Retiree Health Insurance: Gaps in Coverage and Availability	 
(01-NOV-01, GAO-02-178T).					 
								 
Many retired Americans--about ten million aged 55 or over--relied
on employer-sponsored health benefits in 1999 to provide health  
coverage until they became eligible for Medicare or as		 
supplemental coverage to pay for out-of-pocket costs not covered 
by Medicare. However, the number of employers offering these	 
benefits has declined considerably over the past decade. This	 
decline, coupled with the sheer numbers of the aging baby boom	 
population, has raised concerns about whether individuals will	 
continue to have access to employer-sponsored health benefits	 
when they retire, and, if not, whether alternative sources of	 
coverage may assist in meeting retirees' health care needs. Some 
retirees face gaps in coverage to meet their health care and	 
long-term care needs because the availability of		 
employer-sponsored retiree health benefits is declining and	 
alternative sources of coverage are costly or limited. Despite	 
several years of a sustained strong economy and relatively low	 
increases in health insurance premiums during the late 1990s, the
availability of employer-sponsored retiree health benefits has	 
eroded. Two widely cited surveys found that coverage has declined
such that about one-third of large employers and less than ten	 
percent of small employers offer retiree health benefits.	 
Nonetheless, the percentage of retirees with employer-sponsored  
coverage remained relatively stable between 1994 and 1999,	 
covering about 57 percent of retirees ages 55 to 64 and providing
Medicare supplemental coverage to about 32 percent of retirees 65
or older. With the declining availability of employer-sponsored  
retiree health benefits, alternative sources of health coverage  
for retirees may be costly, more limited, or unavailable.	 
Retirees not yet 65 may be eligible for coverage from a spouse's 
employer or from their former employer under the provisions	 
enacted as part of the Consolidated Omnibus Budget Reconciliation
Act of 1985. Other retirees in this age group may seek coverage  
in the individual insurance market, but individual policies can  
be expensive or offer more limited coverage, especially for those
with existing health problems. Nearly one-third of		 
Medicare-eligible retirees have employer-sponsored supplemental  
coverage, but many others purchase individual private		 
supplemental coverage known as ''Medigap.'' Although Medigap	 
coverage is widely available to retirees when they initially	 
enroll in Medicare at 65, it costs an average of $1300 per year  
and even more for policies that include prescription drug	 
coverage. Neither Medicare nor private insurance covers a	 
significant share of long-term care services. The potentially	 
catastrophic costs of long-term care are currently paid primarily
by Medicaid, the joint federal-state health financing program for
certain low-income individuals, and by individuals out-of-pocket.
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-178T					        
    ACCNO:   A02413						        
  TITLE:     Retiree Health Insurance: Gaps in Coverage and	      
Availability							 
     DATE:   11/01/2001 
  SUBJECT:   Health care cost control				 
	     Health insurance cost control			 
	     Managed health care				 
	     Retirement benefits				 
	     Census Bureau Current Population Survey		 
	     Medicaid Program					 
	     Medicare Choice Program				 
	     Medicare Current Beneficiary Survey		 
	     Medicare Program					 
	     Medigap						 

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GAO-02-178T
     
Testimony Before the Subcommittee on Employer- Employee Relations, Committee
on Education and the Workforce, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 2: 30 p. m. Thursday, November 1,
2001 RETIREE HEALTH

INSURANCE Gaps in Coverage and Availability

Statement of William J. Scanlon Director, Health Care Issues

GAO- 02- 178T

Page 1 GAO- 02- 178T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today
as you consider the future financial security of retired Americans,
particularly the availability of employer- sponsored health benefits and
other sources of insurance coverage to meet the increasing health care and
long- term care needs of an aging population. Many retired Americans- about
10 million aged 55 or over- relied on employer- sponsored health benefits in
1999 to provide health coverage until they became eligible for Medicare or
as supplemental coverage to pay for out- of- pocket costs not covered by
Medicare. However, the number of employers offering these benefits has
declined considerably over the past decade. This decline, coupled with the
sheer numbers of the aging baby boom population, has raised concerns about
whether individuals will continue to have access to employer- sponsored
health benefits when they retire and, if not, whether alternative sources of
coverage may assist in meeting retirees? health care needs.

In view of these concerns, you asked us to provide information on trends in
employer- sponsored retiree health benefits and implications for retirees
who may seek alternative sources of coverage. Accordingly, my remarks today
will focus on

 recent changes employers have made to the availability and terms of their
retiree health benefits and whether these trends are likely to continue, and
 the availability of alternative sources of coverage for retirees whose
health

care and long- term care needs typically increase as they age. My comments
are based largely on our previously issued reports on trends in employer-
sponsored retiree health benefits, and in Medicare, Medicare supplemental
insurance (also known as Medigap), and long- term care financing. 1

In summary, some retirees face gaps in coverage to meet their health care
and long- term care needs because the availability of employer- sponsored
retiree health benefits is declining and alternative sources of coverage are
costly or limited. Despite several years of a sustained strong economy and
relatively low increases in health insurance premiums during the late 1990s,
the availability of employer- sponsored retiree health benefits has eroded.
Two widely cited surveys found that coverage has declined such

1 A list of related GAO products is at the end of this statement.

Page 2 GAO- 02- 178T

that about one- third of large employers and less than 10 percent of small
employers offer retiree health benefits. Nonetheless, the percentage of
retirees with employer- sponsored coverage remained relatively stable
between 1994 and 1999, covering about 57 percent of retirees aged 55 to 64
and providing Medicare supplemental coverage to about 32 percent of retirees
65 or older. To some extent, these differing trends may reflect employers?
tendency to eliminate coverage for future rather than current retirees. Some
employers that continue to offer retiree health benefits, however, have
reduced these benefits by increasing the share of premiums that retirees
pay, increasing copayments and deductibles, or limiting future commitments
for what they will spend for retiree coverage. For example, an increasing
share of large employers that offer retiree health benefits- about 40
percent in 2000, about 8 percentage points higher than in 1997- require
retirees younger than 65 to pay the entire premium. Increasing cost
pressures on employers, such as rising premiums and a weakening economy,
suggest that erosion in retiree health benefits may continue.

With the declining availability of employer- sponsored retiree health
benefits, alternative sources of health coverage for retirees may be costly,
more limited, or unavailable. Retirees not yet 65 may be eligible for
coverage from a spouse?s employer or from their former employer under the
provisions enacted as part of the Consolidated Omnibus Budget Reconciliation
Act of 1985 (COBRA). While these provisions allow an individual to purchase
temporary continuation coverage from a former employer, such coverage can be
quite expensive as the retiree may be required to pay the entire premium.
Other retirees in this age group may seek coverage in the individual
insurance market, but individual policies can be expensive or offer more
limited coverage, especially for those with existing health problems.
Although Medicare covers virtually all retirees 65 or older, most Medicare
beneficiaries also obtain supplemental insurance to cover Medicare?s cost-
sharing requirements and some gaps in Medicare?s coverage, such as
prescription drugs. Nearly one- third of Medicare- eligible retirees have
employer- sponsored supplemental coverage, but many others purchase
individual private supplemental coverage known as ?Medigap.? While Medigap
coverage is widely available to retirees when they initially enroll in
Medicare at 65, it costs an average of $1,300 per year and even more for
policies that include prescription drug coverage. Finally, neither Medicare
nor private insurance covers a significant share of long- term care
services. The potentially catastrophic costs of long- term care are
currently paid primarily by Medicaid, the joint federal- state health
financing program for certain low- income individuals,

Page 3 GAO- 02- 178T

and by individuals out- of- pocket. Private long- term care insurance plays
a small role in financing long- term care services.

Since World War II, many employers have voluntarily sponsored health
insurance as a benefit to employees for purposes of recruitment and
retention, and many have also extended these benefits to their retirees. The
federal tax code gives employers incentives to subsidize health benefits
because their contributions can be deducted as a business expense, and these
contributions are also not considered taxable income for employees.
Employer- sponsored health benefits are regulated under the Employee
Retirement Income Security Act of 1974 (ERISA), which gives employers
considerable flexibility to manage the cost, design, and extent of health
care benefits they provide.

Working adults and retirees aged 55 to 64 rely on employer- sponsored
coverage as their primary source of health insurance. In 1999, according to
the Bureau of the Census? Current Population Survey, employers provided
coverage to 78 percent of all working adults aged 55 to 64 and to 57 percent
of the 4 million retirees aged 55 to 64. Other retirees in this age group
purchased individual (nongroup) health insurance or relied on Medicaid or
other public insurance, and a significant portion- 17 percent- were
uninsured. (See fig. 1.)

Retirees aged 65 or older typically rely on Medicare as their primary source
of coverage. However, Medicare, which helps pay for hospital and physician
expenses for acute care, has gaps in coverage that leave Medicare
beneficiaries facing significant out- of- pocket costs. For example,
Medicare does not cover most outpatient prescription drugs nor does it cover
potentially catastrophic expenses associated with long- term stays in
hospitals or skilled nursing facilities. As a result, most Medicare
beneficiaries obtain supplemental insurance to cover some of these out-
ofpocket costs. In 1999, according to the Current Population Survey, nearly
one- third of the 23 million retirees aged 65 or older had Medicare with
employer- sponsored supplemental coverage. Slightly more than one- third had
Medicare with other sources of supplemental coverage. Most often, these
beneficiaries had individually purchased supplemental coverage, known as
Medigap, but some received assistance from Medicaid. The remaining portion
of retirees had Medicare without supplemental coverage. However, many of
these are enrolled in Medicare+ Choice plans, Background

Page 4 GAO- 02- 178T

which provide beneficiaries an alternative to traditional fee- for- service
Medicare and typically have nominal cost- sharing requirements and often
cover additional services, such as prescription drugs. 2 Data from the 1998
Medicare Current Beneficiary Survey indicate that half of Medicare
beneficiaries with Medicare- only coverage were enrolled in a Medicare+
Choice plan.

2 In the Balanced Budget Act of 1997 (P. L. 105- 33, Aug. 5, 1997), the
Congress established the Medicare+ Choice program to expand Medicare
beneficiaries? health plan options and to encourage wider availability of
health maintenance organizations and other types of health plans, such as
preferred provider organizations, as an alternative to traditional fee-
forservice Medicare.

Page 5 GAO- 02- 178T

Figure 1: Sources of Health Coverage for Retired Americans Differ by Age
Group, 1999

Notes: Percentages do not add to 100 because of rounding. Of the 23.4
million Americans aged 55 to 64 in 1999, 4.0 million (17 percent) were
retired. For these retirees, ?public? coverage includes Medicaid, Medicare
(for eligible disabled individuals), and health care through the Departments
of Defense or Veterans Affairs.

Of the 32.6 million Americans aged 65 or older in 1999, 23.4 million (72
percent) were retired, with the remainder either still working or not
working for reasons other than retirement. ?Medicare without supplemental
coverage? includes both traditional fee- for- service Medicare and Medicare+
Choice plans because the Current Population Survey does not distinguish
between these types of Medicare coverage. ?Medicare with other supplemental
coverage? includes those with individually purchased Medigap and Medicaid.
?Other? includes those without Medicare but receiving employer- sponsored
health insurance, Medicaid, or health care through the Departments of
Defense or Veterans Affairs.

Source: GAO analysis of Bureau of the Census? 2000 Current Population
Survey, March Supplement.

The health care needs and costs of retired Americans are likely to grow
significantly as the baby boom generation nears retirement age. As shown in
figure 2, the number of individuals aged 55 to 64 will increase by 75
percent by 2020, and the number of people aged 65 or older will double by
2030. The sheer numbers of baby boomers and greater numbers of people
reaching age 85 and beyond are expected to have a dramatic effect on the
number of people needing long- term and other health care services

Public 15% Private individual

12% Uninsured 17%

Employer sponsored 57%

Medicare with employer supplemental coverage 32%

Medicare with other supplemental coverage

Medicare without supplemental coverage Uninsured 1% Other

(without Medicare) 36% 31%

1%

Aged 65 or older 23.4 million Aged 55 to 64

4.0 million

Page 6 GAO- 02- 178T

because the prevalence of disabilities and dependency increases with age.
Projections of the number of disabled elderly individuals who will need such
care range from 2 to 4 times the current number.

Figure 2: Baby Boom Generation Will Greatly Increase the Populations Aged 55
to 64 and 65 or Older

Source: Bureau of the Census, Projections of the Total Resident Population
by 5- Year Age Groups and Sex With Special Age Categories: Middle Series,
selected years 2000 to 2030 (Washington, D. C.: Jan. 2000).

Insurance coverage, and access to effective preventive, acute, and longterm
care, is particularly important for maintaining the health of older adults.
For those individuals needing nursing home or other extensive continuing
care, the costs can be substantial. On average, nursing home care costs an
individual about $55,000 annually. Individuals needing care and their
families pay a significant portion of long- term care costs out- ofpocket.

37 42

35 24

70 54 40 35

0 10

20 30

40 50

60 70

80 2000 2010 2020 2030

Aged 55 to 64 Aged 65 or older

Number of individuals (in millions)

Page 7 GAO- 02- 178T

Employer sponsorship of retiree health benefits continues to erode, with
about one- third of large employers and few small employers currently
offering health benefits to their retirees. Even when employers continue to
offer insurance, many have reduced coverage by tightening eligibility
requirements, increasing the share of premiums retirees pay for health
benefits, or increasing copayments and deductibles. Increasing cost
pressures on employers, such as rising premiums and a weakening economy,
suggest that erosion in retiree health benefits may continue.

The availability of employer- sponsored retiree health benefits has declined
during the last decade. Two widely cited surveys- by William M. Mercer,
Incorporated, and the Kaiser Family Foundation and Health Research and
Educational Trust (Kaiser/ HRET)- indicated that nearly half of large
employers offered retiree health benefits in the early 1990s, 3 but their
most recent surveys reported that this proportion has declined to about one-
third of large employers. 4 (See fig. 3.) The decline in large employers
offering retiree health benefits has continued in recent years, despite
several years during the latter part of the 1990s experiencing a strong
economy and relatively small premium increases. Large employers are less
likely to offer these benefits to Medicare- eligible retirees than to
retirees under age 65. These surveys also found that large employers are
more likely to sponsor health insurance for retirees than are small firms,
with fewer than 10 percent of the latter doing so.

3 During the early 1990s, accounting rules adopted by the Financial
Accounting Standards (FAS) Board, combined with rising premiums for health
insurance, led many employers to reexamine their sponsorship of retiree
health benefits. FAS 106, adopted in 1993, required employers to report
annually on the liability represented by the promise to provide retiree
health benefits to current and future retirees. While FAS 106 did not affect
an employer?s cash flow, some companies have said that FAS 106 requirements
led to reductions in reported income and shareholder equity and have been a
reason for reducing retiree health benefits.

4 The Mercer survey considers a large employer as one with 500 or more
employees. For the Kaiser/ HRET survey, a large employer is one with 200 or
more employees. Employer- Sponsored

Retiree Health Benefits Continue to Erode

Employer Sponsorship of Retiree Health Benefits Has Declined

Page 8 GAO- 02- 178T

Figure 3: Decreasing Proportion of Large Employers Offer Retiree Health
Benefits

Notes: The Mercer data represent retiree health benefits offered by
employers with at least 500 employees, whereas the Kaiser/ HRET data
represent employers with at least 200 employees.

The Mercer data represent the combined percentages of employers that
reported offering health benefits to most retirees and to selected retirees,
which Mercer reports separately; the Kaiser/ HRET survey does not
distinguish between employers offering insurance to most or selected
retirees.

The narrower dashed lines between 1993 and 1997 for the Kaiser/ HRET survey
(at that time conducted by KPMG Peat Marwick) indicate that the survey did
not report on employer sponsorship of retiree health benefits in 1994 and
1996.

Sources: William M. Mercer, Incorporated and Foster Higgins (which conducted
the survey until 1997 when Foster Higgins merged with Mercer) employer
benefit surveys, 1994 to 2000; and KPMG Peat Marwick and Kaiser/ HRET
employer benefit surveys, 1991 to 2001.

While fewer employers sponsor retiree health benefits now, the percentage of
retirees obtaining health benefits through an employer has remained
relatively stable in recent years. According to our analysis of the

34 46

36 50

29 44

0 10

20 30

40 60

50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Kaiser/ HRET survey Mercer survey (for retirees under age 65) Mercer survey
(for retirees 65 or older)

Percentage

Page 9 GAO- 02- 178T

Current Population Survey, over half of retirees aged 55 to 64 and about
one- third of retirees 65 or older had employer- sponsored coverage in 1999.
5 (See fig. 4.) Since 1994, the percentage of both retirees aged 55 to 64
and those 65 or older with employer- sponsored coverage has varied from year
to year by only 1 or 2 percentage points. This stability in coverage may
exist in part because employers tend to reduce coverage for future rather
than current retirees.

Figure 4: Percentage of Retirees With Employer- Sponsored Health Benefits
Has Remained Relatively Stable

Source: GAO analysis of Current Population Survey, March Supplements 1995
through 2000.

Some employers that continue to offer retiree health coverage have adopted
several strategies to limit their liability for these costs. These
strategies include the following:

 Restricting eligibility. According to Mercer?s data, among the 36 percent
of large employers sponsoring health benefits for retirees younger than 65
in

5 About one- third of retirees aged 55 to 64 and about 20 percent of
retirees 65 or older with employer- sponsored health insurance have coverage
through a spouse or other related individual who may be working or retired.
Employers Are Restricting

Eligibility and Increasing Retirees? Costs

0 10

20 30

40 50

60 70

1994 1995 1996 1997 1998 1999

Aged 55 to 64 Aged 65 or older

Percentage

Page 10 GAO- 02- 178T

2000, about 5 percent did so for only selected employees. The remaining 31
percent offered retiree health benefits to most retirees. 6

 Increasing retirees? share of premiums. The Mercer survey found that as
many as one- fourth of employers increased retirees? share of premium
contributions within the past 2 years. About 40 percent of large employers
that offer health benefits to retirees younger than 65 require those
retirees to pay the entire premium- an increase of about 8 percentage points
since 1997.

 Increasing retirees? out- of- pocket costs. Both the Mercer and Kaiser/
HRET surveys found that more than 10 percent of employers recently increased
retirees? potential out- of- pocket costs for deductibles, coinsurance, and
copayments. In particular, the Kaiser/ HRET survey reported that one- third
of employers have increased the amount that retirees pay for prescription
drugs within the past 2 years.

 Limiting future commitments. The 1999 Kaiser/ HRET survey found that in
the previous 2 years 35 percent of large firms offering retiree health
benefits limited their future financial commitment by implementing a cap on
projected contributions for these benefits. Benefit consultants we
interviewed stated that employers typically set their cap prospectively at a
level higher than current spending, and if spending approaches the cap, they
can either reduce benefits to stay within the cap or raise the cap.

Some employers are considering, but few have implemented, a more fundamental
change that would shift retiree health benefits to a defined contribution
plan. Under a defined contribution plan, an employer directly provides each
retiree with a fixed amount of money to purchase insurance coverage, either
in the individual market or through a choice of plans offered by the
employer. The individual is then responsible for the difference between the
employer?s contribution and the selected plan?s total premium. Benefit
consultants have reported that many employers would prefer to move toward a
defined contribution approach. However, several issues, such as retirees?
readiness to assume responsibility for managing their own health benefits
and contractual bargaining agreements with union plans, could limit
employers? ability to make such a fundamental change.

6 The proportion of large employers- those with 500 or more employees-
offering retiree health benefits to most retirees declined 8 percentage
points between 1997 and 2000. According to Mercer officials, the percentage
of firms offering benefits to most retirees represents firms making these
benefits available to employees who were retiring at the time of the survey.

Page 11 GAO- 02- 178T

Increasing economic pressures and evolving demographic trends could lead
employers to reevaluate their provision of retiree health benefits and could
result in further erosion of benefits. The following are contributing
factors:

 Health insurance premium increases, which were less than the general
inflation rate from 1995 to 1997, began to rise faster than general
inflation in 1998 and were about 6 or 8 percentage points above the general
inflation rate in 2001.

 The weakening economy may lead employers to reevaluate employee salary and
benefit levels. Specifically, the nation?s gross domestic product increased
at an annual rate of 2.4 percent in the second quarter of 2001, slower than
the 4.2 percent and 5.0 percent growth in 1999 and 2000. Also, the nation?s
unemployment rate has gradually but steadily increased to 4.9 percent as of
September 2001 after reaching a historic low of 3.9 percent 1 year earlier.
Many economists expect a further weakening of the economy, at least in the
short term, as a result of the September 11 terrorist attacks.

 The aging of the baby boom generation will increase the proportion and
number of Americans of retirement age, leading some employers to have a
larger number of retirees for whom they provide coverage but comparatively
fewer active workers to subsidize these benefits.

Other factors have increased employers? uncertainty about their future role
in providing retiree health benefits, but their implications are less clear.
For example, if a proposed outpatient prescription drug benefit was added to
Medicare, some employers could redesign their coverage to supplement the
Medicare benefit, while others could choose to reduce or eliminate drug
coverage. General workforce trends could also affect the availability of
retiree health benefits. While some anecdotal information suggests
increasing mobility of the workforce with fewer long- term job attachments,
the data on this trend are mixed. Nonetheless, the percentage of workers
with 20 or more years with a current employer has declined in recent decades
and could indicate that fewer employees are likely to be eligible for
retiree benefits that are often based on longevity with an employer. 7

In addition, a March 2001 ruling in the Third U. S. Circuit Court of Appeals
found an employer- Erie County, Pennsylvania- in violation of the Age

7 See David Rajnes, ?A 21st Century Update on Employee Tenure,? EBRI Notes,
Employee Benefits Research Institute (Mar. 2001). Increasing Cost Pressures

May Further Erode Employer- Sponsored Health Coverage

Page 12 GAO- 02- 178T

Discrimination in Employment Act (ADEA) 8 because it offered a benefit for
Medicare- eligible retirees that the District Court found to be inferior to
the benefit offered retirees not yet eligible for Medicare. 9 To what extent
the decision will lead to limitations on employers? flexibility in designing
their retiree health benefits, and therefore discourage employers from
offering such benefits, remains uncertain. This will depend, in part, on
whether other circuit courts adopt similar interpretations of ADEA and which
differences in benefits employers provide to non- Medicare- eligible and
Medicare- eligible retirees are regarded as potential age- discrimination
violations. The Equal Employment Opportunity Commission (EEOC) had initially
said it would consider employers? reducing or eliminating retiree health
benefits on the basis of a person?s age or Medicare eligibility an ADEA
violation. However, recognizing concerns raised by employers and unions that
this decision could have adverse consequences on the availability of retiree
health benefits, EEOC rescinded this policy statement on August 17, 2001. It
is considering alternative policies to ensure that health benefits provided
to Medicare- eligible retirees are consistent with ADEA without adversely
affecting employers? sponsorship of retiree health benefits.

At an age when their health care needs are likely to grow, retirees who lose
access to employer- sponsored coverage may face limited coverage
alternatives, and those who are unable to obtain coverage may do without or
begin to rely on public programs. Some federal laws guarantee access to
alternative sources of coverage to both retirees under 65 and those eligible
for Medicare; but these options may be costly or limited, particularly for
individuals in poor health. A problem apart from whether employer- provided
retiree health coverage is available is the potential financial burden of
long- term care. Medicare and the private insurance available to most
retirees do not typically cover costs of long- term care services that are
increasingly needed as the prevalence of disability grows with advancing
age. Thus, paying for these services may present a

8 29 U. S. C. sect. 621- 633a. ADEA prohibits employers from discriminating
against individuals aged 40 or older with respect to compensation, terms,
conditions, or privileges of employment.

9 Erie County Retirees Association v. County of Erie, 220 F. 3d 193 (3d Cir.
2000) cert. denied, 69 U. S. L. W. 3409 (U. S. Mar. 5, 2001) (No. 00- 906).
The Third Circuit has jurisdiction for Pennsylvania, New Jersey, Delaware,
and the Virgin Islands. Alternative Sources of

Health and Long- Term Care Coverage May Be Costly and Limited

Page 13 GAO- 02- 178T

significant and growing financial burden for many individuals and for public
health care programs.

Employers have been the predominant source of health coverage for most
working adults. Although more than half of retirees report that they intend
to continue working, the jobs they take are often part- time, or they are
self- employed, and neither situation is likely to offer health benefits.
Some individuals retire because of declining health- more than one- fifth of
retirees aged 55 to 64 report being in fair or poor health- which further
highlights their need for health insurance coverage. Therefore, even in
retirement, over half of those aged 55 to 64 in 1999 continued to rely on
health insurance either from their former employer or their spouse?s
employer. However, retirees without access to employer- sponsored coverage
either seek an alternative source of health insurance or become uninsured.

Individuals whose jobs provided health benefits that ended at retirement may
continue temporary coverage through their employer for up to 18 months under
provisions enacted as part of COBRA. 10 But COBRA coverage may be an
expensive alternative because the employer is not required to pay any
portion of the premium and may charge the enrollee up to 102 percent of the
group rate.

The individual insurance market may be an option for some retirees until
they become eligible for Medicare, but this alternative can be costly as
well. 11 Unlike the employer- sponsored market, where the price for coverage
is based on risk characteristics of the entire group, premium prices in the
individual insurance market in most states are based on the characteristics
of each applicant, such as age, gender, geographic area,

10 29 U. S. C. sect. 1161- 1169 and 26 U. S. C. sect. 4980B. COBRA coverage can be
extended for an additional 11 months for most individuals who qualify for
disability under the Social Security Act; however, they may be charged up to
150 percent of the group rate. Employers with fewer than 20 employees are
not required to offer COBRA coverage.

11 About 7 percent of the population aged 55 to 64 relied on the individual
insurance market for their primary source of coverage in 1999. Retirees Aged
55 to 64 May

Find Alternative Sources of Coverage Costly

Page 14 GAO- 02- 178T

tobacco use, and health status. 12 For example, premiums charged a 60year-
old man may be 2- 1/ 2 times to nearly 4 times higher than those charged a
30- year- old man. For eligible individuals leaving group coverage, the
Health Insurance Portability and Accountability Act of 1996 (HIPAA)
guarantees access to at least two individual insurance policies or an
alternative such as a state high- risk pool, regardless of health status and
without exclusions. 13 Nevertheless, the premiums faced by retirees eligible
for HIPAA protections, as well as by other retirees who must rely on the
individual insurance market for coverage, may be substantially higher than
those charged to healthier or younger individuals and may be
costprohibitive. This is because retirees are more likely than working
adults of the same age to be in fair or poor health. Unless they are
guaranteed coverage by HIPAA, individuals with serious health conditions
such as heart disease are virtually always denied coverage, and those with
other, non- life- threatening conditions such as chronic back pain also may
be excluded from coverage. Under a group plan, these individuals cannot be
denied coverage, nor can they be required to pay a higher premium than
others in the plan, and specific conditions can only be temporarily excluded
from coverage.

Although Medicare is the primary source of coverage for retirees 65 years or
older, gaps in Medicare coverage mean this population may have high out- of-
pocket costs for health care. For example, Medicare does not typically cover
outpatient prescription drugs, and it primarily covers acute care but not
long- term hospital and skilled nursing facility stays. Most Medicare-
eligible retirees obtain supplemental coverage to pay some of the costs not
covered by Medicare. Nearly one- third of Medicare- eligible

12 About 20 states have passed legislation that limits the amount individual
market insurers can vary premium rates or the characteristics they may use
to vary these rates, but substantial variation exists among these states. A
few states, such as New Jersey, use a rating practice known as community
rating which does not allow rates to vary for individual characteristics,
while other states allow variation for selected characteristics but limit
the range in variation.

13 29 U. S. C. sect. 1181- 1191, 26 U. S. C. sect. 9801- 9803. To be eligible for
HIPAA?s group- to- individual portability provision, an individual must have
had at least 18 months of creditable coverage with no break of more than 63
consecutive days; must have exhausted any COBRA or other continuation
coverage available under a similar state program; must not be eligible for
any other group coverage, Medicare, or Medicaid; and must not have lost
group coverage because of nonpayment of premiums by the individual or
because of fraud. Depending on the option states choose to implement this
requirement, coverage may be provided by insurance carriers, through state
high- risk insurance pool programs, or in other ways. Gaps in Medicare

Coverage Lead Many Retirees Aged 65 or Older to Seek Supplemental Coverage,
Which Can Be Costly and Limited

Page 15 GAO- 02- 178T

retirees obtain this supplemental coverage from an employer, and most other
Medicare beneficiaries seek other sources of supplemental coverage, such as
Medigap or Medicaid, or participate in Medicare+ Choice plans, which
typically have low cost- sharing requirements and cover services such as
prescription drugs that traditional Medicare does not cover.

Retirees can purchase private individual Medigap coverage, but this coverage
may cost more or be less comprehensive than typical employersponsored health
coverage. Medigap policies are widely available to 65- year- old Medicare
beneficiaries during an initial 6- month open- enrollment period guaranteed
by federal law. 14 Beneficiaries can select from among 10 standard policy
types. Most purchasers buy mid- level policies that cover Medicare?s cost-
sharing requirements and selected other benefits, but not prescriptions.
Relatively few Medigap purchasers (8 percent of those with a standardized
Medigap policy) have bought the standardized plans that include prescription
drug coverage. Whether they include prescription drug coverage or not,
Medigap policies can be expensive- the average annual Medigap premium per
covered life was more than $1,300 in 1999- and still leave retirees with
significant out- of- pocket costs. Medigap policies that provide
prescription drug coverage average more than $1,600 compared with about
$1,150 for standardized plans without prescription drug coverage. However,
even the standardized coverage for prescription drugs pays less than half of
beneficiaries? drug costs, and catastrophic prescription drug expenses are
not covered. 15

Access to Medigap policies may be more limited for beneficiaries who are not
in the initial open- enrollment period or otherwise eligible for federally
guaranteed access under certain other circumstances. For example, federal
law provides certain guarantees to ensure an individual has access to
Medigap insurance if an employer eliminates or reduces coverage. In these
cases, the individuals are guaranteed access to 4 of the 10

14 42 U. S. C. sect. 1395( s)( 2)( A). 15 The standardized Medigap prescription
drug benefit pays less than half of beneficiaries? costs and limits payments
to $1, 250 or $3,000 per year, depending on which plan is purchased. For
more information on costs and limits of Medigap policies, see Medigap
Insurance: Plans Are Widely Available but Have Limited Benefits and May Have
High Costs (GAO- 01- 941, July 31, 2001).

Page 16 GAO- 02- 178T

standardized Medigap policies, regardless of their health status, but none
of these 4 guaranteed plans includes prescription drug coverage. 16

Although long- term care is a growing need for the retiree population,
Medicare and private insurance (through employers or purchased individually)
play a small role in financing this care. Public programs, primarily
Medicaid, and individuals? out- of- pocket payments are the primary funding
sources for nursing home and home and communitybased care for those needing
long- term care. In 1999, spending for nursing home and home health care was
about $134 billion. Medicaid, which is generally only available after
individuals have become nearly impoverished by spending down their assets,
paid the largest share of these costs- nearly 44 percent. Individuals
needing care and their families paid for almost 25 percent of these
expenditures out- of- pocket. Medicare has traditionally primarily covered
acute care, but during the 1990s it increasingly covered some long- term
home health care services. In 1999, Medicare paid nearly 14 percent of
nursing home and home health care. (See fig. 5.)

16 42 U. S. C. sect. 1395( S)( 3)( C)( i). Federal law also guarantees Medigap
coverage for certain other individuals, including those enrolled in a
Medicare+ Choice plan as an alternative to the traditional Medicare program
but whose selected plan withdraws from their area or who decided to
disenroll within 1 year. See 42 U. S. C. sect.sect. 1395( S)( 3)( B)( ii) and (B)(
v). Retirees? Long- Term Health

Care Needs Typically Are Not Covered by Medicare or Private Insurance

Page 17 GAO- 02- 178T

Figure 5: Percentage of Expenditures for Nursing Home and Home Health Care,
by Source of Payment, 1999

Notes: Percentages do not add to 100 because of rounding. This figure also
includes Medicaid expenditures for home and community- based services, which
are considered as part of ?other personal health care? in the Health Care
Financing Administration?s (HCFA) national health accounts. HCFA is now
known as the Centers for Medicare and Medicaid Services.

Source: Department of Health and Human Services, HCFA, Office of the
Actuary, National Health Statistics Group, Personal Health Care
Expenditures, 2001.

While private long- term care insurance is viewed as a possible way to
reduce catastrophic financial risk for the elderly and relieve some of the
financing burden now shouldered by public programs, private insurance
(through both long- term care insurance and traditional health insurance)
accounted for a small share- 10 percent in 1999- of long- term care
spending. Most long- term care insurance is purchased individually, with
premiums depending on the beneficiary?s age at purchase. Premiums for a 65-
year- old are typically about $1,000 per year and may be much higher for
more generous coverage or older buyers.

The private long- term care insurance market remains small, and few
employers offer this insurance as a benefit to employees. Less than 10

2.9% 4.6%

10.3% 13.7%

24.6% 43.8%

Other public sources Other private sources

Private insurance Medicare Out- of- pocket Medicaid

Page 18 GAO- 02- 178T

percent of individuals 65 or older and an even lower percentage of those
younger than 65 have purchased long- term care insurance. Most private long-
term care insurance is bought by individuals, but some employers offer
employees a voluntary group policy option for long- term care insurance.
Only about one- fourth of long- term care insurance policies sold as of 2000
were group offerings, according to the American Council of Life Insurers.
Even when employers offer long- term care insurance, they usually do not
subsidize any of the costs. In 2000, the Congress passed legislation to
offer optional group long- term care insurance to federal employees,
retirees, and their relatives beginning by fiscal year 2003, with eligible
individuals paying the full premium for the insurance. 17 This initiative
will likely establish the largest group offering of long- term care
insurance and could encourage further expansion of this market.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions that you or Members of the Subcommittee may have.

For more information regarding this testimony, please contact Kathryn G.
Allen at (202) 512- 7118 or John Dicken at (202) 512- 7043. Susan Anthony
and Carmen Rivera- Lowitt also made key contributions to this statement.

17 P. L. 106- 265, ?The Long- Term Care Security Act,? was enacted on
September 19, 2000. Contacts and

Acknowledgments

Page 19 GAO- 02- 178T

Medigap Insurance: Plans Are Widely Available but Have Limited Benefits and
May Have High Costs (GAO- 01- 941, July 31, 2001).

Medicare: Cost- Sharing Policies Problematic for Beneficiaries and Program
(GAO- 01- 713T, May 9, 2001).

Retiree Health Benefits: Employer- Sponsored Benefits May Be Vulnerable to
Further Erosion (GAO- 01- 374, May 1, 2001).

Long- Term Care: Baby- Boom Generation Increases Challenge of Financing
Needed Services (GAO- 01- 563T, Mar. 27, 2001).

Medigap: Premiums for Standardized Plans That Cover Prescription Drugs (GAO/
HEHS- 00- 70R, Mar. 1, 2000).

Private Health Insurance: Employer Coverage Trends Signal Possible Decline
in Access for 55- to 64- Year- Olds (GAO/ T- HEHS- 98- 199, June 25, 1998).

Private Health Insurance: Declining Employer Coverage May Affect Access for
55- to 64- Year- Olds (GAO/ HEHS- 98- 133, June 1, 1998).

Retiree Health Insurance: Erosion in Retiree Health Benefits Offered by
Large Employers (GAO/ T- HEHS- 98- 110, Mar. 10, 1998).

Retiree Health Insurance: Erosion in Employer- Based Health Benefits for
Early Retirees (GAO/ HEHS- 97- 150, July 11, 1997).

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