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

Letter

Background

For retirees aged 65 and older, Medicare is typically the primary source of health insurance coverage. Medicare covers nearly 43 million beneficiaries. The program covers hospital care as well as physician office visits and outpatient services and, effective January 1, 2006, prescription drugs.

Private Supplemental Insurance for Medicare Beneficiaries

Medicare beneficiaries may rely on private retiree health coverage through former employment or through individually purchased Medicare supplemental insurance (known as Medigap) to cover some or all of the costs Medicare does not cover, such as deductibles, copayments, and coinsurance. For 2004, the most recent data available, the Medicare Current Beneficiary Survey (MCBS) found that about one-third of Medicare-eligible beneficiaries obtained supplemental coverage from a former employer or union. Employment-based retiree health benefits are typically offered as a voluntary benefit to retirees, thereby giving sponsors of these benefits the option of decreasing or eliminating benefits. However, some sponsors may be prevented from making immediate changes to coverage because of union contracts, for example. Benefit surveys have found that the percentage of employers offering retiree health benefits has decreased, beginning in the early 1990s. For example, according to a series of surveys conducted by Mercer, the percentage of employers with 500 or more employees offering health insurance to Medicare-eligible retirees declined from 44 percent in 1993 to 29 percent in 2006, although this trend had leveled off from 2001 through 2006. (See app. I for more information on employment-based retiree health coverage.)

Sponsors typically integrate their retiree health benefits with Medicare once retirees reach age 65, with Medicare as the primary payer and the sponsor as the secondary payer. Several types of integration occur between sponsors and Medicare. For example, some sponsors coordinate through a carve out approach, in which the sponsor calculates its normal benefit and then subtracts (or carves out) the Medicare benefit, generally leaving the retiree with out-of-pocket costs comparable to having the employment-based plan without Medicare. Another approach used by sponsors is full coordination of benefits, in which the plan pays the difference between the total health care charges and the Medicare reimbursement amount, often providing retirees complete coverage and protection from out-of-pocket costs.

The provision of employment-based retiree health benefits may vary depending on a variety of factors, including whether the sponsor is in the private or public sector, and by industry type. The 2006 Kaiser Family Foundation and Health Research and Educational Trust (HRET) survey, for example, showed that 82 percent of state and local government employers with 200 or more employees offered coverage to retirees, compared with 35 percent of employers with 200 or more employees across all employer industries that offered coverage to retirees. Coverage can also differ between retirees under age 65 and those eligible for Medicare, although sponsors often cover both groups of retirees. For example, some sponsors offer retirees under age 65 a preferred provider organization plan but offer a fee-for-service plan for retirees eligible for Medicare. While the provision of employment-based retiree health benefits varies by employer size, plan type, industry, and whether retirees are Medicare-eligible, these benefits almost always include coverage of prescription drugs.

The MMA Prescription Drug Benefit

MMA created a prescription drug benefit for beneficiaries, called Medicare Part D, which became effective January 1, 2006. This voluntary benefit is available to all Medicare beneficiaries and is the first comprehensive prescription drug benefit ever offered under the Medicare program. In January 2007 (the most recent data available) CMS reported that approximately 39 million beneficiaries were receiving prescription drug coverage from a combination of Medicare Part D, employment-based coverage, and other sources, such as the Department of Veterans Affairs.

The drug benefit is offered primarily through two types of private plans created as a result of the MMA: stand-alone prescription drug plans (PDP) that supplement fee-for-service Medicare, and Medicare Advantage prescription drug (MA-PD) plans, such as coordinated care plans, that cover drugs and other Medicare benefits. To be in operation for 2006, prospective PDPs and MA-PD plans had to apply by March 2005 and were approved in September 2005. At a minimum, these plans were required to offer the standard Medicare Part D benefit or alternative coverage that was at least equal in value. According to the Kaiser Family Foundation, plans approved for 2006 often varied from the standard Part D benefit in benefit design and covered drugs. For example, although the standard Part D benefit had a $250 deductible for 2006, Kaiser reported that 58 percent of PDPs and 79 percent of MA-PD plans approved for 2006 had no deductible requirement. In 2007, a total of 1,875 PDPs are offered nationally across 34 PDP regions.

The standard Medicare Part D benefit in 2007 has a $265 deductible (up from $250 in 2006) and 25 percent coinsurance up to an initial coverage limit of $2,400 in total drug costs ($2,250 in 2006), followed by a coverage gap in which enrollees pay 100 percent of their drug costs until they have spent $3,850 out of pocket ($3,600 in 2006). Thereafter, the plan pays approximately 95 percent of total drug costs. The standard benefit amounts are set to increase annually by the rate of per capita Part D spending growth. Assistance with drug benefit premiums and cost-sharing is available for certain low-income beneficiaries.

Options Available to Sponsors under Medicare Part D

The MMA resulted in several options for sponsors of employment-based retiree health plans to provide prescription drug coverage to Medicare- eligible retirees. These options are as follows: Retiree Drug Subsidy (RDS). Sponsors with plans ending in 2007 that offer prescription drug coverage that is actuarially equivalent to that under Part D can receive a federal tax-free subsidy equal to 28 percent of the allowable gross retiree prescription drug costs over $265 (up from $250 for plans ending in 2006) through $5,350 (up from $5,000 for plans ending in 2006), with a maximum subsidy of $1,423 per beneficiary for each individual eligible for Part D who is enrolled in the employment-based plan instead of Part D. Actuarial equivalence, which is attested to by a qualified actuary, is intended to certify that a retiree health benefit sponsor’s coverage is at least as generous as the standard Part D coverage. Sponsors must demonstrate actuarial equivalence to qualify for the RDS, and sponsors will only receive the RDS for those Medicare beneficiaries who do not enroll in the Part D benefit. Sponsors may opt to receive RDS payments on a monthly, quarterly, or annual basis.

In order to receive the RDS, sponsors must apply to and receive approval from CMS. For 2007 and subsequent years, sponsors are required to apply for the RDS no later than 90 days prior to the beginning of the plan year. For example, sponsors that applied for a calendar year 2007 plan would have had to apply no later than midnight on October 2, 2006. Additional steps involved in applying for and receiving the RDS include submitting a qualified actuary’s attestation that the plan meets the RDS actuarial equivalence standard; certifying that the creditable coverage status of the plan has been or will be disclosed to plan participants and CMS; electronically submitting and periodically updating enrollment information about retirees and dependents; and electronically submitting aggregate data about drug costs incurred and reconciling costs at year-end.

Provide Supplemental Coverage. Sponsors can set up their own separate plans that supplement, or wrap around, Part D coverage.

Apply to Offer Own PDP or MA-PD Plan. Sponsors can apply to CMS to offer their own PDP or MA-PD plan for retirees. CMS has waived or modified Part D requirements added by the MMA that hinder the design of, the offering of, or the enrollment in a Part D plan offered by a sponsor. For example, CMS has issued guidance that allows sponsors to limit coverage to retirees only, whereas other Part D plans must offer coverage to all eligible individuals residing within a certain location.

Contract with a PDP or MA-PD Plan. Sponsors can contract with a PDP or MA-PD plan to offer the standard Part D prescription drug benefits or enhanced benefits to the sponsors’ retirees who are eligible for Medicare. For example, an enhanced benefit could allow retirees to pay a lower deductible or lower copayment than the standard Part D benefit requires. As with the previous MMA option, CMS has waived or modified Part D requirements that hinder the design of, the offering of, or the enrollment in these types of arrangements.

Payment of Part D Premiums. Sponsors can pay for some or all of the Part D premiums for their eligible retirees.

Majority of Sponsors Reported Continuing to Offer Prescription Drug Coverage and Accepting the RDS

According to survey data we reviewed, the majority of surveyed retiree health benefit sponsors reported that they continued to offer prescription drug coverage and accepted the RDS for 2006. Survey data also indicated that much smaller percentages of sponsors took other MMA options— such as offering supplemental, or wrap-around, prescription drug coverage or contracting with a PDP or MA-PD plan.

Majority of Sponsors Reported Accepting the RDS

According to survey data we reviewed, the majority of surveyed sponsors reported that they continued to offer prescription drug coverage and accepted the RDS for plans ending in 2006. However, the size of the reported majority differed across the surveys. For example, the 2006 Kaiser/Hewitt survey, which surveyed private sector employers that offered retiree health benefits and had 1,000 or more employees, found that 82 percent of these employers accepted the RDS for 2006. In contrast, the 2006 Mercer survey found that 51 percent of surveyed private and public employers that offered retiree health benefits and had 500 or more employees continued to offer prescription drug coverage and accepted the RDS for 2006. Another survey of state and local public sector sponsors that offered retiree health benefits found that 79 percent reported accepting the RDS for 2006. Similarly, a survey of multiemployer plan sponsors that offered retiree health benefits found that 71 percent reported accepting the RDS for 2006.

According to representatives from both Kaiser/Hewitt and Mercer, the percentages of surveyed employers that reported accepting the RDS— 82 percent and 51 percent, respectively—may be different because the employers surveyed differed in size between the two surveys. According to the 2005 Mercer survey, smaller employers may have such a limited number of Medicare-eligible retirees that they do not believe the RDS would be worth the cost and administrative burden associated with applying for the RDS. Furthermore, experts we interviewed told us that a minimum of 50 to 100 retirees is needed to make it worthwhile for employers to apply for the RDS.

Data from CMS show that more than 3,900 sponsors, representing approximately 7 million retirees, were approved for the RDS for 2006. The number of retirees represented by sponsors that year ranged widely, from 1 to 444,818, with a median of 174 retirees. According to CMS data, commercial and government sponsors made up approximately 70 percent of sponsors approved for the RDS and represented approximately 90 percent of retirees covered by the RDS for 2006. Nonprofit, religious, and union sponsors made up the remaining approximately 30 percent of sponsors and approximately 10 percent of retirees covered by the RDS for 2006.

For 2007, the Kaiser/Hewitt survey reported that the majority of surveyed employers planned to take the RDS. Specifically, 78 percent of surveyed private sector employers that offered retiree health benefits and had 1,000 or more employees planned to take the RDS for 2007—compared with 82 percent that took the RDS for 2006. CMS preliminary data for 2007 showed that the number of sponsors approved for the RDS decreased somewhat from 2006, to about 3,600 sponsors. CMS officials indicated that the decrease in the number of sponsors between 2006 and 2007 could be explained by a combination of several factors, including mergers by sponsors offering retiree health benefits, differences in the time of year when data were extracted, and the movement of some sponsors from the RDS to other MMA options. According to CMS data, in 2007 the number of retirees represented by sponsors approved for the RDS continued to show a wide range as in 2006, from 1 to 196,840, with a median of 169 retirees. The percentage of sponsors approved for the RDS by sponsor type, such as commercial or government, remained relatively consistent from 2006 to 2007. (See table 1.)

Smaller Percentages of Sponsors Reported Selecting MMA Options Other than the RDS

All of the surveys we reviewed reported much smaller percentages of sponsors taking MMA options other than the RDS for 2006. In these surveys, the percentage of sponsors that reported offering supplemental, or “wrap-around,” prescription drug coverage in 2006 ranged from 0 to 13 percent. For example, the Mercer survey of private and public employers that offered retiree health benefits and had 500 or more employees reported that 13 percent offered supplemental coverage in 2006. Similarly, among the surveys we reviewed, the percentage of sponsors that reported contracting with a PDP or MA-PD plan ranged from 3 percent to 7 percent. For example, the Kaiser/Hewitt survey reported that 3 percent of surveyed private sector employers that offered retiree health benefits and had 1,000 or more employees contracted with a PDP or MA-PD plan in 2006. In addition, CMS reported that few sponsors applied to offer their own PDP or MA-PD plan for 2006 and 2007. Specifically, CMS reported that for the 2006 and 2007 contract years, there were 10 approved sponsors that offered their own PDP and none that offered their own MA- PD plan.

Sponsors Considered a Variety of Factors When Selecting MMA Prescription Drug Coverage Options

Public and private sponsors we interviewed reported considering a variety of factors when selecting MMA prescription drug coverage options. Sponsors cited factors such as whether they could offer the same retiree health benefits they offered prior to the MMA, their ability to save on costs, the ease of explaining the option to retirees, the administrative requirements associated with each option, and the extent of information available on the options. When making decisions about which, if any, MMA option to pursue, public sponsors we interviewed were affected by some factors that private sponsors did not face.

Sponsors Considered Ability to Offer the Same Retiree Health Benefits

Sponsors we interviewed told us that when selecting an MMA prescription drug coverage option, they considered the extent to which they would be able to continue to offer the same retiree health benefits they had offered before implementing the MMA option. In general, in order to implement most MMA options other than the RDS, sponsors would likely have to change the prescription drug benefits they offer. For example, sponsors that offer their own PDP or MA-PD plan must generally meet all CMS requirements for Part D plans, such as including specific categories of prescription drugs on their formularies. One sponsor we interviewed also told us that it did not consider the option of paying Part D premiums because that option alone would result in a reduction in the level of prescription drug coverage offered to retirees, compared with coverage offered through the sponsor. In contrast, sponsors that select the RDS option are able to offer the same retiree health benefits they offered prior to the MMA, as long as a sponsor’s coverage remains at least as generous as the standard Part D benefit, thus meeting the actuarial equivalence standard to qualify for the RDS. In addition, the final rule implementing the MMA prescription drug benefit that was published in January 2005 gave sponsors flexibility in terms of how they could meet the actuarial equivalence standard. Some of the sponsors and experts we interviewed credited this flexibility with allowing sponsors to meet actuarial equivalence without having to change the retiree health benefits they offered. For example, one sponsor told us that it was able to combine multiple benefit options to meet actuarial equivalence, which allowed the sponsor to collect the RDS for most retirees—including those paying the full cost of their coverage—without making changes to the benefits offered. Prior to the final rule, this sponsor did not plan on collecting the RDS for the group of retirees paying the full cost of coverage because the coverage would not have met the actuarial equivalence standard on its own. Most sponsors we interviewed told us that the ability to offer the same retiree health benefits they offered prior to the MMA was an advantage of the RDS. In addition, experts we interviewed reported that some sponsors are unable to change the benefits they offer in the short term because union contracts prevent them from doing so, thus making the RDS the only MMA option for which they likely would qualify.

Sponsors Considered Their Ability to Save on Costs

Sponsors reported that when selecting an MMA option, they considered how the various options would affect their ability to save on costs. While all of the MMA prescription drug coverage options may provide sponsors with an opportunity for cost savings, the amount of savings may vary based on a sponsor’s tax status. For example, in guidance to employers, CMS estimated that the average cost savings to a sponsor that offers its own PDP or MA-PD plan for 2006 would be close to $900 per participating retiree, and the average tax-free payment for sponsors that took the RDS would be $668 per participating retiree. Because RDS payments are tax- exempt, CMS estimates indicate that the relative value of savings from the RDS as compared with savings from offering a PDP or MA-PD plan would be greater for private, tax-paying sponsors than it would be for public, non-tax-paying sponsors.

In addition, some sponsors said they considered the trade-off between the cost savings associated with the different MMA options and the effect the options would have on the prescription drug benefits sponsors would be able to offer. For example, depending on their tax status, some sponsors might save more money by taking the RDS, while others might save more by offering or contracting with a PDP or MA-PD plan. However, as previously discussed, while most MMA options likely require a change of benefits, the RDS allows sponsors to continue offering the benefits they offered prior to the implementation of the MMA as long as the benefit is at least actuarially equivalent to the Part D benefit. In one case, a sponsor we interviewed reported that it chose the RDS, even though the sponsor could have reduced costs by choosing one of the other MMA options. As one expert explained, the RDS allows sponsors to save money without significantly changing their retiree health plans.

Sponsors Considered the Ease of Explaining MMA Options to Retirees

Sponsors also reported considering how easy it would be to explain an option to retirees. In particular, sponsors we interviewed told us that they considered how benefit changes made as a result of implementing the various MMA options would complicate communications with retirees. For example, one sponsor we interviewed indicated that a disadvantage of some MMA options was that they would require a great effort to communicate changes to retirees, who range in age from 50 to 105 and who might find benefit changes difficult to understand. Conversely, sponsors that take the RDS are able to preserve their benefit structure and may find it easier to communicate this option to retirees, according to CMS.

In addition, depending on the option they choose, sponsors have to meet different MMA requirements for communicating information about the options to retirees. For example, sponsors that take the RDS are required to explain how their prescription drug coverage compares to the Medicare Part D benefit. In contrast, sponsors that offer their own PDP or MA-PD plan are required to meet more strict CMS communication requirements on Part D plans—such as developing and sending more detailed information about prescription drug coverage to retirees.

Sponsors Considered the Administrative Requirements Associated with Each MMA Option

According to CMS and the experts and sponsors we interviewed, each option has different administrative requirements—some of which take up a considerable amount of time and resources, so sponsors also considered these requirements when selecting an option. For example, according to CMS, sponsors that offer their own PDP or MA-PD plan are required to calculate “true out-of-pocket” costs and adjust premiums for low-income retirees, among other administrative requirements. One sponsor we interviewed that offered its own PDP for 2006 indicated that it took 11 full- time employees and 13 part-time employees over 15,000 hours to implement the PDP. Conversely, according to CMS, sponsors that take the RDS are not required to calculate true out-of-pocket costs, adjust premiums for low-income retirees, or meet many of the other administrative requirements required of other options. Some sponsors we interviewed told us that the RDS would be administratively easy or easier than other MMA options, although many reported some first-year implementation issues, such as issues in submitting a list of eligible retirees to CMS, which made administration of the RDS more difficult than originally anticipated.

Sponsors Considered the Extent of Available Information Regarding MMA Options

Sponsors also reported that the extent of available information regarding the MMA options at the time they needed to make decisions was a factor they considered in selecting an option. CMS did not approve PDP and MA- PD plans until September 2005—the same month in which sponsors had to apply for the RDS for plans ending in 2006. Some sponsors we interviewed reported that they did not have enough information about the PDP and MA-PD plan options at the time they had to make their decision for 2006. For example, one sponsor we interviewed that took the RDS told us that there were too many unknowns at the time it had to make its decision for 2006 and that if the sponsor wanted to make changes to its retiree health benefits, it would need to provide a transition period for retirees in order to prepare them for plan changes. In addition, according to the 2005 Mercer survey, the timing of the plan and rate information available from health plans in the Medicare market was a key factor that led many employers to seek the RDS or to delay taking any action for 2006.

When selecting an option for 2007, sponsors we interviewed continued to have concerns about the extent of the information available about the PDP and MA-PD plans. For example, one sponsor we interviewed told us that while there was better information available when it had to make its decision for 2007 compared with 2006, the sponsor still did not have a full year’s worth of data on PDPs when it had to make its decision. As the markets for PDPs and MA-PD plans mature and more detailed information becomes available, the availability of information on the various MMA prescription drug coverage options may become less of a factor in future years. According to one expert we interviewed, when employers are making their decisions for 2008, there should be a full year of information on the MMA prescription drug coverage options so that sponsors will be able to make more fully informed decisions.

Public Sponsors May Have to Consider Unique Factors

When making decisions about which, if any, MMA option to pursue, public sponsors may have to consider some factors that private sponsors do not. For example, some public sponsors may be influenced at the state level to either offer health insurance or choose a certain MMA option. One public sponsor we interviewed was directed by the budget committee of its state legislature to take the RDS in 2007 even though the sponsor—a state retirement system—had concluded that contracting with a PDP would allow the sponsor to decrease premiums for the state, contracting agencies, and some enrollees; decrease prescription drug copayments for enrollees; or both. As we stated earlier in this report, CMS estimates indicate that the relative value of savings from the tax-free RDS, as compared with savings from offering a PDP or MA-PD plan, for example, would be greater for private, tax-paying sponsors than it would be for public, non-tax-paying sponsors. In addition, OPM, which administers FEHBP, opted to continue offering prescription drug coverage to retirees without taking the RDS or any of the other MMA options. We reported previously that OPM officials told us OPM did not apply for the RDS for FEHBP because they said the intent of the RDS was to encourage sponsors to continue offering prescription drug coverage to enrolled Medicare beneficiaries, which all FEHBP plans were already doing. As such, OPM officials told us, the government would be subsidizing itself to provide coverage for prescription drugs to Medicare-eligible federal employees and retirees.

In the Short Term, Sponsors’ Decisions Regarding MMA Options Resulted in Benefits Remaining Relatively Unchanged, but over the Longer Term the Effect Is Unclear

Sponsors’ decisions regarding the various MMA options appear to have resulted in the provision of retiree health benefits remaining relatively unchanged in the short term, although the effect over the longer term on the provision of health benefits to retirees is unclear. The short-term effect of sponsors’ decisions appears to have resulted in benefits remaining relatively unchanged, in part because the majority of sponsors continued to offer prescription drug benefits and accepted the RDS during the first 2 years this option was offered. In addition, according to the 2005 Mercer survey, 72 percent of employers with 500 or more employees reported that the MMA options would have no effect on their ability to provide retiree health coverage. Similarly, many sponsors we interviewed told us that they did not make changes to their retiree health benefits—including decreasing coverage—in direct response to the MMA. Only one of the sponsors we interviewed that selected the RDS for 2006 reported making any changes to its benefits to meet the RDS actuarial equivalence standard. This sponsor told us it eliminated one of its plans that did not meet CMS’s actuarial equivalence standard for the RDS, but the sponsor said it moved all affected Medicare-eligible retirees into coverage that did qualify for the RDS. In addition, some sponsors we interviewed told us that they shared part of the subsidy they received from accepting the RDS with retirees by reducing retiree premiums. Furthermore, the 2005 Mercer survey reported that only 3 percent of employers with 500 or more employees indicated they were likely to terminate drug coverage for Medicare-eligible retirees—rather than choosing one of the MMA options—in response to the availability of the Part D prescription drug benefit.

While, in the short term, sponsors’ decisions regarding the MMA options resulted in benefits remaining relatively unchanged, the effect over the longer term of sponsors’ decisions on the provision of employment-based retiree health benefits is unclear. Experts we interviewed differed in their assessments of what the effect is likely to be over the longer term. In particular, some experts we interviewed indicated that the MMA may extend the amount of time that sponsors offer benefits without reducing coverage. Furthermore, one sponsor we interviewed indicated that the RDS increased the number of years that its retiree health benefits program would be solvent. On the other hand, other experts said that it was possible that the availability of the Medicare Part D benefit may make it more likely that sponsors will stop offering prescription drug benefits for retirees. Nearly all experts we interviewed told us that it was unlikely that an employer or other potential sponsor that did not offer retiree prescription drug coverage prior to the MMA would begin sponsoring these benefits in response to the new options resulting from the MMA.

According to experts, employers are not planning to improve or expand retiree health coverage and do not want the additional financial liability of providing these benefits.

Furthermore, it is unclear to what extent sponsors will continue to select the same MMA option in the future. For example, the 2006 Kaiser/Hewitt survey reported that of those respondents that accepted the RDS for 2006, only 54 percent said they were very or somewhat likely to accept the RDS for 2010. Furthermore, 25 percent said they did not know whether they would accept the RDS for 2010. Most of the sponsors that we interviewed that took the RDS for 2006 and planned to take the RDS for 2007 said they were unsure which option they would be taking for 2008. The 2006 Kaiser/Hewitt survey also reported that employers that are unlikely to take the RDS in the future are considering a number of other MMA options, including contracting with a PDP to offer enhanced coverage. To the extent that sponsors that have accepted the RDS select other MMA options in subsequent years, sponsors’ provision of retiree health benefits may change.

In addition to the MMA options, a host of other long-standing factors may affect a sponsor’s provision of health benefits to retirees. These include the existence of union contracts that may require the provision of certain health benefits, increasing costs for health care, the degree of industry competition, and the strength of sponsors’ financial conditions. For example, in 2005 we reported that sponsors that negotiated retiree health benefits with unions might not have as much flexibility to change these benefits prior to negotiations. Sponsors we interviewed also cited the competitiveness of the industry as another factor that affected retiree coverage, with one sponsor stating that it strove to have benefit packages that were in line with the overall market as well as the specific industry.

Agency and Other External Comments

We provided a draft of this report to CMS and experts on retiree health benefits at the Employee Benefit Research Institute, Hewitt Associates, Mercer Health & Benefits, and the National Opinion Research Center.

In its written comments on a draft of this report, CMS stated that the report provided an excellent summary of available information concerning the choices sponsors made among MMA options. (CMS’s comments are included in app. IV.)

CMS agreed with the finding that the majority of sponsors reported continuing to offer prescription drug coverage and accepting the RDS for 2006, with smaller percentages of sponsors reporting selecting other MMA options. In commenting on the draft report’s identification of several factors that may have contributed to the differences in the surveys’ reported percentages of employers accepting the RDS for 2006, CMS suggested an additional factor that may have contributed to the differences in the survey finding. Specifically, CMS said that some of the surveys reported what sponsors said they intended to do or were considering doing at the time of the survey, and it was possible that a portion ultimately decided not to pursue those options. However, both the 2006 Kaiser/Hewitt survey—which reported that 82 percent of surveyed employers accepted the RDS for 2006—and the 2006 Mercer survey— which reported that 51 percent of surveyed employers accepted the RDS for 2006—were reporting decisions surveyed employers said they had already made, not what they planned to do. Therefore, it is not likely this factor would explain the difference in the survey results. CMS also agreed with the draft report’s related finding regarding the number of sponsors participating in the RDS program. CMS suggested that we identify the 2007 data as preliminary, since it was compiled in February. We have made this clarification to the final report.

CMS stated that it agreed with the report’s second finding, that sponsors considered a variety of factors when selecting which MMA prescription drug coverage options to pursue, with one clarification. The draft report stated that, in general, in order to implement most MMA options other than the RDS, sponsors would likely have to change the prescription drug benefits they offer. CMS stated that the report did not fully acknowledge that CMS has used its statutory waiver authority for several MMA options to afford flexibility in benefit design, and as a result, MMA options may require minimal (if any) adjustments to premiums, cost-sharing, and other primary elements of benefit design. The draft report did describe CMS’s authority to waive or modify Part D requirements added by the MMA that hinder the design of, offering of, or enrollment in certain employer- or union-sponsored Part D retiree plans. In response to CMS’s comments, we have included additional information clarifying that CMS has waived or modified Part D requirements for multiple MMA options. However, while CMS has used this waiver authority, our report notes that sponsors may still need to make changes to benefits—such as changing the drugs included on their formularies—and, according to sponsors we interviewed, any changes to benefits can complicate communications with retirees.

CMS also agreed with the draft report’s finding that in the short term sponsors’ decisions regarding MMA options resulted in benefits remaining relatively unchanged, but over the longer term the effect is unclear. However, CMS stated that the examples of differing experts’ assessments of the likely effect over the longer term lacked sufficient context to be included in the findings. CMS also stated that there was no indication in the finding of the preponderance of expert opinion in favor of one or the other point of view. Our report states that the effect over the longer term is unclear and that experts we interviewed differed in their assessments of what the effect was likely to be. The report describes both the opinions of experts who said the MMA may extend the amount of time that sponsors offer benefits without reducing coverage and those who said the Medicare Part D benefit may make it more likely that sponsors will stop offering prescription drug benefits for retirees, and there was not a preponderance of opinion for either perspective.

The experts who reviewed the draft report generally indicated that the report provided an accurate portrayal of employment-based retiree health benefits and sponsors’ decisions about the options available under the MMA.

CMS and several of these experts also provided technical comments, which we incorporated into the report as appropriate.

We will send copies of this report to the Administrator of CMS and interested congressional committees. We will also provide copies to others on request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact me at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V.

Appendix I: Information on Employment- Based Retiree Health Coverage, Updated since GAO’s 2005 Report

This appendix describes information on employment-based retiree health coverage since the initial mandated GAO study, published in 2005. We reported in 2005 that the long-term decline in employment-based retiree health coverage had leveled off, and retirees were paying an increasing share of the costs. We reported that the percentage of employers offering health benefits to retirees, including those who are Medicare-eligible, had decreased beginning in the early 1990s, but had leveled off by the early 2000s. This leveling off has continued since the initial mandated study. We also reported in 2005 that the percentage of Medicare-eligible retirees aged 65 and older with employment-based coverage remained relatively consistent from 1995 through 2003. Since issuance of our 2005 report, we received data for 2004 and 2005 showing that the overall percentage remained relatively consistent from 2003 through 2005 at about 31 percent, although some modest changes occurred within specific age cohorts. Sponsors continued to respond to increasing costs by implementing strategies that required retirees to pay more for coverage and thus contributed to a gradual erosion of the value and availability of benefits. For example, one employer benefit survey reported that over half of surveyed employers reported increases in retiree contributions to premiums between 2005 and 2006.

Employer Benefit Surveys Showed a Decline, then a Leveling Off, in Share of Employers Offering Health Benefits to Retirees; New Data Showed Continuation of Leveling-Off Trend

According to surveys of sponsors of retiree health benefits, the percentage of employers offering health benefits to retirees declined beginning in the early 1990s and then remained relatively stable by the early 2000s through 2005. In our 2005 report, we reported that a series of surveys conducted by Mercer Human Resource Consulting indicated that the percentage of employers with 500 or more employees offering health insurance to retirees who are eligible for Medicare declined from 1993 to 2001, although this decline had leveled off from 2001 through 2004. Data obtained after the publication of our 2005 report showed that this leveling- off trend continued, with approximately 29 percent of employers with 500 or more employees offering the benefits to Medicare-eligible retirees in 2006. (See fig. 1.)

We also reported in our 2005 report that a series of surveys conducted by the Kaiser Family Foundation and Health Research and Educational Trust (HRET) estimated that the percentage of employers with 200 or more employees offering retiree health coverage decreased from 46 percent in 1991 to 36 percent in 1993. This decline leveled off from 1993 through 2004, with approximately 36 percent of employers with 200 or more employees offering coverage to these groups in 2004. Data obtained after our 2005 report showed that this trend continued. According to the Kaiser/HRET survey, approximately 33 percent and 35 percent of employers with 200 or more employees offered retiree health benefits in 2005 and 2006, respectively. For Medicare-eligible retirees specifically, the percentage of employers reporting that they offered health benefits to this group has generally not changed since our 2005 report, in which we reported that 27 percent of employers with 200 or more employees offered coverage, according to Kaiser/HRET. (See fig. 2.)

For retirees under age 65, we reported in our 2005 report that coverage showed a steady decline from 1993, when 50 percent of employers with 500 or more employees offered coverage to this group of retirees, to 2001, although this percentage generally leveled off from 2001 through 2004. New data reported by Mercer showed that 39 percent of employers with 500 or more employees offered coverage to these retirees in 2006.

The survey data we reviewed for our current report indicated that some types of employers are more likely to provide health benefits to retirees than others. Data on retiree health coverage showed that larger employers, for example, are more likely than smaller employers to offer coverage to retirees, including Medicare-eligible retirees. The 2006 Mercer survey reported that 56 percent of employers with 20,000 or more employees offered coverage to Medicare-eligible retirees, compared with about 22 percent of employers with 500 to 999 employees. The 2006 Kaiser/HRET survey also showed that 54 percent of employers with 5,000 or more employees offered health benefits to retirees, while 35 percent of employers with 200 or more employees offered health benefits to retirees. For smaller employers in the Kaiser/HRET survey—those with 3 to 199 employees—approximately 9 percent offered retiree health benefits. These data are similar to the data reported in our 2005 report, although the percentage of employers with 5,000 or more employees offering health benefits to retirees is slightly lower than in previous surveys.

In addition, employers with a union presence continued to be more likely to offer retiree health coverage than employers without a union presence. For example, in the 2006 Kaiser/HRET survey, among employers with 200 or more employees, 50 percent of those employers that had union employees offered health coverage to retirees, compared with 27 percent without union employees.

According to federal and employer benefit surveys, certain industries continued to be more likely to offer retiree health coverage than others. For example, the most recent Agency for Healthcare Research and Quality’s Medical Expenditure Panel Survey (MEPS) data showed that approximately 88 percent of state entities offered health insurance for retirees aged 65 and older. In addition, new data released from Kaiser/HRET in 2006 showed that 82 percent of state and local government employers with 200 or more employees offered coverage to retirees. Furthermore, these data are similar to the data reported in our 2005 report. Recent data released by Kaiser/HRET continued to list the transportation/communication/utility industry as the second likeliest industry, after government, to offer health benefits to its retirees, with 52 percent of all employers with 200 or more employees in this industry sector offering health benefits to their retirees. This survey also continued to show, as we reported in 2005, that the industries least likely to offer coverage were health care and retail, with 15 percent and 11 percent, respectively, of employers with 200 or more employees in these industry sectors offering retiree health benefits.

Percentage of Medicare-Eligible Retirees with Employment-Based Health Coverage Remained Consistent

In our 2005 report, we stated that the overall percentage of Medicare- eligible retirees and their insured dependents aged 65 and older obtaining employment-based health benefits through a former employer remained relatively consistent from 1995 through 2003, based on data from the U.S. Census Bureau’s Current Population Survey (CPS). Since issuance of that report, we received subsequent data for 2004 and 2005 showing that the overall percentage remained relatively consistent from 2003 through 2005, although some modest changes occurred within specific age cohorts (see fig. 3).

According to our analysis of CPS data, for those aged 65 and older, approximately 32 percent had coverage in 1995 and approximately 31 percent had coverage in 2005 (no change from last report). Medicare- eligible retirees and their insured dependents for two groups—those aged 65 through 69 and those aged 80 and older—continued to show approximately the same modest decline and increase, respectively, in the percentage with employment-based health coverage. For those aged 70 through 79, the modest decline reported in our initial report was no longer statistically significant.

Employer Strategies Implemented to Mitigate Increased Costs of Providing Coverage Continued to Require Greater Retiree Contribution

According to employer benefit surveys and our interviews with sponsors and experts, sponsors have continued to rely on various strategies, as we noted in our 2005 report, for mitigating the increasing costs of providing health benefits to retirees that have contributed to a gradual erosion of the value and availability of health benefits. These strategies included the same strategies identified in our 2005 report: restricting retirees’ eligibility for health benefits; limiting sponsors’ contributions to retirees’ health benefits; and increasing retirees’ copayments, coinsurance, and premiums.

Sponsors Have Limited Retirees’ Eligibility for Benefits

Employers participating in the 2006 Kaiser/Hewitt Associates survey reported that between 2005 and 2006 they limited retiree eligibility for health benefits by restricting eligibility to certain groups of retirees and by increasing age, years of service, or both, needed to be eligible for such benefits. For example, according to 2006 Kaiser/Hewitt survey data, 11 percent of employers that currently offer retiree health benefits reported that they would not provide future employer-subsidized health benefits to a particular group of individuals, such as those hired after January 1, 2006, if they retire under the age of 65. Nine percent of the surveyed employers reported that they would not provide future employer- subsidized health benefits to a particular group of individuals if they retire at age 65 or older. In addition, 4 percent of surveyed employers reported that they raised the age requirements, years of service requirements, or both, for retiree health benefit eligibility for retirees under the age of 65, and 2 percent made such changes for retirees at age 65 or older. Similarly, one sponsor we interviewed told us about changes the sponsor had made to coverage for future retirees since our 2005 report. This sponsor told us about coverage beginning January 1, 2007, in which future retirees will have the option to receive a lump sum of money that can then be used to purchase coverage in the individual market at the time of retirement.

Sponsors Have Limited Their Contributions to Retirees’ Health Benefits

Data from the 2006 Mercer survey showed that 20 percent of employers with 500 or more employees have implemented limits—often referred to as caps—on contributions to retirees’ health benefits. The survey data also showed that an additional 8 percent of such employers were considering such caps. Caps were most common among the employers in the Mercer study with the largest number of employees; 47 percent of employers with 20,000 or more employees had implemented caps and 4 percent were considering implementing caps. Data from the 2006 Kaiser/Hewitt survey showed that 50 percent of employers with 1,000 or more employees reported having capped contributions to the health benefits for Medicare- eligible retirees. Of these employers, 61 percent reported hitting the cap and another 20 percent expected to hit the cap within the next 1 to 3 years. One sponsor we interviewed with financial caps in place but not yet reached told us that sponsors generally have two options once they reach these spending limits: (1) negotiate plan design changes to bring spending under the limits or (2) pass costs on to retirees through higher premiums.

Sponsors Have Increased Retirees’ Copayments, Coinsurance, and Premiums

More than one-fourth of employers participating in the 2006 Kaiser/Hewitt survey reported that between 2005 and 2006 they increased required out- of-pocket contributions from retirees and increased the use of other cost- sharing strategies. In addition, some of these strategies were intended to address the costs of providing prescription drug coverage to retirees. For example, according to the 2006 Kaiser/Hewitt survey, 25 percent of employers raised copayments or coinsurance for prescription drugs for retirees aged 65 and older, and 10 percent of employers replaced fixed dollar copayments for prescription drugs with coinsurance, which can increase retirees’ out-of-pocket expenses as the total cost of the benefit rises.

More than one-half of employers in the 2006 Kaiser/Hewitt survey also reported that between 2005 and 2006 they increased retiree contributions to health care premiums for retirees aged 65 and older. However, the survey reported a lower rate of increase in the amount that retirees aged 65 and older contributed to premiums as compared to the amount that retirees under age 65 contributed to premiums, which the survey largely attributed to the Medicare Part D program. Sponsors we interviewed also told us that they had increased retiree premiums to compensate for the trend in increasing health care costs. For example, one public sponsor told us that premiums for its coverage designed for active workers and retirees under the age of 65 increased 9 percent for 2005 and 2006. Finally, according to the 2006 Mercer survey, about 41 percent of retiree health plans for employers with 500 or more employees required Medicare- eligible retirees to pay the full cost of their employment-based health benefits plan.

Appendix II: Alternative Approaches to Providing Retiree Health Coverage Suggested by Sponsors and Experts

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required GAO to describe both (1) alternative approaches to providing employment-based retiree health coverage suggested by retiree health benefit sponsors and (2) recommendations by sponsors and other experts for improving and expanding such coverage. In this appendix we present a range of alternative approaches to providing employment-based retiree health coverage and options for expanding and improving these alternative approaches, as described by retiree health benefit sponsors and experts we interviewed. To obtain this information, we interviewed officials from 15 private and public sponsors of retiree health benefits and several experts on areas relating to the provision of employment-based retiree health coverage, including five benefit consulting firms; six organizations, including one representing unions, one representing multiemployer plans, two representing large employers, and two representing health plans; one professional organization for actuaries; and other research organizations. The alternative approaches we describe are not intended to be a comprehensive list but rather represent the approaches that were mentioned by the sponsors and experts we spoke with.

Many of the alternative approaches to providing employment-based retiree health coverage that were described to us rely on tax advantages that provide an incentive for a sponsor, an employee, or both to set aside funds for future health care needs. Some of these tax-advantaged approaches are made available as part of consumer-directed health plans, which usually consist of a savings account—such as a health savings account (HSA) or health reimbursement arrangement (HRA)—and a health plan with a high deductible. In addition to consumer-directed health plans, there are other tax-advantaged accounts and trusts that do not require enrollment in a high-deductible health plan, such as a voluntary employees’ beneficiary association (VEBA). Some sponsors and experts described a third category of arrangement, generally without tax advantages, that assists sponsors in providing retiree health care coverage, such as establishing savings accounts that provide a sponsor’s match to the employee’s contribution. Although there is no requirement that retiree health benefit sponsors prefund their retiree health benefit plans, many of the approaches sponsors and experts described are prefunded vehicles— wherein the sponsor directly contributes, rather than earmarks, dedicated funds to an account or trust. The alternative approaches these sponsors and experts described are listed in table 2.

In addition to describing examples of the alternative approaches to traditional employment-based retiree health coverage, sponsors and experts we interviewed provided a variety of recommendations for improving and expanding these approaches. For example, some sponsors and experts recommended permitting tax-advantaged contributions by Medicare-eligible retirees to HSAs and allowing stand-alone HSAs that do not require an accompanying high-deductible health plan. Another expert also suggested increasing the maximum annual contribution that is currently allowed for an HSA and expanding the ability of retirees to use HSA funds to pay for health insurance premiums. One sponsor we interviewed highlighted the increased portability of an HSA as a factor in the sponsor’s decision to stop offering an HRA at the end of 2006 and to begin instead to offer an HSA option for early retirees and active workers. In addition, according to one expert we interviewed, because sponsors are not required to make unused HRA balances available to employees when they change jobs, individuals may have an incentive to spend down accumulated funds. Several sponsors and other experts also suggested creating additional tax-advantaged arrangements for retiree health benefit sponsors. For example, one expert suggested allowing the tax-free transfer of funds from individual tax-preferred vehicles—such as 401(k) retirement accounts—and pensions to pay for health care costs, including health care premiums.

Overall, a majority of the sponsors we interviewed indicated that sponsors are willing to use or consider alternative approaches, such as the ones described above, to assist retirees with their future health care needs without increasing their costs. Indeed, one sponsor indicated that it would support anything that would expand its ability to offer and fund retiree health coverage, such as additional subsidies or favorable tax treatment. Moreover, one expert indicated that alternative approaches such as HSAs offer a level of predictability that allows sponsors to sustain their retiree benefit packages. One reason for this predictability is that contributions by the sponsor in many of these alternative approaches are limited to a defined contribution.

Most alternatives that sponsors and experts described in our interviews were established (or are currently under consideration) for active employees to use for current and future expenses rather than for those who are currently retired. For example, among the alternative approaches described, few of the sponsors we interviewed indicated that they make such approaches available to current retirees. Specifically, only one sponsor we interviewed told us that it makes consumer-directed health plans available to current retirees. Seven sponsors told us that their current use (or consideration) of consumer-directed health plans is targeted to active employees for current and future health care costs. Two experts we interviewed, however, noted flaws with using consumer- directed health plans as adequate savings mechanisms for retiree health care costs because this approach assumes that active employees will not need the account funds for current health care expenses. Similarly, one sponsor noted that because many of the alternative approaches are geared toward active employees, they were less likely to be effective solutions for retiree health care needs.

Appendix III: Scope and Methodology

This appendix describes in detail the scope and methodology used to address the three report objectives—(1) which MMA prescription drug coverage options sponsors selected, (2) the factors they considered in selecting these options, and (3) the effect these decisions may have on sponsors’ provision of employment-based health benefits for retirees. It also addresses the mandated update on employment-based retiree health coverage since our 2005 report (reported in app. I) and sponsors’ and others’ views on alternative approaches for the provision of employment- based retiree health coverage that may help maintain, expand, or improve retiree health coverage (reported in app. II). Because some of the methodologies apply to more than one objective or appendix, we have organized this appendix by data source. Specifically, this appendix briefly describes the methodologies by objective and then discusses (1) surveys of employment-based health benefits, (2) federal surveys, (3) data from the Centers for Medicare & Medicaid Services (CMS), and (4) interviews with sponsors and other experts.

Methodology by Objective

To determine which MMA prescription drug coverage options sponsors selected, we reviewed data from four surveys collected by three benefit consulting firms on the options that sponsors reported selecting for 2006 and the options that sponsors reported that they planned to select for 2007. One survey is an annual survey of employer health benefits, including private and public sector employers, conducted since the early 1990s through 2006, and one is a private sector survey on retiree health benefits conducted in 2006. We obtained and analyzed data provided by CMS on the number and characteristics of sponsors that were approved for the retiree drug subsidy (RDS) for plans ending in 2006 and 2007. To describe the factors that sponsors considered in selecting the MMA options and the effect their decisions about the options may have on the provision of benefits for retirees, we relied on two of the employer benefit surveys and reviewed documents from the literature on the factors that sponsors may consider in selecting the MMA options. We also interviewed private and public sponsors and experts on sponsors’ decisions regarding the MMA options and employment-based retiree health benefits, including benefit consultants and officials at health plans, groups representing large employers, and other organizations.

To update information on employment-based retiree health coverage since our 2005 report, we reviewed data from employer benefit surveys and data from three large federal surveys that contained information either on Medicare beneficiaries or on the percentage of public sector employers that offer retiree health benefits. We also obtained this information in our interviews with sponsors and experts. We focused on trends particularly affecting Medicare-eligible retirees, but in some cases when information specific to Medicare-eligible beneficiaries was not available, we reported on trends affecting all retirees, including those who were under age 65 and those who were eligible for Medicare. To describe alternative approaches for the provision of employment-based retiree health coverage, we reviewed data from several of the same sources used to address the other report objectives, including employer benefit surveys, reports and analyses from the literature, and interviews with sponsors and experts.

Surveys of Employment-Based Health Benefits

We relied on data from annual surveys of employment-based health benefit plans. Kaiser/HRET and Mercer each conduct an annual survey of employment-based health benefits, including a section on retiree health benefits. Each survey has been conducted for at least the past decade, including 2006. We also used data from a survey focused solely on retiree health benefits that Kaiser/Hewitt conducted in 2006. For each of these surveys of employment-based benefits, we reviewed the survey instruments and discussed the data’s reliability with the sponsors’ researchers and determined that the data were sufficiently reliable for our purposes. We also reviewed two 2006 surveys by The Segal Company. The first represented a nonrandom sample of multiemployer plans from a range of industries and geographic regions; the second collected data from a nonrandom sample of public sponsors that offered prescription drug coverage to Medicare-eligible retirees.

Since 1999, Kaiser/HRET has surveyed a sample of employers each year through telephone interviews with human resource and benefits managers and published the results in its annual report—Employer Health Benefits. Kaiser/HRET selects a random sample from a Dun & Bradstreet list of private and public sector employers with three or more employees, stratified by industry and employer size. It attempts to repeat interviews with some of the same employers that responded in prior years. For the most recently completed annual survey—conducted from January to May 2006 and published in September 2006—2,122 employers responded to the full survey, giving the survey a 48 percent response rate. In addition, Kaiser/HRET asked at least one question of all employers it contacted— ”Does your company offer or contribute to a health insurance program as a benefit to your employees?”—to which an additional 1,037 employers, or cumulatively about 72 percent of the sample, responded. By using statistical weights, Kaiser/HRET is able to project its results nationwide. Kaiser/HRET uses the following definitions for employer size: (1) small—3 to 199 employees—and (2) large—200 and more employees. In some cases, Kaiser/HRET reported information for additional categories of small and large employer sizes.

Mercer

Since 1993, Mercer has surveyed a stratified random sample of employers each year through mail questionnaires and telephone interviews and published the results in its annual report—National Survey of Employer- Sponsored Health Plans. Mercer selects a random sample of private sector employers from a Dun & Bradstreet database, stratified into eight categories, and randomly selects public sector employers—state, county, and local governments—from the Census of Governments. The random sample of private sector and government employers represents employers with 10 or more employees. For the 2006 survey, which was published in 2007, Mercer mailed questionnaires to employers with 500 or more employees in July 2006 along with instructions for accessing a Web-based version of the survey instrument, another option for participation. Employers with fewer than 500 employees, which, according to Mercer, historically have been less likely to respond using a paper questionnaire, were contacted by phone only. Telephone follow-up was conducted with employers with 500 or more employees in the random sample and some mail and Web respondents were contacted by phone to clear up inconsistent or incomplete data. A total of 2,136 employers responded to the complete survey, yielding a response rate of 24 percent. By using statistical weights, Mercer projects its results nationwide and for four geographic regions. The Mercer survey report contains information for large employers—500 or more employees—and for categories of large employers with certain numbers of employees as well as information for small employers (fewer than 500 employees). We have excluded from our analysis Mercer’s 2002 data on the percentage of employers that offer retiree health plans because Mercer stated in its 2003 survey report that the 2002 data were not comparable to data collected in other years because of a wording change on the 2002 survey questionnaire. In 2003, Mercer modified the survey questionnaire again to make the data comparable to prior years (except 2002).

Kaiser/Hewitt

The 2006 Kaiser/Hewitt study—Retiree Health Benefits Examined: Findings from the Kaiser/Hewitt 2006 Survey on Retiree Health Benefits—is based on a nonrandom sample of employers because there is no database that identifies all private sector employers offering retiree health benefits from which a random sample could be drawn. Kaiser/Hewitt used previous Hewitt survey respondents and its proprietary client databases, which list private sector employers potentially offering retiree health benefits. Kaiser/Hewitt conducted the survey online from June through October 2006 and obtained data from 302 large (1,000 or more employees) employers. Its results were published in December 2006. According to the survey, these employers represented 36 percent of all Fortune 100 companies and 22 percent of all Fortune 500 companies. They accounted for more than one quarter of the Fortune 100 companies with the largest retiree health liability in 2005. Because the sample is nonrandom and does not include the same sample of companies and plans each year, survey results for 2006 cannot be compared with results from prior years.

Segal

We reviewed two nonrandom surveys conducted and published by The Segal Company in 2006 that report on responses by non-private-sector sponsors to the availability of prescription drug coverage under Medicare Part D. The first survey, which was published in spring 2006, was based on data collected in January and February 2006 from a nonrandom sample of 273 multiemployer plans that provided prescription drug coverage to Medicare-eligible retirees. The 273 multiemployer plans that participated in the survey are Segal clients and, according to Segal, represented a range of industries and geographic regions. The second survey, which was published in summer 2006, was conducted by Segal in conjunction with the Public Sector HealthCare Roundtable, a national coalition of public sector health care purchasers. This survey was based on data collected in May 2006 from a nonrandom sample of 109 public sponsors, including state and local sponsors, 82 of which offered prescription drug coverage to Medicare-eligible retirees.

Federal Surveys

We analyzed three federal surveys containing information either on Medicare beneficiaries or on the percentage of public sector employers that offer retiree health benefits. We obtained information on retired Medicare beneficiaries’ sources of health benefits coverage—including former employers and unions—from the CPS, conducted by the U.S. Census Bureau for the Bureau of Labor Statistics. We obtained data on the sources of coverage for all health care expenditures and for prescription drug expenditures for retired Medicare beneficiaries from the Medicare Current Beneficiary Survey (MCBS), sponsored by CMS. We obtained data on the percentage of public sector employers that offer retiree health benefits from the Medical Expenditure Panel Survey (MEPS), sponsored by the Agency for Healthcare Research and Quality. Each of these federal surveys is widely used for policy research, and we reviewed documentation on the surveys to determine that they were sufficiently reliable for our purposes.

Current Population Survey

We analyzed the Annual Supplement of the CPS for information on the demographic characteristics of Medicare-eligible retirees and their access to insurance. The survey is based on a sample designed to represent a cross section of the nation’s civilian noninstitutionalized population. In the 2006 CPS Annual Supplement, about 83,800 households were included in the sample for the survey, a significant increase in sample size from about 60,000 households prior to 2002. The total response rate for the 2006 CPS Annual Supplement was about 83 percent. We present only those differences that were statistically significant at the 95 percent confidence level.

The CPS asked whether a respondent was covered by employer- or union- sponsored, Medicare, Medicaid, private individual, or certain other types of health insurance in the last year. The CPS questions that we used for employment status, such as whether an individual is retired, are similar to the questions on insurance status. Respondents were considered employed if they worked at all in the previous year and not employed only if they did not work at all during the previous year.

The CPS asked whether individuals had been provided employment-based insurance “in their own name” or as dependents of other policyholders. We selected Medicare-eligible retirees aged 65 and older who had employment-based health insurance coverage in their own names because this coverage could most directly be considered health coverage from a former employer. For these individuals, we also identified any retired Medicare-eligible dependents aged 65 or older, such as a spouse, who were linked to this policy. We used two criteria to determine that these policies were linked to the primary policyholder: (1) the dependent lived in the same household and had the same family type as the primary policyholder and (2) the dependent had employment-based health insurance coverage that was “not in his or her own name.”

Medicare Current Beneficiary Survey

MCBS is a nationally representative sample of Medicare beneficiaries that is designed to determine for Medicare beneficiaries (1) expenditures and payment sources for all health care services, including noncovered services, and (2) all types of health insurance coverage. The survey also relates coverage to payment sources. The MCBS Cost and Use file links Medicare claims to survey-reported events and provides expenditure and payment source data on all health care services, including those not covered by Medicare. We used the 2004 MCBS Cost and Use file, the most current data available, to determine the percentage of Medicare-eligible beneficiaries obtaining supplemental coverage from a former employer or union. We also used the MCBS data to determine the percentage of all health care expenditures for retired Medicare beneficiaries paid by employment-based insurance for prescription drug expenditures.

Medical Expenditure Panel Survey

MEPS consists of four surveys and is designed to provide nationally representative data on health care use and expenditures for U.S. civilian noninstitutionalized individuals. We used data from one of the surveys, the MEPS Insurance Component, to identify the percentage of state entities that offered retiree health benefits in 2004. Insurance Component data are collected through two samples. The first, known as the “household sample,” is a sample of employers and other insurance providers (such as unions and insurance companies) that were identified by respondents in the MEPS Household Component, another of the four surveys, as their source of health insurance. The second sample, known as the “list sample,” is drawn from separate lists of private and public employers. The combined samples provide a nationally representative sample of employers. The target size of the list sample is approximately 40,000 employers each year.

CMS Data

We analyzed data provided by CMS on the number and characteristics of sponsors approved for the RDS for plans ending in 2006 and of sponsors approved for the RDS for plans ending in 2007. The data include selected variables from applications that were approved for the RDS. For plans ending in 2006, the CMS data are current as of September 11, 2006; for plans ending in 2007, the CMS data are current as of February 16, 2007. Based on conversations with CMS and data reliability checks that we performed, we have determined that these data were sufficiently reliable for our purposes.

Interviews with Sponsors and Experts

To learn more about retiree health benefit trends, the factors that sponsors considered in selecting the MMA options, the effect that sponsors’ decisions about the MMA options may have on the provision of health benefits for retirees, and alternative approaches for the provision of employment-based retiree health coverage, we interviewed 13 of the 15 private and public sector sponsors of employment-based retiree health benefits that we interviewed for the initial mandated study published in 2005. In our 2005 study, we interviewed officials of 12 Fortune 500 employers that provided retiree health benefits; the Office of Personnel Management, which administers the Federal Employees Health Benefits Program; and two state retirement systems. To select the 12 Fortune 500 employers in our 2005 study, we judgmentally selected 10 employers from a stratified random sample of 50 Fortune 500 employers. We interviewed at least 1 employer from each of the five groups of 100 Fortune 500 employers that were stratified on the basis of annual revenues. In addition to considering revenues, where data were available, we considered each employer’s industry, number of employees, postretirement benefit obligations, preliminary MMA option decision as reported on its annual financial statement, and union presence when making our selection. We also interviewed officials at two additional Fortune 500 employers at the recommendation of a benefit consultant. In our 2005 study, we judgmentally selected two large states’ retiree health benefits systems on the basis of a review of selected state data and referrals from a benefit consultant that works with public sector clients. For our current study, we also interviewed 2 sponsors that chose to offer their own Medicare Part D plans instead of implementing the RDS or another MMA option. These sponsors were not interviewed for our 2005 report.

To obtain broader-based information about retiree health benefit trends, MMA options, and alternative approaches for the provision of employment-based retiree health coverage, we interviewed benefit consultants and other experts at several other organizations. Specifically, we interviewed representatives of five large employer benefit consulting firms. Benefit consultants help their clients, which include private sector employers, public sector employers, or both, develop and implement human resource programs, including retiree health benefit plans. While most of these benefit consulting firms’ clients were large Fortune 500 or Fortune 1,000 employers, some also had smaller employers as clients. One benefit consulting firm that we interviewed, in particular, provided actuarial, employee benefit, and other services to a range of public sector clients, including state and local governments, statewide retirement systems and health plans, and federal government agencies. It also provided consulting services to multiemployer plans. We also interviewed officials from the American Academy of Actuaries, America’s Health Insurance Plans and its members, AARP, the American Benefits Council, the BlueCross BlueShield Association and its members, the Employee Benefit Research Institute, the National Business Group on Health, and the National Coordinating Committee for Multiemployer Plans. Finally, we reviewed other available literature on retiree health benefit trends, factors affecting sponsors’ decisions about the MMA options, and alternative approaches for the provision of employment-based retiree health coverage.

Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Appendix V: GAO Contact and Staff Acknowledgments

Acknowledgments

In addition to the contact named above, Kristi A. Peterson, Assistant Director; George Bogart; Kevin Dietz; Laura Sutton Elsberg; Krister Friday; Gregory Giusto; Elizabeth T. Morrison; Giao N. Nguyen; and Suzanne Worth made key contributions to this report.