Increasingly, public attention has focused on the health insurance status of Americans between the ages of 55 and 64. Although federal legislation establishes the normal retirement age for full pension benefits at 65, many individuals leave the labor force 5 to 10 years earlier. Labor force participation rates among 55- to 64-year-old men have declined since at least the 1960s. For those who retire before becoming eligible for Medicare, the availability of health benefits is of particular concern. Coverage for most Americans is tied to employment—the very link that is severed by retirement or loosened by a person’s gradual detachment from the labor force. Since 55- to 64-year-olds are more likely to use medical services, insurance they purchase directly in the individual market may be expensive and harder to pay for, considering the decline in income as a result of retirement. Because fewer employers offer retiree health coverage as a benefit and individually purchased insurance, when available, may be prohibitively expensive, the proportion of this age group that is uninsured may rise. Although most of the near elderly receive coverage as a benefit through their employer, some purchase health insurance on their own. The former is commonly referred to as employer-based group coverage and the latter as individual coverage. Complementing these two types of private health insurance are public programs, including Medicaid for the poor and Medicare for the elderly and disabled. Fundamental differences distinguish employer-sponsored group coverage from the individual insurance market and public insurance programs. Employer-Based. Eligibility for group health coverage through an employer typically depends on holding or having held a full-time job or working a sufficient number of hours to meet a minimum eligibility requirement. Increasingly, however, firms are imposing age and length of service eligibility requirements for retiree health benefits. Premiums in the group market are often considerably lower than those in the individual market because they are based on the experience of the entire group, and the larger the group, the smaller the impact of high-cost individuals on the overall premium. Also, individuals with employer-based coverage do not face the task of accessing the insurance market or identifying and comparing a multitude of products on their own. Rather, the employer arranges access and greatly simplifies the task of identifying and comparing products. Employers who offer health coverage generally provide a comprehensive benefit package with an associated deductible and copayment. Normally, annual out-of-pocket costs are capped, and health services beyond that point are reimbursed at 100 percent. Finally, selecting cost-sharing options and paying for the products is often eased by employer contributions and payroll deductions. Individual Market. Instances when Americans may turn to the individual market for health insurance include employment in part-time or temporary jobs, periods of unemployment between jobs, and retirement prior to Medicare eligibility. Unlike employer-based health benefits, however, eligibility and premiums in the individual markets of many states are determined on the basis of the risk associated with each applicant’s demographic characteristics and health status. As a result, coverage in the individual market for those aged 55 to 64 and for individuals whose health is declining may be unavailable or considerably more expensive. Since consumers must absorb the entire cost of coverage themselves, carriers have recognized the importance of offering affordable options to people with different economic resources and health needs, and offer a wide range of health plans with a variety of covered benefits and cost-sharing options. The cost-sharing arrangement selected is a key determinant of the price of an individual insurance product—the higher the potential out-of-pocket expenses, the lower the premium, and the greater the financial risk to the consumer. Finally, because carriers in many states can exclude preexisting health conditions from coverage, the benefits purchased may not be comprehensive. Recent federal legislation, discussed below, prevents preexisting condition exclusions for eligible individuals leaving group coverage. Public Insurance Programs. Significant differences also exist in eligibility for and coverage available through public programs such as Medicaid and Medicare. Medicaid, financed jointly by the federal government and the states, is the dominant public program for financing health coverage for low-income Americans—families, primarily women and children, and the aged, blind, and disabled. Medicare is a national insurance program established in 1965 for elderly Americans aged 65 or older. For Americans under age 65, only those with end-stage renal disease or those who have been determined disabled under the Social Security Act qualify for Medicare. Disabled individuals must fulfill a 2-year waiting period before they are eligible for Medicare; however, in most states, the low-income disabled who receive Supplemental Security Income automatically qualify for Medicaid. Medicare benefits contain more gaps than those offered through Medicaid or a large employer. For example, standard (fee-for-service) Medicare has separate benefits for hospitalization (part A) and physician/outpatient (part B) services. Those eligible for Medicare are automatically enrolled in part A but must pay a premium to elect part B coverage. Part A has a relatively high deductible for each hospitalization and requires copayments for stays longer than 60 days. Part B has a separate deductible, requires 20 percent coinsurance for physicians’ bills, and does not cover prescription drugs. Unlike most employer-based insurance, neither part A nor part B has a limit on out-of-pocket costs. To cover some of the gaps in Medicare coverage, beneficiaries often purchase Medigap insurance; alternatively, if available, they may enroll in a Medicare managed care plan, which generally offers a richer benefit package than fee-for-service Medicare, often with no premium. Finally, some beneficiaries have access to employer-based retiree health benefits, which supplement their Medicare coverage. Medicaid, like most employer-sponsored coverage, offers a comprehensive benefit package, but the depth of coverage varies substantially among states. Federal guidelines require coverage of a broad range of services, including inpatient and outpatient hospital care, physician services, laboratory services, and nursing home and home health care. Most of those enrolled in the program incur no out-of-pocket expenses. Although the decision to offer health benefits to workers or retirees is essentially voluntary, several federal laws have influenced their provision by employers. For example, since 1954, the tax code has encouraged employment-based health coverage by making employer health benefit payments tax deductible and by excluding employer-provided benefits from employees’ taxable income. Also, ERISA, which was enacted in 1974, allows employers to offer uniform national health benefits by preempting states from directly regulating employer benefit plans. ERISA, however, does impose some federal requirements on employer-based plans, including requirements to provide employees with a plan description within 90 days of enrollment and implement a process for appealing claim denials. Because of the federal preemption of state regulation, the rights of active and retired employees under ERISA are largely determined in the courts. Appendix I contains a description of the role of ERISA in safeguarding access to coverage provided voluntarily by an employer. In addition, federal law guarantees that individuals leaving employer-sponsored group health plans have access to continued coverage, and ultimately to a product in the individual market. First, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), which amended ERISA, requires group health plans covering 20 or more workers to offer 18 to 36 months of continued health coverage to former employees and their dependents in certain circumstances, such as when an employee is terminated or laid off, or quits or retires. Although COBRA is not specifically targeted at the near elderly, it clearly provides this age cohort with the opportunity to continue health coverage as they transition from the active workforce to retirement. The mandate to offer continuation coverage, however, does not oblige employers to share in the premium. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) further guarantees access to individual market coverage to individuals leaving group health plans. Group-to-individual portability is available to eligible individuals who, among other criteria, have exhausted their available COBRA or other conversion coverage, regardless of their health status and without the imposition of coverage exclusions for preexisting conditions. HIPAA, however, does not provide similar guarantees of coverage for others in the individual market. The Chairman, Senate Committee on Labor and Human Resources, asked us to assess the ability of Americans aged 55 to 64 to obtain health benefits through the employer-sponsored or individual insurance markets. He specifically asked for information on the near elderly’s (1) health, employment, income, and health insurance status; (2) ability to obtain employer-based coverage if they retire before becoming eligible for Medicare; and (3) use of and costs associated with purchasing coverage through the individual market or COBRA continuation insurance. To determine the demographic and health insurance status of the near elderly, we analyzed the March 1997 Current Population Survey (CPS). Appendix II discusses some of the strengths and limitations of the CPS and other surveys that we considered. As part of our analysis of the CPS, we separately examined two subgroups of the near elderly—those aged 55 to 61, who are more likely to be in the labor force, and those aged 62 to 64, who have a greater chance of being retired. Since the March CPS asks respondents about their employment, retirement, health, income, marital, and social security status, we were able to make observations about the relationship of these variables to the health insurance status of the near elderly. To supplement CPS data on the health status of this age cohort, we also obtained more objective data on their health conditions, health care use, and health care expenditures from the Agency for Health Care Policy and Research and the National Center for Health Statistics. To determine trends in employer-based health insurance coverage for those who retire before reaching Medicare eligibility, we conducted a literature review on employer-based health benefits for early retirees.