 percent of employers  with 500 or more employees have implemented limits—often referred to as  caps—on contributions to retirees’ health benefits. The survey data also  showed that an additional 8 percent of such employers were considering  such caps. Caps were most common among the employers in the Mercer  study with the largest number of employees; 47 percent of employers with  20,000 or more employees had implemented caps and 4 percent were  considering implementing caps. Data from the 2006 Kaiser/Hewitt survey  showed that 50 percent of employers with 1,000 or more employees  reported having capped contributions to the health benefits for Medicare- eligible retirees. Of these employers, 61 percent reported hitting the cap  and another 20 percent expected to hit the cap within the next 1 to 3 years.  One sponsor we interviewed with financial caps in place but not yet  reached told us that sponsors generally have two options once they reach  these spending limits: (1) negotiate plan design changes to bring spending  under the limits or (2) pass costs on to retirees through higher premiums.
section_title: Sponsors Have Increased Retirees’ Copayments, Coinsurance, and Premiums
paragraphs: More than one-fourth of employers participating in the 2006 Kaiser/Hewitt  survey reported that between 2005 and 2006 they increased required out- of-pocket contributions from retirees and increased the use of other cost- sharing strategies. In addition, some of these strategies were intended to  address the costs of providing prescription drug coverage to retirees. For  example, according to the 2006 Kaiser/Hewitt survey, 25 percent of  employers raised copayments or coinsurance for prescription drugs for  retirees aged 65 and older, and 10 percent of employers replaced fixed  dollar copayments for prescription drugs with coinsurance, which can  increase retirees’ out-of-pocket expenses as the total cost of the benefit  rises.
More than one-half of employers in the 2006 Kaiser/Hewitt survey also  reported that between 2005 and 2006 they increased retiree contributions  to health care premiums for retirees aged 65 and older. However, the  survey reported a lower rate of increase in the amount that retirees aged  65 and older contributed to premiums as compared to the amount that  retirees under age 65 contributed to premiums, which the survey largely  attributed to the Medicare Part D program. Sponsors we interviewed also  told us that they had increased retiree premiums to compensate for the  trend in increasing health care costs. For example, one public sponsor  told us that premiums for its coverage designed for active workers and  retirees under the age of 65 increased 9 percent for 2005 and 2006. Finally,  according to the 2006 Mercer survey, about 41 percent of retiree health  plans for employers with 500 or more employees required Medicare- eligible retirees to pay the full cost of their employment-based health  benefits plan.
section_title: Appendix II: Alternative Approaches to Providing Retiree Health Coverage Suggested by Sponsors and Experts
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of  2003 (MMA) required GAO to describe both (1) alternative approaches to  providing employment-based retiree health coverage suggested by retiree  health benefit sponsors and (2) recommendations by sponsors and other  experts for improving and expanding such coverage. In this appendix we  present a range of alternative approaches to providing employment-based  retiree health coverage and options for expanding and improving these  alternative approaches, as described by retiree health benefit sponsors  and experts we interviewed. To obtain this information, we interviewed  officials from 15 private and public sponsors of retiree health benefits and  several experts on areas relating to the provision of employment-based  retiree health coverage, including five benefit consulting firms; six  organizations, including one representing unions, one representing  multiemployer plans, two representing large employers, and two  representing health plans; one professional organization for actuaries; and  other research organizations. The alternative approaches we describe are  not intended to be a comprehensive list but rather represent the  approaches that were mentioned by the sponsors and experts we spoke  with.
Many of the alternative approaches to providing employment-based retiree  health coverage that were described to us rely on tax advantages that  provide an incentive for a sponsor, an employee, or both to set aside funds  for future health care needs. Some of these tax-advantaged approaches are  made available as part of consumer-directed health plans, which usually  consist of a savings account—such as a health savings account (HSA) or  health reimbursement arrangement (HRA)—and a health plan with a high  deductible. In addition to consumer-directed health plans, there are other  tax-advantaged accounts and trusts that do not require enrollment in a  high-deductible health plan, such as a voluntary employees’ beneficiary  association (VEBA). Some sponsors and experts described a third  category of arrangement, generally without tax advantages, that assists  sponsors in providing retiree health care coverage, such as establishing  savings accounts that provide a sponsor’s match to the employee’s  contribution. Although there is no requirement that retiree health benefit  sponsors prefund their retiree health benefit plans, many of the  approaches sponsors and experts described are prefunded vehicles— wherein the sponsor directly contributes, rather than earmarks, dedicated  funds to an account or trust. The alternative approaches these sponsors  and experts described are listed in table 2.
In addition to describing examples of the alternative approaches to  traditional employment-based retiree health coverage, sponsors and  experts we interviewed provided a variety of recommendations for  improving and expanding these approaches. For example, some sponsors  and experts recommended permitting tax-advantaged contributions by  Medicare-eligible retirees to HSAs and allowing stand-alone HSAs that do  not require an accompanying high-deductible health plan. Another expert  also suggested increasing the maximum annual contribution that is  currently allowed for an HSA and expanding the ability of retirees to use  HSA funds to pay for health insurance premiums. One sponsor we  interviewed highlighted the increased portability of an HSA as a factor in  the sponsor’s decision to stop offering an HRA at the end of 2006 and to  begin instead to offer an HSA option for early retirees and active workers.  In addition, according to one expert we interviewed, because sponsors are  not required to make unused HRA balances available to employees when  they change jobs, individuals may have an incentive to spend down  accumulated funds. Several sponsors and other experts also suggested  creating additional tax-advantaged arrangements for retiree health benefit  sponsors. For example, one expert suggested allowing the tax-free transfer  of funds from individual tax-preferred vehicles—such as 401(k) retirement  accounts—and pensions to pay for health care costs, including health care  premiums.
Overall, a majority of the sponsors we interviewed indicated that sponsors  are willing to use or consider alternative approaches, such as the ones  described above, to assist retirees with their future health care needs  without increasing their costs. Indeed, one sponsor indicated that it would  support anything that would expand its ability to offer and fund retiree  health coverage, such as additional subsidies or favorable tax treatment.  Moreover, one expert indicated that alternative approaches such as HSAs  offer a level of predictability that allows sponsors to sustain their retiree  benefit packages. One reason for this predictability is that contributions by  the sponsor in many of these alternative approaches are limited to a  defined contribution.
Most alternatives that sponsors and experts described in our interviews  were established (or are currently under consideration) for active  employees to use for current and future expenses rather than for those  who are currently retired. For example, among the alternative approaches  described, few of the sponsors we interviewed indicated that they make  such approaches available to current retirees. Specifically, only one  sponsor we interviewed told us that it makes consumer-directed health  plans available to current retirees. Seven sponsors told us that their  current use (or consideration) of consumer-directed health plans is  targeted to active employees for current and future health care costs. Two  experts we interviewed, however, noted flaws with using consumer- directed health plans as adequate savings mechanisms for retiree health  care costs because this approach assumes that active employees will not  need the account funds for current health care expenses. Similarly, one  sponsor noted that because many of the alternative approaches are geared  toward active employees, they were less likely to be effective solutions for  retiree health care needs.
section_title: Appendix III: Scope and Methodology
paragraphs: This appendix describes in detail the scope and methodology used to  address the three report objectives—(1) which MMA prescription drug  coverage options sponsors selected, (2) the factors they considered in  selecting these options, and (3) the effect these decisions may have on  sponsors’ provision of employment-based health benefits for retirees. It  also addresses the mandated update on employment-based retiree health  coverage since our 2005 report (reported in app. I) and sponsors’ and  others’ views on alternative approaches for the provision of employment- based retiree health coverage that may help maintain, expand, or improve  retiree health coverage (reported in app. II). Because some of the  methodologies apply to more than one objective or appendix, we have  organized this appendix by data source. Specifically, this appendix briefly  describes the methodologies by objective and then discusses (1) surveys  of employment-based health benefits, (2) federal surveys, (3) data from the  Centers for Medicare & Medicaid Services (CMS), and (4) interviews with  sponsors and other experts.
subsections: section_title: Methodology by Objective
paragraphs: To determine which MMA prescription drug coverage options sponsors  selected, we reviewed data from four surveys collected by three benefit  consulting firms on the options that sponsors reported selecting for 2006  and the options that sponsors reported that they planned to select for  2007. One survey is an annual survey of employer health benefits,  including private and public sector employers, conducted since the early  1990s through 2006, and one is a private sector survey on retiree health  benefits conducted in 2006. We obtained and analyzed data provided by  CMS on the number and characteristics of sponsors that were approved  for the retiree drug subsidy (RDS) for plans ending in 2006 and 2007. To  describe the factors that sponsors considered in selecting the MMA  options and the effect their decisions about the options may have on the  provision of benefits for retirees, we relied on two of the employer benefit  surveys and reviewed documents from the literature on the factors that  sponsors may consider in selecting the MMA options. We also interviewed  private and public sponsors and experts on sponsors’ decisions regarding  the MMA options and employment-based retiree health benefits, including  benefit consultants and officials at health plans, groups representing large  employers, and other organizations.
To update information on employment-based retiree health coverage since  our 2005 report, we reviewed data from employer benefit surveys and data  from three large federal surveys that contained information either on  Medicare beneficiaries or on the percentage of public sector employers  that offer retiree health benefits. We also obtained this information in our  interviews with sponsors and experts. We focused on trends particularly  affecting Medicare-eligible retirees, but in some cases when information  specific to Medicare-eligible beneficiaries was not available, we reported  on trends affecting all retirees, including those who were under age 65 and  those who were eligible for Medicare. To describe alternative approaches  for the provision of employment-based retiree health coverage, we  reviewed data from several of the same sources used to address the other  report objectives, including employer benefit surveys, reports and  analyses from the literature, and interviews with sponsors and experts.
section_title: Surveys of Employment-Based Health Benefits
paragraphs: We relied on data from annual surveys of employment-based health  benefit plans. Kaiser/HRET and Mercer each conduct an annual survey of  employment-based health benefits, including a section on retiree health  benefits. Each survey has been conducted for at least the past decade,  including 2006. We also used data from a survey focused solely on retiree  health benefits that Kaiser/Hewitt conducted in 2006. For each of these  surveys of employment-based benefits, we reviewed the survey  instruments and discussed the data’s reliability with the sponsors’  researchers and determined that the data were sufficiently reliable for our  purposes. We also reviewed two 2006 surveys by The Segal Company. The  first represented a nonrandom sample of multiemployer plans from a  range of industries and geographic regions; the second collected data from  a nonrandom sample of public sponsors that offered prescription drug  coverage to Medicare-eligible retirees.
Since 1999, Kaiser/HRET has surveyed a sample of employers each year  through telephone interviews with human resource and benefits managers  and published the results in its annual report—Employer Health Benefits.  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  2006 and published in September 2006—2,122 employers responded to the  full survey, giving the survey a 48 percent response rate. In addition,  Kaiser/HRET asked at least one question of all employers it contacted— ”Does your company offer or contribute to a health insurance program as  a benefit to your employees?”—to which an additional 1,037 employers, or  cumulatively about 72 percent of the sample, responded. By using  statistical weights, Kaiser/HRET is able to project its results nationwide.  Kaiser/HRET uses the following definitions for employer size: (1) small—3  to 199 employees—and (2) large—200 and more employees. In some  cases, Kaiser/HRET reported information for additional categories of small  and large employer sizes.
subsections: section_title: Mercer
paragraphs: Since 1993, Mercer has surveyed a stratified random sample of employers  each year through mail questionnaires and telephone interviews and  published the results in its annual report—National Survey of Employer- Sponsored Health Plans. Mercer selects a random sample of private  sector employers from a Dun & Bradstreet database, stratified into eight  categories, and randomly selects public sector employers—state, county,  and local governments—from the Census of Governments. The random  sample of private sector and government employers represents employers  with 10 or more employees. For the 2006 survey, which was published in  2007, Mercer mailed questionnaires to employers with 500 or more  employees in July 2006 along with instructions for accessing a Web-based  version of the survey instrument, another option for participation.  Employers with fewer than 500 employees, which, according to Mercer,  historically have been less likely to respond using a paper questionnaire,  were contacted by phone only. Telephone follow-up was conducted with  employers with 500 or more employees in the random sample and some  mail and Web respondents were contacted by phone to clear up  inconsistent or incomplete data. A total of 2,136 employers responded to  the complete survey, yielding a response rate of 24 percent. By using  statistical weights, Mercer projects its results nationwide and for four  geographic regions. 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).
section_title: Kaiser/Hewitt
paragraphs: The 2006 Kaiser/Hewitt study—Retiree Health Benefits Examined:  Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health  Benefits—is based on a nonrandom sample of employers because there is  no database that identifies all private sector employers offering retiree  health benefits from which a random sample could be drawn.  Kaiser/Hewitt used previous Hewitt survey respondents and its proprietary  client databases, which list private sector employers potentially offering  retiree health benefits. Kaiser/Hewitt conducted the survey online from  June through October 2006 and obtained data from 302 large (1,000 or  more employees) employers. Its results were published in December 2006.  According to the survey, these employers represented 36 percent of all  Fortune 100 companies and 22 percent of all Fortune 500 companies. They  accounted for more than one quarter of the Fortune 100 companies with  the largest retiree health liability in 2005. Because the sample is  nonrandom and does not include the same sample of companies and plans  each year, survey results for 2006 cannot be compared with results from  prior years.
section_title: Segal
paragraphs: We reviewed two nonrandom surveys conducted and published by The  Segal Company in 2006 that report on responses by non-private-sector  sponsors to the availability of prescription drug coverage under Medicare  Part D. The first survey, which was published in spring 2006, was based on  data collected in January and February 2006 from a nonrandom sample of  273 multiemployer plans that provided prescription drug coverage to  Medicare-eligible retirees. The 273 multiemployer plans that participated  in the survey are Segal clients and, according to Segal, represented a range  of industries and geographic regions. The second survey, which was  published in summer 2006, was conducted by Segal in conjunction with  the Public Sector HealthCare Roundtable, a national coalition of public  sector health care purchasers. This survey was based on data collected in  May 2006 from a nonrandom sample of 109 public sponsors, including  state and local sponsors, 82 of which offered prescription drug coverage to  Medicare-eligible retirees.
section_title: Federal Surveys
paragraphs: We analyzed three federal surveys containing information either on  Medicare beneficiaries or on the percentage of public sector employers  that offer retiree health benefits. We obtained information on retired  Medicare beneficiaries’ sources of health benefits coverage—including  former employers and unions—from the CPS, conducted by the U.S.  Census Bureau for the Bureau of Labor Statistics. We obtained data on the  sources of coverage for all health care expenditures and for prescription  drug expenditures for retired Medicare beneficiaries from the Medicare  Current Beneficiary Survey (MCBS), sponsored by CMS. We obtained data  on the percentage of public sector employers that offer retiree health  benefits from the Medical Expenditure Panel Survey (MEPS), sponsored  by the Agency for Healthcare Research and Quality. Each of these federal  surveys is widely used for policy research, and we reviewed  documentation on the surveys to determine that they were sufficiently  reliable for our purposes.
subsections: section_title: Current Population Survey
paragraphs: We analyzed the Annual Supplement of the CPS for information on the  demographic characteristics of Medicare-eligible retirees and their access  to insurance. The survey is based on a sample designed to represent a  cross section of the nation’s civilian noninstitutionalized population. In the  2006 CPS Annual Supplement, about 83,800 households were included in  the sample for the survey, a significant increase in sample size from about  60,000 households prior to 2002. The total response rate for the 2006 CPS  Annual Supplement was about 83 percent. We present only those  differences that were statistically significant at the 95 percent confidence  level.
The CPS asked whether a respondent was covered by employer- or union- sponsored, Medicare, Medicaid, private individual, or certain other types  of health insurance in the last year. The CPS questions that we used for  employment status, such as whether an individual is retired, are similar to  the questions on insurance status. Respondents were considered  employed if they worked at all in the previous year and not employed only  if they did not work at all during the previous year.
The CPS asked whether individuals had been provided employment-based  insurance “in their own name” or as dependents of other policyholders.  We selected Medicare-eligible retirees aged 65 and older who had  employment-based health insurance coverage in their own names because  this coverage could most directly be considered health coverage from a  former employer. For these individuals, we also identified any retired  Medicare-eligible dependents aged 65 or older, such as a spouse, who were  linked to this policy. We used two criteria to determine that these policies  were linked to the primary policyholder: (1) the dependent lived in the  same household and had the same family type as the primary policyholder  and (2) the dependent had employment-based health insurance coverage  that was “not in his or her own name.”
section_title: Medicare Current Beneficiary Survey
paragraphs: MCBS is a nationally representative sample of Medicare beneficiaries that  is designed to determine for Medicare beneficiaries (1) expenditures and  payment sources for all health care services, including noncovered  services, and (2) all types of health insurance coverage. The survey also  relates coverage to payment sources. The MCBS Cost and Use file links  Medicare claims to survey-reported events and provides expenditure and  payment source data on all health care services, including those not  covered by Medicare. We used the 2004 MCBS Cost and Use file, the most  current data available, to determine the percentage of Medicare-eligible  beneficiaries obtaining supplemental coverage from a former employer or  union. We also used the MCBS data to determine the percentage of all  health care expenditures for retired Medicare beneficiaries paid by  employment-based insurance for prescription drug expenditures.
section_title: Medical Expenditure Panel Survey
paragraphs: MEPS consists of four surveys and is designed to provide nationally  representative data on health care use and expenditures for U.S. civilian  noninstitutionalized individuals. We used data from one of the surveys,  the MEPS Insurance Component, to identify the percentage of state  entities that offered retiree health benefits in 2004. Insurance Component  data are collected through two samples. The first, known as the  “household sample,” is a sample of employers and other insurance  providers (such as unions and insurance companies) that were identified  by respondents in the MEPS Household Component, another of the four  surveys, as their source of health insurance. The second sample, known as  the “list sample,” is drawn from separate lists of private and public  employers. The combined samples provide a nationally representative  sample of employers. The target size of the list sample is approximately  40,000 employers each year.
section_title: CMS Data
paragraphs: We analyzed data provided by CMS on the number and characteristics of  sponsors approved for the RDS for plans ending in 2006 and of sponsors  approved for the RDS for plans ending in 2007. The data include selected  variables from applications that were approved for the RDS. For plans  ending in 2006, the CMS data are current as of September 11, 2006; for  plans ending in 2007, the CMS data are current as of February 16, 2007.  Based on conversations with CMS and data reliability checks that we  performed, we have determined that these data were sufficiently reliable  for our purposes.
section_title: Interviews with Sponsors and Experts
paragraphs: To learn more about retiree health benefit trends, the factors that sponsors  considered in selecting the MMA options, the effect that sponsors’  decisions about the MMA options may have on the provision of health  benefits for retirees, and alternative approaches for the provision of  employment-based retiree health coverage, we interviewed 13 of the   15 private and public sector sponsors of employment-based retiree health  benefits that we interviewed for the initial mandated study published in  2005. In our 2005 study, we interviewed officials of 12 Fortune 500  employers that provided retiree health benefits; the Office of Personnel  Management, which administers the Federal Employees Health Benefits  Program; and two state retirement systems. To select the 12 Fortune 500  employers in our 2005 study, we judgmentally selected 10 employers from  a stratified random sample of 50 Fortune 500 employers. We interviewed  at least 1 employer from each of the five groups of 100 Fortune 500  employers that were stratified on the basis of annual revenues. In addition  to considering revenues, where data were available, we considered each  employer’s industry, number of employees, postretirement benefit  obligations, preliminary MMA option decision as reported on its annual  financial statement, and union presence when making our selection. We  also interviewed officials at two additional Fortune 500 employers at the  recommendation of a benefit consultant. In our 2005 study, we  judgmentally selected two large states’ retiree health benefits systems on  the basis of a review of selected state data and referrals from a benefit  consultant that works with public sector clients. For our current study, we  also interviewed  2 sponsors that chose to offer their own Medicare Part D  plans instead of implementing the RDS or another MMA option. These  sponsors were not interviewed for our 2005 report.
To obtain broader-based information about retiree health benefit trends,  MMA options, and alternative approaches for the provision of  employment-based retiree health coverage, we interviewed benefit  consultants and other experts at several other organizations. Specifically,  we interviewed representatives of five large employer benefit consulting  firms. Benefit consultants help their clients, which include private sector  employers, public sector employers, or both, develop and implement  human resource programs, including retiree health benefit plans. While  most of these benefit consulting firms’ clients were large Fortune 500 or  Fortune 1,000 employers, some also had smaller employers as clients. One  benefit consulting firm that we interviewed, in particular, provided  actuarial, employee benefit, and other services to a range of public sector  clients, including state and local governments, statewide retirement  systems and health plans, and federal government agencies. It also  provided consulting services to multiemployer plans. We also interviewed  officials from the American Academy of Actuaries, America’s Health  Insurance Plans and its members, AARP, the American Benefits Council,  the BlueCross BlueShield Association and its members, the Employee  Benefit Research Institute, the National Business Group on Health, and the  National Coordinating Committee for Multiemployer Plans. Finally, we  reviewed other available literature on retiree health benefit trends, factors  affecting sponsors’ decisions about the MMA options, and alternative  approaches for the provision of employment-based retiree health  coverage.
section_title: Appendix IV: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Kristi A. Peterson, Assistant  Director; George Bogart; Kevin Dietz; Laura Sutton Elsberg; Krister Friday;  Gregory Giusto; Elizabeth T. Morrison; Giao N. Nguyen; and Suzanne  Worth made key contributions to this report.