Retiree Health Benefits: Options for Employment-Based Prescription Drug Benefits under the Medicare Modernization Act
Published: 2005-02-14T00:00:00

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 included incentives for sponsors of employment-based retiree health plans to offer prescription drug benefits to Medicare-eligible retirees, such as a federal subsidy when sponsors provide benefits meeting certain MMA requirements. Plan sponsors cannot receive a subsidy for retired Medicare beneficiaries who enroll in part D. In response to an MMA mandate, GAO determined (1) the trends in employment-based retiree health coverage prior to the MMA and (2) which MMA prescription drug options plan sponsors said they would pursue and the effect these options might have on retiree health benefits. GAO identified trends using data from federal and private sector surveys of employers' health benefit plans and financial statements of 50 randomly selected Fortune 500 employers. Where data for Medicare-eligible retirees were not available, GAO reported data for all retirees, including Medicare-eligible retirees. To obtain plan sponsors' views about options they were likely to pursue, GAO reviewed the 50 employers' financial reports and interviewed benefit consultants; private and public sector plan sponsors, including the Office of Personnel Management for federal employees' health benefits; and other experts.
section_title: What GAO Found
paragraphs: A long-term decline in the percentage of employers offering retiree health coverage has leveled off in recent years, but retirees face an increasing share of costs, eligibility restrictions, and benefit changes that contribute to an overall erosion in the value and availability of coverage. Although the percentages and time frames differed, two employer benefit surveys showed that the percentage of employers offering health coverage to retirees has declined since the early 1990s; this trend, however, has leveled off. The cost to provide retiree health coverage, including coverage for Medicare-eligible retirees, has increased significantly: one employer benefit survey cited double-digit increases each year from 2000 through 2003. Prescription drugs for Medicare-eligible retirees constituted a large share of retiree health costs. Employers and other plan sponsors have used various strategies to limit overall benefit cost growth that included increasing retiree cost sharing and premiums, restricting eligibility for benefits, placing financial caps on health care expenditures, and revising prescription drug benefits. Many plan sponsors had not made final decisions about which MMA prescription drug options they would choose for their Medicare-eligible retirees at the time of GAO's review. Specifically, 13 of the 15 private and public plan sponsors GAO interviewed were undecided for some or all retirees. However, most plan sponsors interviewed had chosen the federal subsidy option for some or all retirees or were considering the subsidy as one of several options. Alternatively, some plan sponsors that had set caps on their retiree health benefit obligations were considering supplementing (known as "wrapping around") the new Medicare prescription drug benefit for some or all retirees rather than providing their own comprehensive prescription drug coverage in lieu of the Medicare drug benefit. Also, some plan sponsors and benefit consultants said they were waiting to see how the market for other MMA options, such as Medicare Advantage plans, develops. About two-thirds of financial statements GAO reviewed for Fortune 500 employers reporting obligations for retiree health benefits had begun to reflect reduced obligations resulting from the MMA options. While plan sponsors contacted said they did not anticipate reducing their drug coverage in view of new coverage offered through the MMA, increasing health care costs might cause them to do so in the future. Benefit consultants and other experts interviewed said that the MMA was not likely to induce employers to begin to provide prescription drug coverage or to supplement the Medicare drug benefit if they had not previously offered retiree health coverage. In commenting on a draft of this report, the Centers for Medicare & Medicaid Services and four experts generally agreed with the report's findings. The Office of Personnel Management indicated that it has not made final decisions about which MMA prescription drug option it would choose for the Federal Employees Health Benefits Program, but it does not expect to choose the subsidy option.

section_title: Letter
paragraphs: As prescription drug costs have continued to increase, many retired senior  citizens face significant out-of-pocket costs for prescription drugs.  Because the Medicare program as originally designed did not cover  outpatient prescription drugs, many beneficiaries relied on other sources  to cover the costs of drugs. About a third of all retired Medicare  beneficiaries obtained supplementary health benefits through plans  sponsored by former employers or other employment-based groups, and  most of these plans covered prescription drugs. However, most retired  Medicare beneficiaries, including those with employment-based health  plans, still relied to varying degrees on their own financial resources to  pay for prescription drugs. More broadly, there has been concern in recent  years about a long-term decline in the availability of employment-based  retiree health coverage. To help senior citizens with increasing  prescription drug costs and encourage employment-based retiree health  coverage, especially for prescription drugs, Congress passed the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) in  December 2003 that among other things, created a new prescription drug  benefit as part D of the Medicare program. The Medicare part D benefit  begins in January 2006. The MMA also established various options and  incentives to encourage sponsors of employment-based retiree health  plans to offer prescription drug benefits to retired Medicare beneficiaries.
Once the Medicare drug benefit is available in 2006, employers and other  sponsors of health coverage will have several options to provide  prescription drug benefits to Medicare-eligible retirees. To encourage plan  sponsors to offer prescription drug coverage to retired Medicare  beneficiaries—which they generally do on a voluntary basis—the MMA  established a federal subsidy payment for plan sponsors that offer  comprehensive drug benefits meeting certain MMA requirements.3, 4  Subsidy payments will be available for each retiree who chooses to enroll  in the sponsor’s plan in lieu of enrolling in part D. Alternatively, plan  sponsors can provide coverage that supplements (wraps around) the  retiree’s Medicare part D prescription drug benefit and forgo eligibility for  the subsidy. Plan sponsors also have several other options for providing  prescription drug coverage to retired Medicare beneficiaries under the  MMA, such as contracting with private plans that provide standard or  enhanced Medicare part D prescription drug benefits.
The MMA required that we conduct a study documenting trends in  employment-based retiree health coverage prior to the enactment of the  MMA, including coverage provided under the Federal Employees Health  Benefits Program (FEHBP), and the options and incentives available  through the MMA that could affect the voluntary provision of employment- based retiree health benefits. As discussed with the committees of  jurisdiction, this report addresses the following questions:    What were the trends in employment-based retiree health coverage,  particularly for Medicare-eligible retirees, prior to the MMA? “Plan sponsor” refers to a sponsor of employment-based retiree group health coverage,  including private sector employers and public sector employers, including federal, state, or  local governments; sponsors of church plans; and sponsors of plans offered under  collectively bargained agreements.
MMA sec. 101, § 1860D-22, 117 Stat. 2125-28. The subsidy will be available to employment- based group health plans regulated under the Employee Retirement Income Security Act of  1974 (29 U.S.C. §§ 1001 et seq. (2000)) as well as to federal government and other public  sector plans and church plans.
Which MMA prescription drug coverage options do plan sponsors say they  are likely to pursue and what effect will these options likely have on health  benefits for Medicare-eligible retirees?
To identify trends in employment-based retiree health coverage and  expenditures, we reviewed data from several sources, including (1) three  private sector surveys of employers’ health benefit plans nationwide, two  of which covered both private and public sector employers and have been  conducted annually for more than a decade; (2) three large federal  surveys, which contained information on public sector employers’ retiree  health benefit offer rates, retired Medicare beneficiaries covered by  employment-based health coverage from 1995 through 2003, and retired  Medicare beneficiaries’ prescription drug expenditures, respectively;   (3) financial statements that 50 randomly selected Fortune 500 employers  filed with the Securities and Exchange Commission (SEC) reporting their  anticipated obligations for retiree health benefits; and (4) studies, reports,  and analyses from the literature on retirees’ health benefits. To  supplement these sources and to obtain more in-depth information, we  interviewed officials at (1) 6 firms providing benefit consulting services  primarily for large public and private sector employers; (2) 12 Fortune 500  employers that sponsored retiree health benefit plans; (3) 3 public sector  sponsors of retiree health benefits, including the Office of Personnel  Management (OPM), which administers FEHBP; (4) 1 association  representing unions and 1 representing multiemployer plans that sponsor  retiree health benefit plans for unionized workers; (5) 2 associations  representing small to midsized employers; (6) 4 trade organizations,  including those representing large employers; and (7) 1 professional  organization for actuaries. We focused on trends particularly affecting  Medicare-eligible retirees, but in some cases when information specific to  Medicare-eligible beneficiaries was not available, we reported on trends  affecting all retirees, including those who were under age 65 and those  who were eligible for Medicare. To determine which MMA prescription  drug coverage options plan sponsors said they would likely pursue and  what effect these options might have on retiree health benefits, we relied  primarily on our review of the annual and quarterly financial statements  that 50 Fortune 500 employers filed with the SEC and on our interviews  with benefit consultants, private and public sector sponsors of  employment-based retiree health benefit plans, and other experts. We also  interviewed officials at the Centers for Medicare & Medicaid Services  (CMS), the federal agency that administers Medicare, to obtain  information on MMA prescription drug options for plan sponsors. We  assessed the reliability of the data from the three employer benefit  nationwide surveys and three large federal surveys and determined that  the data were sufficiently reliable for the purposes of our study. (App. I  provides more detailed information on our methodology.) We performed  our work from April 2004 through February 2005 in accordance with  generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: For retirees aged 65 or older, Medicare is typically the primary source of  health insurance coverage. Medicare covered about 41 million  beneficiaries as of July 2003. The program covers hospital care as well as  doctor visits and outpatient services but has never covered most  outpatient prescription drugs.
subsections: section_title: Medicare and Supplemental Coverage before Implementation of Medicare Drug Benefit
paragraphs: Under traditional Medicare, eligible individuals may apply for part A,  which helps pay for care in hospitals and some limited skilled nursing  facility, hospice, and home health care, and may purchase part B, which  helps pay for doctors, outpatient hospital care, and other similar services.  Depending on where they live, individuals may have the option of  obtaining traditional Medicare coverage (on a fee-for-service basis) or  coverage from a managed care or other private plan offered through the  Medicare Advantage program. Many beneficiaries have been attracted to  these plans because they typically have lower out-of-pocket costs than fee- for-service plans and offer services not covered by traditional Medicare  prior to the MMA, such as routine physical examinations and most  outpatient prescription drugs. Nearly 4.7 million Medicare beneficiaries  were enrolled in a local Medicare Advantage plan as of July 2004.
To cover some or all of the costs Medicare does not cover, such as  deductibles, copayments, and coinsurance, Medicare beneficiaries may  rely on private retiree health coverage through former employment or  through individually purchased Medicare supplemental insurance (known  as Medigap).13, 14 For example, for 2001, the Medicare Current Beneficiary  Survey (MCBS) found that about three-fourths of Medicare-eligible  beneficiaries obtained supplemental coverage from the following sources:  a former employer or union (29 percent); individually purchased coverage,  including Medigap policies (27 percent); both employment-based and  individually purchased coverage (7 percent); or Medicaid (13 percent).  About 24 percent had Medicare-only coverage.
Medigap is a privately purchased health insurance policy that supplements Medicare by  paying for some of the health care costs not covered by Medicare. 42 U.S.C. 1395ss (2000).  Medicare beneficiaries can purchase 1 of 10 standardized Medigap benefit packages. Three  of the 10 standardized Medigap benefit packages offer limited prescription drug benefits,  paying 50 percent of drug charges up to either $1,250 per year or $3,000 per year after the  beneficiary pays a $250 deductible. New Medigap plans sold after January 1, 2006, will no  longer include prescription drug benefits. MMA sec. 104(a)(1), § 1882(v)(1), 117 Stat. 2161  (to be codified at 42 U.S.C. § 1395ss(v)(1)).
Health plans typically require enrollees to pay a portion of the cost of their medical care.  These cost sharing arrangements include deductibles, which are fixed payments enrollees  are required to make before coverage applies; copayments, which are fixed payments  enrollees are required to make at the time benefits or services are received; and  coinsurance, which is a percentage of the cost of benefits or services that the enrollee is  responsible for paying directly to the provider.
Employers generally offer health benefits to retirees on a voluntary basis.  While these benefits vary by employer, they almost always include  prescription drugs and often cover both retirees under age 65 as well as  those eligible for Medicare. However, coverage can vary between these  groups of retirees. For example, premiums are often lower for those aged  65 and over because Medicare pays for certain costs, and cost sharing  requirements, which can make retirees more sensitive to the costs of care,  may differ. Plan types may also differ based on Medicare eligibility. For  example, some employers offer retirees under age 65 a preferred provider  organization (PPO) plan but offer a fee-for-service plan for retirees eligible  for Medicare. Regardless of the type of plan offered, retirees who have  employment-based coverage generally have a choice of more than one  plan.
Plan sponsors typically coordinate their retiree health benefits with  Medicare once retirees reach age 65, with Medicare as the primary payer  and the plan sponsor as the secondary payer. Several types of  coordination occur between plan sponsors and Medicare. For example,  some plan sponsors coordinate through a carveout approach, in which the  plan calculates its normal benefit and then subtracts (or carves out) the  Medicare benefit, generally leaving the retiree with out-of-pocket costs  comparable to having the employment-based plan without Medicare.  Another approach used by plan sponsors is full coordination of benefits, in  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. According to  one employer benefit survey, carveout is the most common type of  coordination used by employers that sponsor retiree health plans.
section_title: The MMA Established a New Prescription Drug Benefit for Medicare Beneficiaries
paragraphs: In January 2006, Medicare will begin offering beneficiaries outpatient  prescription drug coverage through a new Medicare part D. Medicare  beneficiaries who choose to enroll for this voluntary benefit will have  some of their prescription drug expenditures covered by prescription drug  plans authorized by the MMA. In addition to paying a premium— estimated initially to be about $35 per month ($420 per year)— beneficiaries must meet other out-of-pocket expense requirements:    a $250 deductible;    25 percent of their next $2,000 in prescription drug expenditures; and    100 percent of the next $2,850 in prescription drug expenditures, a  coverage gap often referred to as the Medicare part D benefit “doughnut  hole.”
Medicare beneficiaries must therefore pay $3,600 out-of-pocket for  prescription drugs in 2006 before part D catastrophic coverage begins.  Part D catastrophic coverage pays most drug costs once total costs exceed  $5,100, with beneficiaries paying either the greater of a $2 copayment for  each generic drug and $5 copayment for other drugs, or 5 percent  coinsurance. Only prescription drug costs paid by the part D enrollee or by  another person or certain charitable organizations or state pharmaceutical  assistance programs on behalf of the enrollee, rather than by a plan  sponsor, are considered in determining a beneficiary’s true out-of-pocket  costs. (See fig. 1.)
After the part D benefit becomes effective in January 2006, Medicare  beneficiaries will be able to receive prescription drug coverage in several  ways, such as the following:    Beneficiaries covered through the traditional fee-for-service Medicare  program will be able to enroll in privately sponsored prescription drug  plans that contract with CMS to receive their drug benefits.
Beneficiaries enrolled in Medicare Advantage plans providing part D  prescription drug benefits will receive all of their health care services,  including part D benefits, through their Medicare Advantage plan.
Beneficiaries will be able to continue to receive prescription drug benefits  from other sources, such as an employment-based plan, if the plan sponsor  chooses to provide prescription drug coverage to Medicare-eligible  retirees.
section_title: The MMA Provides Plan Sponsors Options and Incentives for Providing Prescription Drug Coverage
paragraphs: The MMA creates options and incentives for a current or a potential  sponsor of an employment-based retiree health plan to provide  prescription drug coverage to Medicare-eligible retirees. Options for plan  sponsors under the MMA include the following:    Offer retirees comprehensive prescription drug coverage through an  employment-based plan in lieu of Medicare part D prescription drug  coverage. Under this option, a sponsor of a plan with prescription drug  coverage actuarially equivalent to that under part D will receive an  incentive to maintain coverage through a federal tax-free subsidy equal to  28 percent of the allowable gross retiree prescription drug costs over $250  through $5,000 (maximum $1,330 per beneficiary) for each individual  eligible for part D who is enrolled in the employment-based plan. For 2006,  CMS estimated that the average annual subsidy would be $668 per  beneficiary. In order to qualify for this subsidy, however, a plan sponsor  must attest that the actuarial value of prescription drug coverage under  the plan is at least equal to the actuarial value of standard Medicare part D  prescription drug coverage. Furthermore, a plan sponsor will receive a  subsidy only for those Medicare beneficiaries who do not enroll in the  Medicare part D benefit.
Offer prescription drug coverage that supplements (“wraps around”) the  part D benefit, as health plans commonly do for hospital and physician  services under Medicare parts A and B.
Pay all or part of the monthly premium for any of the prescription drug  plans or Medicare Advantage plans in which Medicare-eligible retirees  (and dependents) choose to enroll.
Contract with a prescription drug plan or Medicare Advantage plan to  provide the standard part D prescription drug benefit or enhanced benefits  to the plan sponsor’s retirees who are Medicare-eligible (equivalent to  offering a fully insured benefit) or become a prescription drug plan or  Medicare Advantage plan (equivalent to offering a self-insured benefit).
Plan sponsors also have other options. As has always been the case, plan  sponsors could stop providing any type of subsidized health care coverage,  including prescription drugs, to Medicare-eligible retirees and their  dependents. While they are not available for current Medicare  beneficiaries, the MMA also authorized the use of health savings accounts  (HSA) to which employers and active workers and retirees not eligible for  Medicare can contribute to cover future health care costs. This option  could provide a means for employees who are not offered employment- based retiree health coverage to save money for health coverage when  they retire.
On August 3, 2004, CMS published a proposed rule for implementing the  Medicare part D prescription drug provisions of the MMA, and the  comment period closed October 4, 2004. The proposed rule provided a  preliminary overview of how CMS intended to implement the MMA,  including the subsidy and other options. On January 28, 2005, CMS  published a final rule implementing the MMA. CMS also indicated that it  will provide further guidance relating to the subsidy for plan sponsors  providing retiree drug coverage.
section_title: Long-term Decline in Employment-Based Retiree Health Coverage Has Leveled Off, with Retirees Paying an Increasing Share of the Costs
paragraphs: The percentage of employers offering health benefits to retirees, including  those who are Medicare-eligible, has decreased since the early 1990s,  according to employer benefit surveys, but offer rates have leveled off in  recent years. At about the same time, the percentage of Medicare-eligible  retirees aged 65 and older with employment-based coverage has remained  relatively consistent. Meanwhile, employment-based retiree health plans  experienced increased costs to provide coverage, with one employer  benefit survey citing double-digit annual average increases from 2000  through 2003. Financial statements we reviewed for a random sample of 50  Fortune 500 employers showed that over 90 percent of the employers that  offered retiree health coverage had increased postretirement benefit  obligations from 2001 through 2003. Private and public plan sponsors,  including those that provide coverage for Medicare-eligible retirees, have  responded to increasing costs by implementing strategies that require  these retirees to pay more for coverage and thus contribute to a gradual  erosion of the value and availability of benefits.
subsections: section_title: Employer Benefit Surveys Show Decrease in Share of Employers Offering Health Benefits to Retirees, but Trend Has Leveled Off in Recent Years
paragraphs: Employer benefit surveys reported that the percentage of employers  offering health benefits to retirees has decreased since the early 1990s;  however, these offer rates have remained relatively stable in recent years.  A series of surveys conducted by Mercer Human Resource Consulting  indicated that the portion of employers with 500 or more employees  offering health insurance to Medicare-eligible retirees declined from 44  percent in 1993 to 27 percent in 2001, and leveled off from 2001 through  2004, with approximately 28 percent offering the benefits to Medicare- eligible retirees in 2004 (see fig. 2). A second series of surveys conducted  by the Kaiser Family Foundation and Health Research and Educational  Trust (Kaiser/HRET) estimated that the percentage of employers with 200  or more employees offering retiree health coverage—for those Medicare- eligible or those under age 65 or both—decreased from 46 percent in  1991 to 36 percent in 1993 and then leveled off from 1993 through 2004,  with approximately 36 percent of employers with 200 or more employees  offering retiree health benefits to these groups in 2004 (see fig. 3). For  Medicare-eligible retirees specifically, the percentage of employers in the  Kaiser/HRET survey offering coverage fluctuated from 1995 to 2004, but  differed by only 1 percentage point in 1995 (the earliest data available) and  2004, with 28 and 27 percent of employers, respectively, offering coverage  in these 2 years. Coverage for early retirees, those under age 65, has also  been significantly affected since the early 1990s. For example, the Mercer  surveys showed a steady decline in employers with 500 or more employees  offering coverage to this population from 50 percent in 1993 to 34 percent  in 2001, although this percentage has generally leveled off since 2001.
Employer benefit consultants and the 15 private and public sector plan  sponsors that we interviewed consistently cited a general erosion in health  benefits for all retirees, including those who are Medicare-eligible, but  some officials we interviewed also told us that plan sponsors that could  eliminate benefits had already done so, which is consistent with the period  of leveling off shown in the Mercer and Kaiser/HRET surveys. For  example, although the provision of health benefits for all retirees by  employers is generally voluntary, officials we interviewed noted that  employers that continue to offer retiree health benefits may be limited in  their ability to decrease benefits further because of existing contracts with  unions, which are generally negotiated every 3 to 5 years. According to the  15 private and public sector plan sponsors and employer benefit  consultants that we interviewed, many plan sponsors have restricted  coverage for future retirees—including those who are Medicare-eligible— but have continued to offer benefits to existing retirees, which would also  contribute to a leveling off of these rates.
Large employers are more likely than small employers to offer retiree  health coverage, including coverage for Medicare-eligible retirees. For  example, Kaiser/HRET data for 2004 showed that 36 percent of employers  with 200 or more employees offered health benefits to retirees compared  to approximately 5 percent of employers with 3 to 199 employees. Within  the Mercer and Kaiser/HRET definitions of large employers (at least 500  and at least 200 employees, respectively), those with the greatest numbers  of employees were the most likely to sponsor health benefits for retirees.  For example, Kaiser/HRET reported that approximately 60 percent of  employers with 5,000 or more employees offered health benefits in 2004 to  retirees compared to about 31 percent of employers with 200 to 999  employees. Based on the 2003 Mercer survey, 63 percent of employers  with 20,000 or more employees offered coverage specifically to Medicare- eligible retirees compared to 23 percent of employers with 500 to 999  employees.
In addition, employers with a union presence were more likely to offer  retiree health coverage than those employers without a union presence.  According to the 2004 Kaiser/HRET survey, among employers with 200 or  more employees, 60 percent of these employers with union employees  offered health coverage to retirees compared to 22 percent of these  employers without union employees.
The provision of retiree health coverage also varies between the private  and public sector and by industry type. For example, employers in the  public sector were more likely than employers in the private sector to  offer coverage to retirees, including those who are Medicare-eligible. All  federal government retirees—Medicare-eligible and those under age 65— are generally eligible for FEHBP health benefits and pay the same  premiums as active federal workers for the same benefits, including  prescription drugs. State plan sponsors also typically have higher offer  rates than private sector employers for retirees. For example, the 2004  Kaiser/HRET study showed that 77 percent of state and local government  employers with 200 or more employees offered coverage to retirees  compared with the average offer rate of 36 percent across all employer  industries. For retirees aged 65 and older, Medical Expenditure Panel  Survey (MEPS) data for 2002 indicated that approximately 86 percent of  state entities offered health insurance to this group of retirees. After  government employers, according to the 2004 Kaiser/HRET study, the  industry sector with the next highest percentage offering retiree coverage  was transportation/communication/utility, with 53 percent of all  employers in this industry sector (200 or more employees) offering health  benefits to their retirees in 2004. The industry sectors in this survey least  likely to offer coverage were health care and retail, with 22 percent and   10 percent, respectively, of employers (200 or more employees) in these  industry sectors offering retiree health benefits.
section_title: Percentage of Medicare- Eligible Retirees with Employment-Based Health Coverage Remained Consistent
paragraphs: The overall percentage of Medicare-eligible retirees and their insured  dependents aged 65 and older obtaining employment-based health benefits  through a former employer has remained relatively consistent from 1995  through 2003, based on data from the U.S. Census Bureau’s Current  Population Survey (CPS). According to our analysis of CPS data, the  percentage of Medicare-eligible retirees aged 65 and older with  employment-based health coverage and their insured dependents was  approximately 32 percent in 1995 and 31 percent in 2003. Among  Medicare-eligible retirees and their insured dependents aged 65 through 69  and aged 70 through 79, there was a modest decline in the percentage with  employment-based health coverage from 1995 through 2003, but a modest  increase among Medicare-eligible retirees and their insured dependents  aged 80 and over (see fig. 4). The modest decline among those aged 65  through 69 and aged 70 through 79 relative to all Medicare-eligible retirees  aged 65 and over may be because plan sponsors are more likely to reduce  benefits for future or recent retirees than for all retirees. Thus, the effect  of changes that plan sponsors have made to their retiree health benefits  may take additional time to be evident in the percentage of current retirees  receiving employment-based health benefits.
section_title: Faced with Increasing Costs, Plan Sponsors Have Implemented Various Cost- Cutting Strategies, Which Often Require Retirees to Pay More for Coverage
paragraphs: Retiree health costs continue to increase for many plan sponsors of retiree  health coverage, including those that provide coverage to Medicare- eligible retirees. Our analysis of financial statements filed with the SEC by  a sample of 50 Fortune 500 employers pointed to increases—some 50  percent or higher—in employers’ obligations for postretirement benefit  obligations from 2001 through 2003. Employer benefit surveys and our  interviews with officials from 15 private and public plan sponsors have  also cited increased retiree health costs. These increases often have  prompted plan sponsors to attempt to contain cost growth to provide  coverage in a variety of ways, including requiring greater cost sharing from  retirees.
subsections: section_title: Increasing Cost of Providing Retiree Health and Prescription Drug Coverage
paragraphs: The cost of providing retiree health coverage—and prescription drug costs  in particular—is increasing for many plan sponsors. Financial statements  filed with the SEC by 50 randomly selected Fortune 500 employers showed  that over 90 percent of the 38 employers that reported postretirement  benefit obligations from 2001 through 2003 had an increase in these  obligations during this period. About 20 percent of these 38—8  employers—had an increase in their obligations above 50 percent, while  one-third of these 38—13 employers—had an increase of between 25 and  50 percent from 2001 through 2003. During this same period, the Bureau of  Labor Statistics estimated that the Consumer Price Index, which reports  prices for all consumer items, increased 5.3 percent, a 1.8 percent average  annual rate of increase. Over 80 percent of the 38 employers that reported  postretirement benefit obligations from 2001 through 2003 had a change in  their postretirement benefit obligations that exceeded the Consumer Price  Index increase of 5.3 percent for all consumer items from 2001 through  2003.
Data from employer benefit surveys also showed increased costs for plan  sponsors for roughly the same period. For example, a survey conducted in  2004 by the Kaiser Family Foundation and Hewitt Associates reported that  the total cost of providing health benefits to all retirees for employers  surveyed (1,000 or more employees) rose rapidly between 2003 and 2004,  with an estimated average annual increase of nearly 13 percent. Mercer  data projections by employers for 2003 also showed an average annual  cost increase of approximately 11 percent from 2002 for Medicare-eligible  retirees from—$2,702 to $3,003—the fourth straight year of double digit  increases. (For active employees, employers in the Mercer survey reported  a 10 percent increase in 2003 in the average total health benefit cost from  2002.)
The cost for public sector plan sponsors to provide retiree health  coverage, both for Medicare-eligible retirees and those under age 65, is  also increasing. For example, one public sector plan sponsor we  interviewed reported that retiree health care costs had doubled in a 6-year  period, from $440 million in 1998 to over $900 million in 2003, with an  average annual cost in 2004 of $3,542 per Medicare-eligible retiree,  compared to $1,822 per Medicare-eligible retiree in 1998. For FEHBP, as  set in statute, the federal government pays 72 percent of the weighted  average premium of all health benefit plans participating in FEHBP but no  more than 75 percent of any health benefit plan’s premium. Thus, retirees  and active workers pay approximately 28 percent of their plan  premiums—a share that has not changed since it became effective in  January 1999. While the percentage of plan premiums contributed by the  government has remained constant in recent years, the actual rates have  increased over time. In December 2002, we reported that health insurance  premiums for FEHBP plans had increased on average about 6 percent per  year from 1991 through 2002. According to OPM, average FEHBP  premiums increased by 11 percent in 2003, about 11 percent in 2004, and  about 8 percent for 2005.
Prescription drug benefits represent a large share of plan sponsors’ retiree  health costs, particularly for Medicare-eligible retirees. In 2002,  prescription drug costs were cited as a key driver of increases in  employment-based retiree health costs and were estimated to be typically  50 to 80 percent of an employer’s total health care costs for Medicare- eligible retirees. According to 2001 MCBS data, prescription drug  expenditures for retired Medicare beneficiaries that were paid by  employment-based insurance accounted for 45 percent of all health care  expenditures for these beneficiaries. Three Fortune 500 employers we  interviewed reported that prescription drug costs for Medicare-eligible  retirees and their dependents ranged from approximately 56 to 64 percent  of their total estimated annual cost of providing health benefits for this  same population.
section_title: Private Sector Plan Sponsors’ Cost-Cutting Strategies
paragraphs: Faced with increasing costs, private sector plan sponsors have  implemented certain strategies to reduce these obligations that often  require retirees to pay more for coverage and contribute to a general  erosion in the value and availability of health coverage for retirees. For  example, many plan sponsors have increased cost sharing through  increased copayments, coinsurance, and premium shares; restricted  eligibility for benefits based on retirement or hiring date; implemented  financial caps or other limits on plan sponsors’ contributions to coverage;  and made changes to prescription drug benefits, such as creating tiered  benefit structures and increasing retiree out-of-pocket contributions.  These cost-cutting strategies are not new—in 2001 we reported that  employers had implemented similar mechanisms designed to control  retiree health care expenditures. However, according to private plan  sponsors we interviewed, the share of costs paid by retirees is increasingly  affected as the plan sponsors reach and enforce financial caps and other  limits they had set. While these strategies are intended to limit the increase  in plan sponsor obligations, the information provided by employer benefit  surveys and the plan sponsors and consultants we interviewed did not  specify the magnitude of any decrease in plan sponsors’ costs for retiree  health benefits that could be attributed to these changes.
Increasing Retirees’ Cost Sharing. One strategy that plan sponsors  have adopted to limit their obligations for retiree health costs is increasing  the share of costs for which the retiree is responsible. For example,  employers have increased retiree copayments and coinsurance. When  asked about changes made “in the past year,” Kaiser/Hewitt reported that  nearly half of its surveyed private employers (1,000 employees or more)  had increased cost sharing. The majority of employers in the  Kaiser/Hewitt study reported that they expected to make similar increases  “for the 2005 plan year,” with 51 percent indicating they were very or  somewhat likely to increase retiree coinsurance or copayments. These  increases are consistent with the changes cited in our interviews with  private employers and with officials we interviewed at other organizations,  including benefit consulting firms and an organization representing  unions. For example,    one employer we interviewed reported cost sharing increases for all  retirees every year since 1993;    another employer we interviewed introduced a mix of coinsurance and  copayment requirements in January 2004 to address rising health care  costs and make retirees more aware of the cost of the benefits they  received; and    a third employer we interviewed that had historically paid approximately  90 percent of total retiree health care costs was planning to increase the  share of costs borne by retirees who had retired prior to 1994 from  approximately 10 percent to 20 percent of health care costs by   January 1, 2006.
Increasing Premiums. Increased contributions by retirees to health care  premiums is another area where plan sponsors have continued to make  changes to control their health care expenditures. Kaiser/Hewitt data  showed that 79 percent of surveyed employers had increased retiree  contributions to premiums in the past year, and 85 percent reported that  they were very or somewhat likely to increase these contributions for the  2005 plan year. Retiree contributions for new retirees aged 65 and over  increased, on average, 24 percent from 2003 to 2004, according to the  Kaiser/Hewitt study. The Mercer 2003 study reported that employers  varied retiree premium contributions, with Medicare-eligible retirees  paying on average about 38 percent of plan premiums when the cost was  shared between the employer and the retiree, an increase of  approximately 4 percentage points since 1999. Four of the 12 Fortune 500  plan sponsors we interviewed also reported changes to premiums. For  example, one plan sponsor made a change in 2004 to increase premiums  for all individuals retiring after January 1, 2004, consistent with increases  in premiums for active workers, whereas previously retirees kept the same  premiums for life. Officials we interviewed representing unions and their  members also cited increased premiums for many retired union workers.
Some employers are also beginning to offer access-only coverage to some  or all retirees, in which employers allow retirees to buy into a health plan  at the group rate, but without any financial assistance from the employer.  For example, according to 2003 Mercer data, about 37 percent of retiree  health plans for employers with 500 or more employees required  Medicare-eligible retirees to pay the full cost of the employment-based  plan. Thirteen percent of the Kaiser/Hewitt employers reported making a  change in the past year to provide access-only coverage to retirees, with  retirees paying 100 percent of the costs. A supplement to the 2004  Kaiser/HRET survey examined the percentage of Medicare-eligible retirees  with access-only coverage and found that 5 percent of Medicare-eligible  individuals who are retired from employers with 200 or more employees  that offer retiree health benefits had such coverage. While 5 of the 12  Fortune 500 plan sponsors we interviewed had implemented access-only  coverage, 1 of these plan sponsors had implemented this level of coverage  for all of its retirees in the early 1990s in response to health care costs. The  other 4 plan sponsors had implemented the access-only change at a later  date, implementing it for some or all employees ranging from those hired  after January 1, 1995, to those retiring on or after January 1, 2007.
Reducing Benefits for Future Retirees. Implementing access-only  coverage is often part of a broader movement by plan sponsors to restrict  eligibility or offer reduced benefits for employees who are hired or retire  after a certain date. In December 2004, Kaiser/Hewitt reported that   8 percent of surveyed employers (with 1,000 or more employees) said they  had made a change “in the past year” to eliminate their subsidized health  benefits for future retirees, typically for those hired after a specific date.  Of the 12 Fortune 500 plan sponsors we interviewed, 5 plan sponsors had  eliminated retiree health coverage for some or all individuals hired after a  certain date, ranging from January 1, 1993, to January 1, 2003, while 4 of  the 5 plan sponsors that had switched to providing access-only coverage  did so for some or all of their future retirees. Some plan sponsors said that  they generally avoided making changes for current retirees rather than for  future retirees, who may be in a position to make other arrangements. In  addition, plan sponsors generally tried to minimize the disruption when  making changes for those already in retirement. For example, one Fortune  500 plan sponsor we interviewed carried 15 separate health plans for  several years that had accumulated as the result of grandfathering in  current coverage levels for existing retirees. It was only in 2003 that the  company consolidated the 15 plans into 3 plans and instituted changes  affecting both existing and some future retirees. Plan sponsors that have  either eliminated coverage or created access-only plans for some or all  retirees generally reported that recruitment had not been affected. One  plan sponsor we interviewed, however, noted that current employees’  retirement planning could be affected, as some employees might stay  longer with the company because they could not afford to retire. This  sentiment is consistent with data reported in Mercer’s 2003 annual survey  of employer-sponsored health plans showing that retirees tended to delay  retirement when their employers did not sponsor retiree medical plans.
Introducing and Enforcing Financial Caps. In 2001, we reported that  some employers had established caps and other limits on expenditures for  retiree health benefits, but it was not clear at that time how employers  would ensure that spending did not exceed the caps and how coverage  would be affected. Employers began to implement caps in response to  rising retiree health costs and to accounting changes introduced in the  early 1990s when the Financial Accounting Standards Board (FASB)  adopted Financial Accounting Standards (FAS) 106, requiring employers  to report annually on the obligation represented by the promise to provide  retiree health benefits to current and future retirees. The 2003 annual  survey of employer-sponsored health plans conducted by Mercer shows  that 18 percent of employers with 500 or more employees have  implemented caps, while an additional 10 percent of such employers were  considering them. Caps were most common among the employers with the  largest number of employees in the Mercer study (20,000 or more  employees); 33 percent of such employers had implemented these limits  on overall spending and 9 percent were considering them. Similarly,   54 percent of employers with 1,000 or more employees offering retiree  coverage in the 2004 Kaiser/Hewitt employer survey reported having  capped contributions. Ninety percent of employers in the Kaiser/Hewitt  study that have hit caps or anticipated hitting caps in the next year  reported that they intended to enforce them or already had.
Of the 12 Fortune 500 plan sponsors we interviewed, 8 had implemented  capped contributions or other limits on retiree health spending. For  example, 1 plan sponsor reported monthly caps of $217 per person for  nonunionized retirees under age 65 and $51 per person for nonunionized  Medicare-eligible retirees. Another plan sponsor provided fixed company  health care credits for its retirees under age 65 (unionized and  nonunionized) in which an individual could receive up to $3,750 to apply  to the plan sponsor’s estimate for health care costs for a retiree under age  65. While many plan sponsors had implemented these types of limits, they  varied as to whether all groups of retirees were affected and whether the  caps had been reached and thus enforced. For example, 2 of the 12  Fortune 500 plan sponsors we interviewed had capped benefits for some  individuals depending on the individual’s date of retirement (typically  more recent retirees were affected), and in some cases the caps varied by  whether retirees were part of a union or former employees of an acquired  company. The plan sponsors we interviewed whose retiree health benefit  costs had reached the caps generally were enforcing them. For example,  one plan sponsor required some retirees—both Medicare-eligible and  those under age 65—to pay a portion of premiums for the first time after  the plan’s costs reached the cap in 2002. However, implementing and  enforcing caps can be an issue in union negotiations. One plan sponsor we  interviewed had opted in the past to negotiate benefit changes with unions  to delay hitting the caps, but now expects to hit and enforce the caps by  2007. Another plan sponsor, while enforcing the financial caps for retiree  health benefits, has agreed in some union negotiations to give retirees an  additional contribution toward health care expenses that effectively  offsets the premium increases triggered by reaching the caps. A few plan  sponsors and benefit consultants we interviewed noted that employers are  more likely today to enforce caps than to raise them. For example, the  2003 Kaiser/Hewitt study stated that there is some concern that auditors  will question the effectiveness of a cap if there is a pattern of continually  raising it once costs approach the set limit.
Implementing Changes to Prescription Drug Benefit Design. Given  the sensitivity of retiree health benefits to prescription drug costs, many  plan sponsors have made changes to prescription drug benefits. The  primary mechanisms cited by the 2004 Kaiser/Hewitt employer benefit  survey and benefit consultants and the 12 Fortune 500 plan sponsors we  interviewed included increasing copayments; switching from copayments  to coinsurance; and implementing tiered benefit structures in which  generic drugs, formulary/preferred drugs, and nonformulary/nonpreferred  drugs are subject to different retiree copayment and coinsurance rates.  Over half of the employers in the 2004 Kaiser/Hewitt study reported having  increased copayments or coinsurance for prescription drugs in the past  year, and 15 percent had replaced fixed-dollar copayments with  coinsurance in the past year. Over half of the plan sponsors offered a  three-tiered benefit structure, and among plans with this design, about  two-thirds require copayments and nearly one-fourth required coinsurance  for retail pharmacy purchases. In addition, about one-fourth of the  Kaiser/Hewitt-surveyed employers had instituted a three-tiered drug plan  in the past year to save money.
The 12 Fortune 500 plan sponsors we interviewed echoed these types of  changes in their prescription drug benefit for retirees within the last 5  years. For example, 3 plan sponsors had instituted retiree coinsurance  requirements, which can make retirees more price conscious because the  retiree out-of-pocket cost is higher for more expensive drugs than for less  expensive drugs. One plan sponsor reported it had increased drug  copayments for retirees. Several of the 12 Fortune 500 plan sponsors we  interviewed already had tiered benefits in place. One plan sponsor had  implemented a three-tiered structure as well as mandatory use of a mail- order pharmacy for some prescription drugs. Another plan sponsor  reported it planned to implement “step-therapy” in January 2005, in which  retirees would have to demonstrate the ineffectiveness of a lower-cost  generic drug before receiving coverage for a higher cost brand-name drug.  Officials we interviewed representing unions and their members noted  similar prescription drug trends for many former union workers.
section_title: Public Sector Plan Sponsors’ Cost-Cutting Strategies
paragraphs: While public sector plan sponsors generally offer more coverage than  those in the private sector, these plan sponsors are also starting to  implement cost-cutting mechanisms similar to those implemented in the  private sector, with one major exception—they generally are not  eliminating retiree health benefits for future retirees. For example, in  December 2002, we reported that FEHBP plans had implemented some  benefit reductions for all enrollees—mostly by increasing enrollee cost  sharing. We reported that three large fee-for-service plans had increased  or introduced cost sharing features such as copayments or coinsurance for  prescription drugs and deductibles for other services. OPM officials  informed us that FEHBP plans have implemented cost-containment  strategies relating to prescription drugs, such as three-tiered cost sharing,  comparable to private sector employers. However, OPM does not  implement cost-containment strategies for retirees that do not also affect  active workers.
Similarly, other public sector plan sponsors, such as state governments,  are starting to reduce benefit levels and implement cost-cutting  mechanisms, including changes to prescription drug benefits. However,  eliminating retiree health benefits entirely for current or future retirees  does not appear to be as prevalent in the public sector as the private  sector. For example, a 2003 survey conducted by the Segal Company, a  benefit consulting firm specializing in the public sector, reported that no  state plan sponsor in its survey was considering eliminating retiree health  coverage as a cost-containment strategy. A 2003 study prepared by  Georgetown University for the Kaiser Family Foundation that collected  survey data from 43 states and the District of Columbia also found that no  state government had terminated subsidized health benefits for current or  future retirees and no state government was planning to do so. However,  the Georgetown study found that 24 of these states reported increased  cost sharing in the past 2 years, while 13 had increased retiree premium  shares in the past 2 years. A study released by AARP in July 2004 on state  government retiree health benefits found that 11 states required Medicare- eligible retirees to pay the full amount of the premium. Almost all of the  states in the Georgetown study cited prescription drugs as the most  important driver behind the growth in state retiree health spending and, as  a result, have taken specific steps to manage these costs, such as  increasing cost sharing and implementing tiered benefit structures. The  majority of states in the AARP study had three-tiered copayment benefits.  One public sector plan sponsor we interviewed is proposing significant  changes to keep its retiree health benefits fund solvent that would vary the  employer’s contribution toward retiree health care costs on the basis of  the retiree’s age and years of service, rather than paying the full cost of  coverage for those meeting the minimum age and service requirements.
Benefit consultants and officials from other organizations we interviewed  noted new pressures on public sector funding of retiree health care  benefits as a result of standards adopted in 2004 by the Governmental  Accounting Standards Board (GASB) that affect the reporting of  postretirement benefit obligations for many public sector sponsors of  employment-based retiree health coverage. Similar to FAS 106 for private  sector employers, the new standards require public sector plan sponsors,  including state governments, to accrue the costs of postretirement health  care benefits during the years of service as opposed to reporting these  costs on a pay-as-you-go basis. However, the GASB standards are not  identical to those in the private sector, and the July 2004 AARP study  noted that it is unclear whether the experience of FAS 106—and its  frequently cited impact on the decrease in employment-based retiree  health coverage—would directly translate to the public sector. While the  study stated that the new GASB standards might encourage state  governments to reduce retiree health benefit programs in order to reduce  obligations, it also noted that these standards alone were not likely to  cause major program changes. Regardless, benefit consultants and other  officials we interviewed cited notable implications for public sector  employers. For example, large unfunded obligations can affect bond  ratings in the public sector, which affect these public sector entities’  ability to borrow money. One benefit consultant told us that its public  sector clients are raising issues such as plan design, cost, financing, and  the possible reduction of retiree health benefits in light of the new GASB  standards. The provision of retiree health benefits in the public sector may  also be affected by other factors, such as state budget deficits and state  political pressures.
section_title: Employers and Plan Sponsors Considering MMA Options for Prescription Drug Coverage, Often Considering Subsidy as Primary Option for Some or All Medicare- Eligible Retirees
paragraphs: At the time of our review, many employers and plan sponsors said they  had not decided which MMA options they would implement for their  Medicare-eligible retirees, but the primary option many sponsors were  considering was the subsidy. Ten of the 15 plan sponsors we interviewed  said that while undecided, they were considering the federal subsidy  option for some or all of their Medicare-eligible retirees, while 2 other plan  sponsors had chosen the subsidy option for all their Medicare-eligible  retirees. Four plan sponsors we interviewed were concerned that because  their benefits already had reached or soon would reach the caps they had  set on their retiree health benefit obligations, they would be ineligible for  the subsidy and therefore said that redesigning their benefits to wrap  around Medicare would be prudent. In our random sample of 50 Fortune  500 employers, most that reported obligations for retiree health benefits  indicated that they would choose the federal subsidy or other options, but  others had not reported their final MMA decisions on their financial  statements filed with the SEC as of November 2004. In addition, 2 plan  sponsors we interviewed were considering Medicare Advantage plans, but  these plan sponsors were waiting to see how the market for these  developed. While plan sponsors generally expected to continue to  maintain coverage levels for their retirees as they considered their MMA  options, they acknowledged that cost pressures could cause them to  reevaluate their benefits. If employers were not already providing  prescription drug benefits to retirees, most benefit consultants and other  experts we interviewed said that the MMA was not likely to prompt  employers to begin providing coverage or supplementing the Medicare  benefits.
subsections: section_title: Plan Sponsors We Interviewed Were Considering MMA Options for Prescription Drug Coverage, but Few Had Made Final Decisions
paragraphs: The 15 private and public sector sponsors of retiree health benefit plans  we interviewed were considering their MMA options for prescription drug  coverage, but few had decided which MMA options they would choose for  all their Medicare-eligible retirees. Of the 15 plan sponsors we interviewed,  12 were Fortune 500 private sector employers. Two of the 12 had made a  decision for all of their Medicare-eligible retirees, and 10 said they had not  yet made their final decisions for some or all of their retirees and were  assessing the implications associated with the MMA options. Officials from  the three public sector sponsors of health benefit plans we interviewed— the federal government and two state retirement systems—said they were  considering their options. Both private and public sector plan sponsors  told us they anticipated making their final decisions by early 2005. In  addition, officials we interviewed representing multiemployer plans told  us that most multiemployer plans had not focused on the MMA options to  the same extent as single-employer private sector plan sponsors, and  therefore most were undecided about the options they would implement.  As part of their deliberations, plan sponsors were considering several  MMA options, including the federal subsidy option if they decided to  provide their own prescription drug benefits for Medicare-eligible retirees;  coordinating with part D by wrapping their prescription drug benefits  around the Medicare part D benefit, thus providing secondary coverage;  and several other options. In some cases, plan sponsors were considering  implementing a combination of options for different groups of Medicare- eligible retirees.
subsections: section_title: The Federal Subsidy
paragraphs: Ten of the 15 private and public sector sponsors of employment-based  retiree health benefits that we interviewed were considering the   28 percent federal subsidy for prescription drug costs for some, if not all,  Medicare-eligible retirees, although they were in different stages of the  decision-making process at the time of our interviews. Two private sector  sponsors had chosen the subsidy option for all of their Medicare-eligible  retirees. Three of the private and public sector sponsors, including OPM  for FEHBP, said they would not or did not expect to choose the subsidy  option. (See table 1.)
Retiree health benefit plan designs and other circumstances affected plan  sponsors’ decisions regarding the subsidy. In particular, whether a plan  sponsor had implemented financial caps on retiree health benefit  expenditures played a major role in the decision-making process. In  addition, plan sponsors that negotiated retiree health benefits with unions  said that they did not have as much flexibility to change these benefits  prior to negotiations. Three of the private sector plan sponsors we  interviewed said they would choose the subsidy option only for some of  their Medicare-eligible retirees because of capped benefits, the role of  unions, or both, as described in the following:    One of the three plan sponsors capped health benefits for workers who  retired after a specific date, so it offered richer uncapped benefits to those  who retired before that date. This sponsor determined that the uncapped  benefits would be actuarially equivalent. Therefore, this plan sponsor said  it would choose the subsidy option for the uncapped benefits but was not  certain that the capped benefits would be actuarially equivalent for  purposes of the subsidy.
Another of these sponsors offered many different prescription drug plan  designs to retirees with collectively bargained benefits (union retirees)  and those without collectively bargained benefits. This sponsor chose the  subsidy option for all plans that met the actuarial equivalence test. The  sponsor’s plans that were not likely to meet the actuarial equivalence test  typically had financial caps.
The third sponsor said it was fairly certain it would choose the subsidy  option for its collectively bargained retiree prescription drug benefits.  While both the collectively bargained and noncollectively bargained  retiree benefits were capped, the unions had renegotiated higher capped  amounts for the collectively bargained benefits. The next negotiation  session with the primary union was scheduled for July 2006, thereby  making it difficult to make changes to these benefits other than accepting  the subsidy in the interim. The caps for the retirees with noncollectively  bargained benefits would be reached sooner and were less likely to be  actuarially equivalent. Therefore, this sponsor said it was considering  other options for the retirees with noncollectively bargained benefits.
Although they had not made any final decisions on the MMA options at the  time of our interviews, 5 of the 12 private sector Fortune 500 sponsors of  employment-based health benefit plans we interviewed were considering  the subsidy option. Two of these 5 plan sponsors said they were likely to  apply for the subsidy for their Medicare retirees. Of the 2, 1—whose  employees were partially unionized and that had not capped any of its  retiree health benefits—said it did not “strongly consider” any other  options during its deliberations. The other of the 2 sponsors expected to  apply for the subsidy for all of the prescription drug plans for Medicare- eligible retirees that met the actuarial equivalence test. At the time of our  interviews, 3 of these 5 plan sponsors said they either needed additional  information from CMS regarding actuarial equivalence or needed more  time before they could make their final decisions about the subsidy option.
Two large state sponsors of health benefits for Medicare-eligible retirees  were considering the subsidy option along with others. OPM had not made  any decisions at the time of our interview, but in written comments on a  draft of this report it indicated that it did not expect to choose the federal  subsidy for FEHBP.
The subsidy option offers plan sponsors several advantages. Cost savings  associated with the subsidy played a major role in the plan sponsors’  decision-making process. Several benefit consultants and plan sponsors  we interviewed stressed the importance of cost savings when considering  the MMA options. Most of the plan sponsors we interviewed considered  the savings associated with the subsidy to be an advantage. For example,  one plan sponsor estimated that it would reduce its accumulated  postretirement benefit obligations by about $161 million just by choosing  the subsidy option for one group of its Medicare-eligible retirees.
Some plan sponsors and benefit consultants we interviewed said that most  of the prescription drug expenditures for Medicare-eligible retirees would  be eligible for the subsidy because most retirees incurred costs from $251  through $5,000, the range eligible for the subsidy as defined in the MMA.  While Medicare-eligible retirees’ prescription drug expenditures could be  paid by several different sources, employment-based coverage accounted  for about 27 percent of total expenditures in 2001, while out-of-pocket  payments accounted for about 37 percent, according to our analysis of  MCBS. According to our projections of the estimated amount of Medicare- eligible retirees’ total prescription drug expenditures that employment- based plans would pay for and that beneficiaries would pay out-of-pocket  in 2006, most of the expenditures from employment-based coverage and  from out-of-pocket—about 75 percent—could be eligible for the subsidy  (see fig. 5).
Preserving the benefits the plan sponsors currently provide and retaining  the control over and flexibility of the benefits were also cited as  advantages to choosing the subsidy option. Benefit consultants, plan  sponsors, and others we interviewed said that it would be easier for  beneficiaries if the benefits offered did not change. Choosing the subsidy  option also gave plan sponsors the ability to maintain control over the  benefits and their costs. In addition, preserving their current benefits  allowed plan sponsors time to see how other MMA options would play out  in the marketplace. For some plan sponsors, these advantages made the  subsidy the easiest, most seamless, and least risky option to pursue.
Several benefit consultants we interviewed said that to receive the  subsidy, sponsors of employment-based retiree health plans would have to  fulfill certain administrative reporting and record keeping requirements, as  identified by CMS. For example, sponsors will have to apply for the  subsidy no later than 90 days prior to the start of the calendar year,  including providing an attestation regarding actuarial equivalence. Each  application must include the names of all people enrolled in the sponsor’s  drug plan to ensure that a sponsor is not receiving a subsidy for an  individual who is enrolled in a part D prescription drug plan or a Medicare  Advantage plan. The plan sponsor must also notify Medicare-eligible  retirees and their spouses and dependents whether their retiree health  plan provides “creditable coverage”—that is, generally whether the  expected amount of paid claims under the plan sponsor’s prescription  drug coverage is at least equal to that of the expected amount of paid  claims under the standard part D coverage. This notice is important  because retirees who do not enroll in part D when first eligible will be  charged a penalty for late enrollment if they enroll after finding that their  previous employment-based coverage did not meet CMS’s creditable  coverage criteria. A special enrollment period will be provided, however,  without a late enrollment penalty, when there is an involuntary loss of  creditable coverage because, for example, an employer eliminates or  reduces coverage. All plan sponsors choosing the subsidy will have to  document prescription drug costs that fall within the MMA’s eligibility  criteria.
Although several benefit consultants saw the potential administrative  requirements as a disadvantage of the subsidy, most of the plan sponsors  we interviewed were not concerned about the subsidy’s proposed  administrative requirements. For example, one plan sponsor told us it was  less concerned about how it would manage the subsidy’s administrative  requirements than about how it would manage relations with retirees if it  changed prescription drug benefits under other MMA options. At the time  of our interviews, however, some plan sponsors said they were not fully  aware of or had not considered all of the administrative requirements.
Besides cost savings, ease for retirees, and administrative requirements,  plan sponsors we interviewed said they also considered other factors  when making decisions about the subsidy. For example, plan sponsors  considered as part of their decision-making process possible negative  press, potential for lawsuits, relations and communications with Medicare- eligible retirees, benefit equity between Medicare-eligible retirees and  retirees not yet eligible for Medicare, future union negotiations, hiring and  retention of workers, marketplace competition, and uncertainty about  CMS rules.
section_title: Wrapping Retiree Drug Benefits around Medicare Part D
paragraphs: One alternative to choosing the federal subsidy option for plan sponsors  that provide prescription drug coverage to Medicare-eligible retirees is the  option of coordinating with part D by wrapping their benefits around the  new Medicare part D benefit by covering some drug costs not paid by  Medicare. Plan sponsors would offer coverage wrapping around Medicare  part D rather than providing their own comprehensive prescription drug  coverage. Prescription drug costs not covered by Medicare part D that  plan sponsors could cover might include the $250 deductible or the  retirees’ costs within the coverage gap (i.e., the doughnut hole) until the  Medicare catastrophic coverage begins paying for most drug costs. Several  plan sponsors we interviewed said they were considering this option for  Medicare-eligible retirees along with the subsidy and other options as part  of their overall MMA deliberations. For example, one plan sponsor said it  was considering wrapping its drug benefits around the part D benefit as its  primary option for all its Medicare-eligible retirees because it had set  financial caps on its retiree health benefit obligations that would  eventually render it ineligible for the subsidy. Three other plan sponsors  told us they were considering wrapping their prescription drug benefits  around the part D benefit for those Medicare-eligible retirees for whom  they could not qualify to receive the federal subsidy. Furthermore, OPM  officials said that wrapping prescription drug benefits around the part D  benefit could be more complex for the federal government than for  employers in the private sector because, in contrast to many large private  sector employers, FEHBP does not provide different benefits for active  workers and for retirees.
Some plan sponsors and benefit consultants we interviewed expected that  wrapping prescription drug benefits offered to Medicare-eligible retirees  around the new Medicare part D benefit would provide several  advantages. For example, some benefit consultants said that this option  could save more money than the subsidy. However, they said plan  sponsors would have to do a cost/benefit analysis to make this  determination. Also, plan sponsors could continue to provide the same  level of benefits to Medicare-eligible retirees in coordination with the  Medicare part D coverage, thereby maintaining benefit continuity.  Conceptually, sponsors of employment-based health benefit plans and  benefit consultants generally viewed the option to wrap prescription drug  benefits around the part D benefit as being similar to how most now  coordinate other benefits with Medicare parts A and B. Some sponsors we  interviewed planned to rely on their pharmacy benefit managers, benefit  consultants, and others for assistance in administering the benefit.  However, plan sponsors and benefit consultants we interviewed were  waiting to learn more from CMS about how the benefit coordination would  operate. As a result, at the time of our interviews, employers and others  had questions about how prescription drug benefit designs would wrap  around the Medicare part D benefit.
Wrapping benefits around the Medicare part D benefit also could present  some administrative and other challenges for plan sponsors. Two benefit  consultants we interviewed told us that wrapping benefits around the  different Medicare part D plans, such as Medicare Advantage or a private  prescription drug plan, in which retirees might enroll could add to the  administrative complexity. Also, according to one benefit consultant and  CMS officials, while coordinating with the Medicare program can be a  fairly straightforward task for part A and B services, part D coordination  might be more difficult because each Medicare-eligible retiree’s true out- of-pocket costs must be determined. Part D requires that Medicare  beneficiaries must have $3,600 in out-of-pocket expenses for covered  drugs in 2006 before federal catastrophic coverage begins. Generally,  beneficiaries’ expenses reimbursed by other sources such as employment- based plans are not counted. This can become complicated for plan  sponsors that have different copayment and coinsurance requirements for  different groups of retirees.
Another possible challenge for plan sponsors in wrapping around  Medicare part D coverage is financial. Plans sponsors that supplement the  Medicare part D benefit could spend thousands of dollars for each retiree  before the Medicare catastrophic coverage begins. Two plan sponsors and  several benefit consultants were concerned about how employment-based  drug benefits that wrap around the Medicare part D benefit would affect  the out-of-pocket payment requirements for beneficiaries. For example, if  a plan sponsor covered 75 percent of a Medicare-eligible retiree’s  expenditures within the coverage gap (i.e., the doughnut hole) the plan  sponsor would have to spend $8,550 before the retiree reached $3,600 in  out-of-pocket expenditures as required by the MMA. Specifically, under  this wraparound scenario,  the Medicare-eligible retiree would spend $3,600 out-of-pocket—$250 for  the part D deductible, $500 in coinsurance for the next $2,000 in  expenditures, and $2,850 for the expenses not covered by Medicare;    Medicare would spend $1,500—75 percent of the next $2,000 in  expenditures after the deductible is met; and  the plan sponsor would spend $8,550.
This would require a total of $13,650 in expenditures from all sources  before the retiree would reach the amount—that is, combined Medicare  and beneficiary expenditures equal to $5,100—at which Medicare part D  catastrophic coverage would begin.
section_title: Other Options
paragraphs: Under the MMA, sponsors of employment-based health benefit plans for  Medicare-eligible retirees have several other options. For example, plan  sponsors could contract with privately marketed prescription drug plans  and Medicare Advantage plans to cover the part D benefit, or they could  become prescription drug plans or Medicare Advantage plans. In  addition, while not allowed for current Medicare-eligible retirees, plan  sponsors could establish HSAs for their active workers, who could use  these benefits when they retire.
Several benefit consultants told us their clients might consider these other  MMA options, and some plan sponsors we interviewed were doing so. For  example, four benefit consultants we interviewed said that Medicare  Advantage plans could offer advantages to plan sponsors. Two of these  benefit consultants said that having Medicare-eligible retirees enroll in  Medicare Advantage plans would shift the financial risk away from the  plan sponsor to the Medicare Advantage plan. The other two said that  Medicare Advantage plans could help to reduce costs, and they also  believed that having Medicare-eligible retirees enroll in these plans could  help reduce administrative burdens associated with the Medicare part D  benefit. Two benefit consultants noted that these plans might not be  available in all parts of the country, but others said that increased federal  reimbursement rates established as part of the MMA might cause more  private plans to enter this market in the future. In addition, two benefit  consultants commented that their clients might be more interested in  Medicare Advantage once the market for these plans is established. During  our interviews, some Fortune 500 plan sponsors generally discussed  Medicare Advantage plans as an option they might consider. While several  plan sponsors said that none of their Medicare retirees were enrolled in a  health maintenance organization (HMO), two said that HMOs might be a  viable option in the future as long as managed care plans continued to  participate in the Medicare program. One plan sponsor considered  Medicare Advantage plans as an option during its deliberations but  determined that based on its past experience with Medicare+Choice, it did  not provide many savings.
One benefit consultant we interviewed said that plan sponsors might be  reluctant to form their own Medicare Advantage plans because many  HMOs left the Medicare+Choice program in the past. However, new  options that had not yet been offered under the Medicare Advantage  program might also be attractive to employers with retirees living all  across the country. CMS officials said that they are currently developing  the waivers that plan sponsors would need to form their own Medicare  Advantage plans.
The MMA also established HSAs, which receive preferential tax treatment,  that are used in conjunction with high deductible health insurance plans.  The HSA can be used to pay for qualified medical expenses not covered by  insurance or other reimbursements. Although HSAs cannot be set up to  fund health benefits for current Medicare-eligible retirees, they can be a  savings vehicle for workers to pay the cost of their health care coverage  when they retire. However, some benefit experts said it is unlikely that  enough money would accumulate in these accounts for retirees, especially  for older workers, to benefit substantially from them. Six of the 15 plan  sponsors we interviewed said they were exploring how HSAs would  integrate into their overall benefit programs or were considering them for  the future.
section_title: Most Plan Sponsors in Our Sample Reported MMA- Related Changes on Recent Financial Statements, While a Third Were Considering MMA Options
paragraphs: According to financial statements filed with the SEC as of November 2004,  most of the Fortune 500 employers we reviewed that reported  postretirement benefit obligations (27 of 39) reflected the effect of the  MMA options on these obligations. For example, 3 of these plan sponsors  each reported reductions in accumulated obligations of over $100 million.  The other 12 employers did not report on their MMA decisions in these  financial statements. (See table 2.)
Thirteen of the 27 plan sponsors that reflected the effect of the MMA  options reported they would be choosing the subsidy option, which  reduces their postretirement benefit obligations and other expenditures.  However, even among these 13 plan sponsors, 3 reported that they would  be choosing the subsidy option for some but not all of their retirees. They  had not reported what options they would pursue for the remaining  retirees. While the remaining 14 plan sponsors addressed the MMA options  in their financial statements, their MMA decisions for Medicare-eligible  retirees were not as clear. These plan sponsors generally reported that the  MMA options either reduced their postretirement benefit obligations or  that the changes they made because of the MMA were not expected to  have a material impact on their postretirement benefit obligations.
Twelve of the 39 employers that reported sponsoring retiree health benefit  plans and having postretirement benefit obligations did not report on their  MMA decisions in financial statements filed as of November 2004. One of  these 12 plan sponsors reported that it had determined that its  prescription drug benefits were not actuarially equivalent to the Medicare  part D benefit and could not take advantage of the subsidy option. This  plan sponsor reported that it was evaluating the impact of other MMA  options. The remaining 11 plan sponsors did not report on the impact of  the MMA on their postretirement obligations; 4 of these 11 plan sponsors  did not expect any changes they made to be material.
section_title: Sponsors of Retiree Health Benefit Plans We Interviewed Unlikely to Reduce Current Drug Benefits for Medicare Retirees in Response to the MMA
paragraphs: In interviews, sponsors of health plans that included prescription drug  benefits for Medicare-eligible retirees told us they did not expect to reduce  these benefits in response to the new Medicare part D benefit and the  MMA options. Although one benefit consultant said that some of his  clients might consider reducing benefits in response to the MMA, plan  sponsors we interviewed that were considering choosing the subsidy  option said they did not expect to reduce their benefits in response to the  MMA, even though some could do so and still qualify for the subsidy. Plan  sponsors considering wrapping their benefits around the Medicare part D  benefit were focused on wrapping benefits in a way that would maintain,  not restrict, the current level of benefits. According to a benefit consultant,  many employers who sponsored retiree health benefit plans supplemented  Medicare parts A and B with additional benefits and might also do so for  Medicare part D. However, plan sponsors change benefits for different  reasons. Even though they said they were not considering a reduction in  prescription drug benefits in response to the MMA, some plan sponsors  and benefit consultants said that ongoing cost pressures prompt plan  sponsors to constantly review and, if necessary, adjust their benefits for  future retirees.
Two of the 12 private sector employers that sponsored retiree health  benefits told us that during their deliberations on the MMA options they  had considered, but dismissed, elimination of some or all retiree  prescription drug benefits as one of several options. One of these plan  sponsors said eliminating prescription drug coverage would not be  realistic, especially with collectively bargained benefits. The other plan  sponsor said it was easier to continue to provide the benefits to this  declining population—it no longer offered retiree health benefits to new  hires—than to contend with the negative press and relations with current  retirees and active workers.
None of the three public sector sponsors of health benefits for Medicare- eligible retirees we interviewed expected to reduce or eliminate  prescription drug benefits in response to the MMA options. OPM officials  said that they did not plan to decrease or eliminate any prescription drug  coverage for Medicare-eligible retirees in response to the MMA. These  officials, who administer health benefits for federal employees and  retirees, noted that eliminating prescription drug benefits would not be a  politically realistic option. An official at a public sector plan that provides  health benefits to Medicare-eligible retirees in one state said that the state  also was not planning to reduce its benefits in response to the MMA.  However, the state had already planned to make extensive changes to its  benefits in response to rising health care costs about a year before  Congress passed the MMA, and eliminating or further reducing benefits for  public sector retirees was not an option currently being considered.
section_title: The MMA Is Not Likely to Induce Employers Not Already Offering Retiree Health Coverage to Begin Doing So
paragraphs: Few employers, if any, that were not sponsoring retiree prescription drug  benefits were expected to begin sponsoring them in response to the MMA.  Benefit consultants and experts we interviewed consistently agreed that it  was doubtful that an employer would want to assume new benefit  obligations for retiree health or prescription drugs if it did not already do  so, regardless of the MMA options. Furthermore, the availability of  Medicare’s prescription drug benefits in 2006 might give employers more  of an incentive not to start to provide these benefits because prescription  drug benefits would be available without the employer’s participation.  Ultimately, benefit consultants and experts told us this decision would  vary by employer. An employer’s particular financial, business, and  competitive situation could affect the employer’s decision to provide any  new benefits or to provide supplemental coverage—pay the part D  premium, cover out-of-pocket expenses, or consider a Medicare  Advantage plan as an option—to Medicare-eligible retirees in response to  the MMA.
According to officials at organizations representing small and midsized  employers and other experts, the MMA is not likely to encourage such  employers to add to their operating costs by beginning to offer retiree  health benefits or supplementing the prescription drug benefits available  through Medicare part D. These employers are more concerned about  providing health benefits to active workers rather than to retirees.  However, as with large employers, employers’ specific circumstances  drive their business and benefit decisions. Therefore, according to these  officials, while there may be isolated individual employers that might  begin to provide retiree health benefits or prescription drug coverage  supplementing the benefits established by the MMA, they would likely be  the exception rather than the rule.
section_title: Concluding Observations
paragraphs: The provision of employment-based retiree health benefits for Medicare  beneficiaries continues to be an issue for evaluation and change with  employers and other plan sponsors even as they begin to choose options  available as a result of the Medicare drug benefit enacted as part of the  MMA. The long-term decline in the percentage of employers offering  retiree health benefits to Medicare-eligible individuals has leveled off in  recent years. Plan sponsors have continued to modify their requirements  for eligibility, benefits, and cost sharing in an effort to contain cost growth.  As employers and other plan sponsors choose options as provided under  the MMA, they likely will continue to face rising health care costs,  particularly for prescription drugs, that will increase their obligations for  retiree health benefits. The Medicare drug benefit is expected to provide  some insulation from these cost increases for plans that qualify and  employers that receive a subsidy for a portion of their drug expenditures  or that choose to allow Medicare to bear primary responsibility for these  costs for Medicare-eligible retirees. Nonetheless, even after employers  select a particular option in response to the Medicare drug benefit, it is  likely that they will continue to reshape their retiree health benefits in  response to cost pressures, as they have for the last decade. However, few  employers not already offering retiree health or prescription drug  coverage are likely to begin doing so as a result of the options available  under the MMA.
section_title: Agency and Other External Comments
paragraphs: We provided a draft of this report to CMS, OPM, and experts on retiree  health benefits at the Employee Benefits Research Institute, Health  Research and Educational Trust, Hewitt Associates, and Mercer Human  Resource Consulting.
In its written comments, CMS generally agreed with our findings. CMS  stated that the new Medicare drug benefit and the subsidy can help plan  sponsors continue to provide drug coverage to Medicare-eligible retirees.  Consistent with our finding that plan sponsors intend to continue offering  prescription drug benefits, CMS cited a survey released in January 2005  that indicated that most plan sponsors intended to continue offering  prescription drug coverage after the Medicare part D benefit begins. CMS  confirmed that many plan sponsors are still considering their options  under the MMA. CMS also indicated that some employers may reevaluate  their retiree benefits and that some plan sponsors may begin to offer  prescription drug benefits. In its comments, CMS noted that it had recently  released its final rule implementing the Medicare part D benefit and plan  sponsor options. CMS also noted that it plans to provide additional  guidance to respond to issues raised by comments on the proposed rule,  including guidance on actuarial equivalence. CMS acknowledged that plan  sponsors need to have timely guidance because of the complexity of the  process, and CMS intends to continue to conduct outreach and education  efforts on the options for retirees’ prescription drug coverage available to  plan sponsors. (CMS’s comments are reprinted in app. II.)
In its written comments, OPM highlighted its role in limiting premium  increases while continuing to provide the same level of health insurance  coverage at the same premium rates for retirees that it provides to active  federal employees. While at the time of our interviews OPM officials  indicated that OPM was considering the federal subsidy for FEHBP, in its  written comments the agency said that it does not expect to choose the  federal subsidy option. We revised the report to reflect that OPM does not  expect to choose the subsidy option. (OPM’s comments are reprinted in  app. III.)
The experts who reviewed the draft report generally indicated that the  report provided a comprehensive and accurate portrayal of employment- based retiree health benefits and prescription drug benefits under the  MMA. Two of the experts noted that while they concurred that the  percentage of employers offering retiree health benefits has leveled off in  recent years, this finding may understate the impact of other changes that  reduce the extent of retiree health benefits. They highlighted other  changes, as we cited in the draft report, such as reduced eligibility for  future retirees, increased cost sharing and premium contributions, and  financial caps. We agree that as noted in the report, these changes  contribute to an overall erosion in the value and availability of retiree  health benefits.
CMS and several of these experts also provided technical comments,  which we incorporated as appropriate.
We are sending copies of this report to the Administrator of CMS, the  Director of OPM, and interested congressional committees. We will also  provide copies to others on request. In addition, this report is available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7118. Another contact and staff acknowledgments are  listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify trends in employment-based retiree health benefits, we  analyzed data from (1) two annual private sector surveys of employer  health benefits conducted since the early 1990s through 2004, (2) one  private sector survey on retiree health benefits conducted in 2004, and (3)  three surveys conducted by the federal government that included  information on Medicare beneficiaries and employment-based health  benefits. We also reviewed financial data for fiscal years 2001 through 2003  that a sample of Fortune 500 employers submitted to the Securities and  Exchange Commission (SEC) to identify changes in large employers’  retiree health benefit obligations. To supplement the trend and financial  data and to identify which options for prescription drug coverage provided  under the Medicare Prescription Drug, Improvement, and Modernization  Act of 2003 (MMA) sponsors of employment-based retiree health benefits  said they planned to implement, we interviewed benefit consultants,  private and public sector sponsors of employment-based retiree health  benefits, officials at associations and groups representing large and small  employers and others. In addition, we reviewed studies and literature  addressing retiree health benefits. We conducted our work from April 2004  through February 2005 in accordance with generally accepted government  auditing standards.
subsections: section_title: Surveys of Employment-Based Health Benefits
paragraphs: We relied on data from two annual surveys of employment-based health  benefit plans. The Kaiser Family Foundation and the Health Research and  Educational Trust (Kaiser/HRET) and Mercer Human Resource Consulting  each conduct an annual survey of employment-based health benefits,  including a section on retiree health benefits. Each survey has been  conducted for at least the past decade, including 2004. We also used data  from a survey focused solely on 2004 retiree health benefits that the Kaiser  Family Foundation and Hewitt Associates (Kaiser/Hewitt) conducted in  2004. For each of these surveys of employment-based benefits, we  reviewed the survey instruments and discussed the data’s reliability with  the sponsors’ researchers and determined that the data were sufficiently  reliable for our purposes.
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  2004, 1,925 employers completed the full survey, giving the survey a   50 percent response rate. In addition, Kaiser/HRET asked at least one  question of all employers it contacted—“Does your company offer or  contribute to a health insurance program as a benefit to your  employees?”—to which an additional 1,092 employers, or cumulatively  about 78 percent of the sample, responded. By using statistical weights,  Kaiser/HRET is able to project its results nationwide. Kaiser/HRET uses  the following definitions for employer size: (1) small—3 to 199  employees—and (2) large—200 and more employees. In some cases,  Kaiser/HRET reported information for additional categories of small and  large employer sizes.
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. Mercer conducts the survey by telephone for  employers with from 10 to 499 employees and mails questionnaires to  employers with 500 or more employees. Mercer’s database contains  information from 2,981 employers who sponsor health plans. By using  statistical weights, Mercer projects its results nationwide and for four  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 Kaiser/Hewitt study—Current Trends and Future Outlook for Retiree  Health Benefits: Findings from the Kaiser/Hewitt 2004 Survey on  Retiree Health Benefits—is based on a nonrandom sample of employers  because there is no database that identifies all private sector employers  offering retiree health benefits from which a random sample could be  drawn. Kaiser/Hewitt used previous Hewitt survey respondents and its  proprietary client database—a list of private sector employers potentially  offering retiree health benefits. Kaiser/Hewitt conducted the survey online  from May 2004 through September 2004 and obtained data from 333 large  (1,000 or more employees) employers. According to information provided  by Hewitt, these employers included about one-third of the 100 Fortune  500 companies with the largest retiree health obligations in 2003. Because  the sample is nonrandom and does not include the same sample of  companies and plans each year, survey results for 2004 cannot be  compared to results from prior years.
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 Current Population Survey (CPS),  conducted by the U.S. Census Bureau. We obtained data on the sources of  coverage for all health care expenditures and for prescription drug  expenditures for retired Medicare beneficiaries from the Medicare Current  Beneficiary Survey (MCBS), sponsored by the Centers for Medicare &  Medicaid Services (CMS). We obtained data on the percentage of public  sector employers that offer retiree health benefits from the Medical  Expenditure Panel Survey (MEPS), sponsored by the Agency for  Healthcare Research and Quality. Each of these federal surveys is widely  used for policy research, and we reviewed documentation on the surveys  to determine that they were sufficiently reliable for our purposes.
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  2004, about 84,500 households were included in the sample for the survey,  a significant increase in sample size from about 60,000 households prior to  2002. The total response rate for the 2004 CPS Annual Supplement was  about 84 percent. Because the CPS is based on a sample, any estimates  derived from the survey are subject to sampling errors. A sampling error  indicates how closely the results from a particular sample would be  reproduced if a complete count of the population were taken with the  same measurement methods. To minimize the chances of citing  differences that could be attributable to sampling errors, we present only  those differences that were statistically significant at the 95 percent  confidence level.
The CPS asked whether a respondent was covered by employer- or 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  sponsored by CMS. The survey is designed to determine for Medicare  beneficiaries (1) expenditures and payment sources for all health care  services, including noncovered services, and (2) all types of health  insurance coverage. The survey also relates coverage to payment sources.  The sample represents 16,315 Medicare beneficiaries from CMS’s  enrollment files who are interviewed three times a year at 4-month  intervals. The complete interview cycle for a respondent consists of 12  interviews over 4 years. Response rates for initial interviews ranged from  about 85 to 89 percent. After completing a first interview, individuals had a  response rate of 95 percent or more in subsequent interviews. Interview  data are linked to Medicare claims and other administrative data, and  sample data are weighted so that results can be projected to the entire  Medicare population.
The MCBS Cost and Use file links Medicare claims to survey-reported  events and provides expenditure and payment source data on all health  care services, including those not covered by Medicare. Therefore, this file  contains data on Medicare beneficiaries’ expenditures and sources of  coverage for prescription drugs. Among other items, the prescription drug  data include the following payment source categories: Medicare, Medicaid,  health maintenance organizations (HMO), Medicare HMO, employment- based insurance, individually purchased insurance, unknown, out-of- pocket, discounts, and other.
We analyzed prescription drug expenditure data for retired Medicare  beneficiaries aged 65 and older who had employment-based health  coverage in 2001, the most current data available at the time we did our  analysis. We extrapolated these data to 2006—when the Medicare part D  benefit begins—using projections based on National Health Care  Expenditures per capita data developed by CMS to provide estimates of  prescription drug expenditures paid by employment-based insurance or  paid out-of-pocket for retired Medicare beneficiaries with employment- based insurance. We did not make adjustments to reflect significant  changes in payment sources for prescription drug coverage once the  Medicare part D benefit begins in 2006. For employers that elect to  continue covering prescription drugs, these projections provide an  estimate of the share of these prescription drug expenditures covered that  could be eligible for the MMA subsidy.
section_title: Medical Expenditure Panel Survey
paragraphs: MEPS, sponsored by the Agency for Healthcare Research and Quality,  consists of four surveys and is designed to provide nationally  representative data on health care use and expenditures for U.S. civilian  noninstitutionalized individuals. We used data from the MEPS Insurance  Component, one of the four surveys, to identify the percentage of state  entities that offered retiree health benefits in 1998 and 2002. Insurance  Component data are collected through two samples. The first, known as  the “household sample,” is a sample of employers and other insurance  providers (such as unions and insurance companies) that were identified  by respondents in the MEPS Household Component, another of the four  surveys, as their source of health insurance. The second sample, known as  the “list sample,” is drawn from separate lists of private and public  employers. The combined surveys provide a nationally representative  sample of employers. The target size of the list sample is approximately  40,000 employers each year. The response rate for the public sector MEPS  Insurance Component was about 88 percent in 2002.
section_title: Financial Data from Fortune 500 Employers
paragraphs: We reviewed selected financial data for a stratified random sample of 2003  Fortune 500 employers, which is a list of the U.S. corporations with the  highest annual revenues. First, we stratified the Fortune 500 list into five  groups of 100 in descending order of revenues. We then randomly  selected 10 Fortune 500 employers from each of the five groups, for a total  of 50 employers. To identify the 50 employers’ postretirement benefit  obligations, we reviewed the annual financial statements (Form 10-K) that  these employers submitted to the SEC. We reviewed the Form 10-K that  each employer submitted for its most recent fiscal year, ending in 2003 or  early in 2004. Then, to identify each employer’s postretirement benefit  obligations for the two previous fiscal years, we reviewed the Form 10-K  filed in either 2002 or 2003. To identify the types of changes these  employers planned to make to their postretirement benefits in light of the  MMA, we reviewed the latest quarterly financial statements (Form 10-Q)  that employers submitted to the SEC, most as of November 2004.
section_title: Interviews with Benefit Consultants, Plan Sponsors, and Others
paragraphs: We interviewed representatives of six large employer benefit consulting  firms. Benefit consultants help their clients, which include private sector  employers, public sector employers, or both, develop and implement  human resource programs, including retiree health benefit plans. While  most of these benefit consulting firms’ clients were large Fortune 500 or  Fortune 1,000 employers, some also had smaller employers as clients. One  benefit consulting firm that we interviewed, in particular, provided  actuarial, employee benefit, and other services to a range of public sector  clients, including state and local governments, statewide retirement  systems and health plans, and federal government agencies. It also  provided human resources services to multiemployer plans.
To learn more about retiree health benefit trends and MMA options from  large private sector plan sponsors, we interviewed 12 Fortune 500  employers that provided retiree health benefits. From the stratified  random sample of 50 Fortune 500 employers selected for a financial data  review, we judgmentally selected 10 employers for interviews. We  interviewed at least 1 employer from each of the five groups of 100  Fortune 500 employers that were stratified on the basis of annual  revenues. In addition to considering revenues, where data were available,  we considered each employer’s industry, number of employees,  postretirement benefit obligations, preliminary MMA option decision as  reported on its annual Form 10-K, and union presence when making our  selection. We also interviewed officials at two additional Fortune 500  employers at the recommendation of a benefit consultant.
While small and midsized employers are less likely than large employers to  offer retiree health benefits, we also assessed small and midsized  employers’ preliminary reactions to the MMA options. We relied primarily  on discussions with officials at two organizations representing the  interests of small and midsized employers—the National Federation of  Independent Business and the United States Chamber of Commerce—and  benefit consultants.
To learn more about retiree health benefit trends and MMA options at  public sector plan sponsors, we interviewed officials at the Office of  Personnel Management (OPM), two state retirement systems, and one  association. OPM administers the Federal Employees Health Benefits  Program—the country’s largest employment-based health plan. We  judgmentally selected two large states’ retiree health benefits systems on  the basis of a review of selected state data and referrals from a benefit  consultant that works with public sector clients. We also interviewed  officials at the National Conference on Public Employee Retirement  Systems and reviewed available studies on retiree health benefits in the  public sector.
To obtain broader-based information about retiree health benefit trends  and MMA options, we interviewed officials at several other groups and  associations. Specifically, we interviewed the President of the National  Business Group on Health and the Director of the Health Research and  Education Program of the Employee Benefit Research Institute to obtain  more information about large private sector employers. We also  interviewed officials from the American Academy of Actuaries, the Kaiser  Family Foundation, the American Federation of Labor and Congress of  Industrial Organizations, and the National Coordinating Committee for  Multiemployer Plans. Finally, we reviewed other available literature on  retiree health benefit trends, cost-containment strategies, and plan  sponsors’ likely responses to MMA options.
section_title: Appendix II: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix III: Comments from the Office of Personnel Management
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Laura Sutton Elsberg, Joseph A. Petko, Kevin Dietz, Elizabeth T. Morrison,  and Suzanne Worth made key contributions to this report.