Decline in Access to and Participation in Employer-Based Retiree Coverage

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. 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. The late 1980s was a period of double-digit health care inflation. There are several potential explanations for this disparity. 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. Employers’ Decisions to Terminate Coverage Expose Retirees to New Costs and Risks

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. Although HIPAA guarantees access to the individual market, it does not address the cost of coverage. 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. Limited Federal Protection of Employer-Based Retiree Health Benefits

The Employee Retirement and Income Security Act (ERISA) protects both the pension and health benefits of workers. America’s voluntary, employer-based system of health insurance. However, if the language leaves some doubt as to the nature or duration of benefits, or if there are conflicts in the plan documents, the courts have examined significant written and oral representations made to employees to determine whether the employer has the right to modify retiree health benefits. For many individuals, the high cost of COBRA coverage is a shock because under employer-based coverage, large companies typically pay 70 to 80 percent of the premium. To address the coverage gap for such retirees, Members of the Congress as well as the President have proposed allowing affected retirees to purchase continuation coverage at a cost that reflects their higher utilization of services until they become eligible for Medicare. The Health Insurance Portability and Accountability Act of 1996: Early Implementation Concerns (GAO/HEHS-97-200R, Sept. 2, 1997). Retiree Health Insurance: Erosion in Employer-Based Health Benefits for Early Retirees (GAO/HEHS-97-150, July 11, 1997).
Why GAO Did This Study

GAO discussed the erosion in employer-based health benefits for retirees, especially early retirees, focusing on: (1) trends in access to employer-sponsored retiree health benefits; (2) the impact on retirees of an employer's decision to terminate health benefits; and (3) federal safeguards that protect the rights of retirees who have health benefits.

What GAO Found

GAO noted that: (1) retiree access to and participation in private insurance through an employer has undergone a slow but persistent decline since the early 1990s; (2) there are several explanations for this erosion in coverage: (a) high and rising health care costs have spurred employers to look for ways to control their benefit expenditures, including eliminating retiree coverage and increasing cost sharing; and (b) a new financial accounting standard developed in the late 1980s has changed employers' perceptions of retiree health benefits and may have acted as a catalyst for reductions in retiree coverage; (3) the new rule makes employers much more aware of the future liability inherent in retiree health benefits by requiring them to account for its estimated value; (4) losing access to employer-based coverage poses major challenges for retirees; (5) the 1997 implementation of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) has eliminated one potential obstacle for retirees who lose group coverage through their former employer--the possibility that coverage in the individual market will be denied or restricted by a preexisting medical condition; (6) because state laws governing the operation of the individual market differ, the premiums faced by early retirees vary substantially; (7) moreover, considering that large companies typically pay 70 to 80 percent of the premium, costs in the individual market may come as a rude awakening for early retirees; (8) early evidence from the implementation of HIPAA suggests that rates developed by insurance carriers for HIPAA guaranteed access products are substantially higher than the prices of standard products available in the individual market to those who are healthy; (9) as a result, these 1996 rates may understate the cost of a HIPAA product purchased in 1998; (10) a key characteristic of America's voluntary, employer-based system of health insurance is an employer's freedom to modify the conditions of coverage or to terminate benefits; (11) when an employer has terminated retiree health benefits, federal courts have turned to the nature of the written agreements and other pertinent evidence covering the provision of retiree benefits to determine the legitimacy of the action; and (12) to address the potential gap in coverage when a former employer unexpectedly terminates health insurance, Congress as well as the President have proposed allowing affected retirees to purchase continuation coverage at a cost that reflects their higher utilization of services until they become eligible for Medicare.