Because of the cost, retiree health benefits are a concern to both employers and older Americans. Employers recognize that these benefits help to retain an experienced workforce but must also consider the cost of providing coverage. Older Americans approaching or at retirement age consume a higher level of medical services, and as a result, their health care is commensurately more expensive. For workers under age 65 and not yet eligible for Medicare, the decision to retire may turn on the continuation of health benefits by an employer. For those 65 or older living on a fixed income, employer-based benefits may help fill coverage gaps in Medicare, such as deductibles and copayments or the lack of a prescription drug benefit. Overall, about one-third of retirees 55 and older received health benefits from a former employer in 1994. About 75 percent were over age 65, and any employer-based coverage available to them supplemented their Medicare benefits; the remaining 25 percent of retirees were generally ineligible for Medicare because they were between ages 55 and 65. For the latter group, employer-based benefits were the primary source of coverage. Bureau of the Census data show that the number of retirees increased from 18.5 million to 23.4 million between 1988 and 1994. However, the first members of the baby boom generation are now aged 52 and poised to enter retirement, an event that will begin to dramatically increase the number of retirees. Data from an annual survey conducted by Foster Higgins, a benefit consulting firm, suggest a significant decline between 1988 and 1996 in the availability of retiree coverage from large employers with over 500 workers. Because of a change in the survey methodology, the pre-1993 data should not be viewed as authoritative. However, the data from these two periods appear to be consistent. The data distinguish between early retirees and those who are Medicare-eligible. Since 1993, coverage for both groups has declined by 8 to 9 percentage points, a continuation of a trend evident since 1988. As shown by figure 1, early retirees are more likely than those who are Medicare-eligible to be offered health benefits by a former employer. In 1997, for example, only 31 percent of Medicare-eligible retirees were offered health benefits compared with 38 percent of early retirees. future costs, and thus it does not affect their cash flow. However, by dropping retiree coverage, a company can immediately improve its balance sheet, making its stock more attractive to potential investors. In responding to benefit consultant surveys, many companies cited FAS 106 as a reason for modifying retiree health benefits, including the phasing out of such coverage. The late 1980s was a period of double-digit health care inflation. Although the growth in premiums has slowed dramatically in the past few years, the percentage of large firms offering retiree health benefits has continued to drop. Among the reasons cited by Foster Higgins for the slowdown in the growth of employers’ health care costs are that more workers moved into managed care plans—including retirees—and the fact that some employers dropped retiree coverage. As shown in figure 1, employers are less likely to offer coverage to Medicare-eligible retirees than to early retirees. There are several potential explanations for this disparity. First, individuals are not as likely to seek early retirement if they cannot continue employer-based health benefits. A RAND study on the effect of access to postretirement health insurance found that the offer of continued coverage made it more likely that men aged 55 to 62 would retire. Second, those who retired early through buyouts may have been guaranteed health benefits as an enticement to do so. Third, federally mandated COBRA coverage allows some individuals to retire at age 63-1/2 and continue with employer-based group coverage until they become Medicare-eligible at age 65. Finally, employers know that coverage is available to retirees aged 65 and older through Medicare, an option not open to younger retirees. 8 percentage points since 1988. Moreover, the percentage of individuals with employer-based coverage continued to decrease throughout retirement. Thus, only 34 percent still retained coverage several years after retirement. In addition to the availability of coverage, the Labor Department study suggests that cost is another factor contributing to the decline in retirees with employer-based insurance. Thus, the propensity for retirees to enroll in employer-based plans when they are offered has also dropped because of the increased costs retirees are being asked to shoulder by employers. In both the 1988 and 1994 surveys, individuals who declined employer-based coverage at retirement were asked the reasons for their decisions. Of the approximately 5.3 million retirees who discontinued employer-based benefits in 1994, an estimated 27 percent cited the expense as a factor—an increase from 21 percent in the earlier survey. Moreover, there was a 6-percentage-point increase over the same time period in the number of such retirees who indicated that they still had health insurance through a plan other than that of their former employer. Thus, some retirees who find coverage from their own employer too expensive may have switched to plans with lower cost-sharing available through a working or retired spouse. Other sources of private insurance do appear to be filling a significant portion of the gap created by the fact that fewer employers offer retiree health benefits. We estimated that between 1989 and 1995, the percentage of early retirees with private coverage fell by only 7 percentage points, compared with a much larger drop in the number of employers offering retiree coverage. If employer-based coverage is not available, early retirees may postpone retirement, purchase coverage themselves, or obtain insurance through a working spouse. CPS data also contain insights on the characteristics of retirees more likely or less likely to have employer-based coverage. The characteristics for these two groups of retirees are summarized in table 1. If available, employer-based group health insurance provides two important advantages to retirees: (1) more affordable health benefits and (2) access to benefits for those retirees whose health status might otherwise impinge on their ability to obtain coverage in the individual insurance market. Such insurance is affordable because many employers continue to finance all or a significant amount of their retirees’ health insurance premiums, even though over the last decade retirees have been required to pay an increasing share of these costs. In addition, the overall premiums for employer-based health plans are generally lower than those in the individual insurance market because the premiums that insurers charge employers are based on risks spread over an entire group of workers. In contrast, premiums in the individual insurance market reflect the risk characteristics of each applicant. These characteristics include not only age but also gender, health status, geographic differences in health care costs, and family size. Unless there is a state law prohibiting price differences by age, most carriers charge higher premiums to older applicants. glaucoma; and charged higher premiums for plans that covered conditions like anemia and arteriosclerosis. HIPAA guarantees access to the individual market by eligible individuals with qualifying coverage from a former employer—regardless of their health status—and also provides for the renewability of individual coverage. This guaranteed access is often referred to as “portability.” However, HIPAA offers no protection to Pabst retirees whose health benefits were terminated in 1996 or to any retiree who lost employer-based health benefits before its July 1, 1997, implementation date. Although HIPAA guarantees access to the individual market, it does not address the cost of coverage. Retirees no longer covered by their former employer’s group health plan are likely to pay higher premiums for similar coverage in the individual insurance market. And with the loss of employer-based coverage, affected retirees who want to purchase health insurance must now absorb its full cost, which can be significant. Thus, had HIPAA been in effect in 1996, a Milwaukee retiree who wanted to replace the benefits terminated by Pabst would have paid $8,187 for a standard family plan with a $250 deductible. Since Wisconsin does not restrict the underwriting practices of carriers, a carrier may choose to charge an unhealthy individual more. Before its decision to terminate health benefits to retired employees at its Milwaukee plant, Pabst financed the total cost of practically all of the health plans it offered to retired workers. Given the substantial geographic variability of health insurance rates in the individual market, HIPAA-eligible retirees will be affected differently. For example, in 1996, a major carrier in New Jersey offered family coverage with a $250 deductible at an annual price of $11,825. The price of similar family coverage in Maricopa County, Arizona, was only $6,264 in 1996. However, as in Wisconsin, HIPAA-eligible retirees in Arizona with preexisting conditions can be charged a premium much higher than the standard. These 1996 rates may understate the actual cost of a HIPAA guaranteed access product purchased today. Thus, in September 1997 correspondence to the Chairman of the Senate Labor and Human Resources Committee on early HIPAA implementation concerns, we reported that (1) premiums for some HIPAA products may be substantially higher than for standard products available to healthy individuals and (2) the way many carriers will determine future premium rates for portability products may lead to even higher rates. Some carriers permit HIPAA eligibles to apply for both a HIPAA product and a lower-cost standard product. Since healthy individuals are likely to enroll in the less expensive option, only unhealthy individuals would be enrolled in the HIPAA product—a practice that could result in an increasing spiral of poorer risks and higher premiums. States were allowed to choose a number of approaches to meet HIPAA’s portability requirements. Thus, 22 states elected to use their high-risk pools to provide guaranteed access to the individual market for qualified individuals leaving group coverage. Prior to the enactment of HIPAA, many states had high-risk pools for those who had been denied coverage or had one of a number of specified health conditions.