1.) Long-term Decline in Employment-Based Retiree Health Coverage Has Leveled Off, with Retirees Paying an Increasing Share of the Costs

The percentage of employers offering health benefits to retirees, including  those who are Medicare-eligible, has decreased since the early 1990s,  according to employer benefit surveys, but offer rates have leveled off in  recent years. Meanwhile, employment-based retiree health plans  experienced increased costs to provide coverage, with one employer  benefit survey citing double-digit annual average increases from 2000  through 2003. Financial statements we reviewed for a random sample of 50  Fortune 500 employers showed that over 90 percent of the employers that  offered retiree health coverage had increased postretirement benefit  obligations from 2001 through 2003. Prescription drug benefits represent a large share of plan sponsors’ retiree  health costs, particularly for Medicare-eligible retirees. For  example, many plan sponsors have increased cost sharing through  increased copayments, coinsurance, and premium shares; restricted  eligibility for benefits based on retirement or hiring date; implemented  financial caps or other limits on plan sponsors’ contributions to coverage;  and made changes to prescription drug benefits, such as creating tiered  benefit structures and increasing retiree out-of-pocket contributions. Employers and Plan Sponsors Considering MMA Options for Prescription Drug Coverage, Often Considering Subsidy as Primary Option for Some or All Medicare- Eligible Retirees

At the time of our review, many employers and plan sponsors said they  had not decided which MMA options they would implement for their  Medicare-eligible retirees, but the primary option many sponsors were  considering was the subsidy. Ten of the 15 plan sponsors we interviewed  said that while undecided, they were considering the federal subsidy  option for some or all of their Medicare-eligible retirees, while 2 other plan  sponsors had chosen the subsidy option for all their Medicare-eligible  retirees. In our random sample of 50 Fortune  500 employers, most that reported obligations for retiree health benefits  indicated that they would choose the federal subsidy or other options, but  others had not reported their final MMA decisions on their financial  statements filed with the SEC as of November 2004. In addition, 2 plan  sponsors we interviewed were considering Medicare Advantage plans, but  these plan sponsors were waiting to see how the market for these  developed. If employers were not already providing  prescription drug benefits to retirees, most benefit consultants and other  experts we interviewed said that the MMA was not likely to prompt  employers to begin providing coverage or supplementing the Medicare  benefits. Plan Sponsors We Interviewed Were Considering MMA Options for Prescription Drug Coverage, but Few Had Made Final Decisions

The 15 private and public sector sponsors of retiree health benefit plans  we interviewed were considering their MMA options for prescription drug  coverage, but few had decided which MMA options they would choose for  all their Medicare-eligible retirees. OPM had not made  any decisions at the time of our interview, but in written comments on a  draft of this report it indicated that it did not expect to choose the federal  subsidy for FEHBP. Plan sponsors would offer coverage wrapping around Medicare  part D rather than providing their own comprehensive prescription drug  coverage. Sponsors of Retiree Health Benefit Plans We Interviewed Unlikely to Reduce Current Drug Benefits for Medicare Retirees in Response to the MMA

In interviews, sponsors of health plans that included prescription drug  benefits for Medicare-eligible retirees told us they did not expect to reduce  these benefits in response to the new Medicare part D benefit and the  MMA options. The MMA Is Not Likely to Induce Employers Not Already Offering Retiree Health Coverage to Begin Doing So

Few employers, if any, that were not sponsoring retiree prescription drug  benefits were expected to begin sponsoring them in response to the MMA. We agree that as noted in the report, these changes  contribute to an overall erosion in the value and availability of retiree  health benefits. To supplement the trend and financial  data and to identify which options for prescription drug coverage provided  under the Medicare Prescription Drug, Improvement, and Modernization  Act of 2003 (MMA) sponsors of employment-based retiree health benefits  said they planned to implement, we interviewed benefit consultants,  private and public sector sponsors of employment-based retiree health  benefits, officials at associations and groups representing large and small  employers and others. We obtained data on the sources of  coverage for all health care expenditures and for prescription drug  expenditures for retired Medicare beneficiaries from the Medicare Current  Beneficiary Survey (MCBS), sponsored by the Centers for Medicare &  Medicaid Services (CMS).
Why GAO Did This Study

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a prescription drug benefit for beneficiaries, called Medicare part D, beginning in January 2006. The MMA included incentives for sponsors of employment-based retiree health plans to offer prescription drug benefits to Medicare-eligible retirees, such as a federal subsidy when sponsors provide benefits meeting certain MMA requirements. Plan sponsors cannot receive a subsidy for retired Medicare beneficiaries who enroll in part D. In response to an MMA mandate, GAO determined (1) the trends in employment-based retiree health coverage prior to the MMA and (2) which MMA prescription drug options plan sponsors said they would pursue and the effect these options might have on retiree health benefits. GAO identified trends using data from federal and private sector surveys of employers' health benefit plans and financial statements of 50 randomly selected Fortune 500 employers. Where data for Medicare-eligible retirees were not available, GAO reported data for all retirees, including Medicare-eligible retirees. To obtain plan sponsors' views about options they were likely to pursue, GAO reviewed the 50 employers' financial reports and interviewed benefit consultants; private and public sector plan sponsors, including the Office of Personnel Management for federal employees' health benefits; and other experts.

What GAO Found

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