Retiree Health Benefits: Majority of Sponsors Continued to Offer 
Prescription Drug Coverage and Chose the Retiree Drug Subsidy	 
(31-MAY-07, GAO-07-572).					 
                                                                 
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 resulted in options for sponsors of employment-based	 
prescription drug benefits, such as a federal subsidy		 
payment--the retiree drug subsidy (RDS)--when sponsors provide	 
benefits meeting certain MMA requirements to Medicare-eligible	 
retirees. The MMA required GAO to conduct two studies on trends  
in employment-based retiree health coverage and the MMA options  
available to sponsors. The first study, Retiree Health Benefits: 
Options for Employment-Based Prescription Drug Benefits under the
Medicare Modernization Act (GAO-05-205), was published February  
14, 2005. In this second study, GAO determined which MMA	 
prescription drug coverage options sponsors selected, the factors
they considered in selecting these options, and the effect these 
decisions may have on the provision of employment-based health	 
benefits for retirees. GAO identified options that sponsors	 
selected using data from employer benefit surveys and the Centers
for Medicare & Medicaid Services (CMS), the federal agency that  
administers Medicare. To obtain sponsors' views about the factors
they considered and the effects of their decisions, GAO also	 
interviewed private and public sector sponsors and experts.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-572 					        
    ACCNO:   A70069						        
  TITLE:     Retiree Health Benefits: Majority of Sponsors Continued  
to Offer Prescription Drug Coverage and Chose the Retiree Drug	 
Subsidy 							 
     DATE:   05/31/2007 
  SUBJECT:   Beneficiaries					 
	     Elderly persons					 
	     Employee benefit plans				 
	     Health insurance					 
	     Health surveys					 
	     Medicare						 
	     Prescription drugs 				 
	     Program evaluation 				 
	     Retirement benefits				 
	     Medicare Part D					 

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GAO-07-572

   

     * [1]Results in Brief
     * [2]Background

          * [3]Private Supplemental Insurance for Medicare Beneficiaries
          * [4]The MMA Prescription Drug Benefit
          * [5]Options Available to Sponsors under Medicare Part D

     * [6]Majority of Sponsors Reported Continuing to Offer Prescripti

          * [7]Majority of Sponsors Reported Accepting the RDS
          * [8]Smaller Percentages of Sponsors Reported Selecting MMA Optio

     * [9]Sponsors Considered a Variety of Factors When Selecting MMA

          * [10]Sponsors Considered Ability to Offer the Same Retiree Health
          * [11]Sponsors Considered Their Ability to Save on Costs
          * [12]Sponsors Considered the Ease of Explaining MMA Options to Re
          * [13]Sponsors Considered the Administrative Requirements Associat
          * [14]Sponsors Considered the Extent of Available Information Rega
          * [15]Public Sponsors May Have to Consider Unique Factors

     * [16]In the Short Term, Sponsors' Decisions Regarding MMA Options
     * [17]Agency and Other External Comments
     * [18]Appendix I: Information on Employment-Based Retiree Health C

          * [19]Employer Benefit Surveys Showed a Decline, then a Leveling O
          * [20]Percentage of Medicare-Eligible Retirees with Employment-Bas
          * [21]Employer Strategies Implemented to Mitigate Increased Costs

               * [22]Sponsors Have Limited Retirees' Eligibility for Benefits
               * [23]Sponsors Have Limited Their Contributions to Retirees'
                 Healt
               * [24]Sponsors Have Increased Retirees' Copayments,
                 Coinsurance, a

     * [25]Appendix II: Alternative Approaches to Providing Retiree Hea
     * [26]Appendix III: Scope and Methodology

          * [27]Methodology by Objective
          * [28]Surveys of Employment-Based Health Benefits

               * [29]Kaiser/HRET
               * [30]Mercer
               * [31]Kaiser/Hewitt
               * [32]Segal

          * [33]Federal Surveys

               * [34]Current Population Survey
               * [35]Medicare Current Beneficiary Survey
               * [36]Medical Expenditure Panel Survey

          * [37]CMS Data
          * [38]Interviews with Sponsors and Experts

     * [39]Appendix IV: Comments from the Centers for Medicare & Medica
     * [40]Appendix V: GAO Contact and Staff Acknowledgments

          * [41]Contact
          * [42]Acknowledgments

               * [43]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

May 2007

RETIREE HEALTH BENEFITS

Majority of Sponsors Continued to Offer Prescription Drug Coverage and
Chose the Retiree Drug Subsidy

GAO-07-572

Contents

Letter 1

Results in Brief 5
Background 6
Majority of Sponsors Reported Continuing to Offer Prescription Drug
Coverage and Accepting the RDS 12
Sponsors Considered a Variety of Factors When Selecting MMA Prescription
Drug Coverage Options 16
In the Short Term, Sponsors' Decisions Regarding MMA Options Resulted in
Benefits Remaining Relatively Unchanged, but over the Longer Term the
Effect Is Unclear 23
Agency and Other External Comments 25
Appendix I Information on Employment-Based Retiree Health Coverage,
Updated since GAO's 2005 Report 29
Appendix II Alternative Approaches to Providing Retiree Health Coverage
Suggested by Sponsors and Experts 39
Appendix III Scope and Methodology 44
Appendix IV Comments from the Centers for Medicare & Medicaid Services 53
Appendix V GAO Contact and Staff Acknowledgments 57

Tables

Table 1: Number and Percentage of Sponsors Approved for the RDS, and
Percentage of Retirees Affected, by Sponsor Type, for 2006 and 2007 15
Table 2: Alternative Approaches to Providing Employment-Based Retiree
Health Coverage Described by Sponsors and Experts 40

Figures

Figure 1: Mercer Survey Results--Percentage of Employers with 500 or More
Employees Offering Health Benefits to Medicare-Eligible Retirees,
1993-2006 30
Figure 2: Kaiser/HRET Survey Results--Percentage of Employers with 200 or
More Employees Offering Health Benefits to All Retirees and to
Medicare-Eligible Retirees, 1991-2006 32
Figure 3: Percentage of Medicare-Eligible Retirees and Their Insured
Dependents with Employment-Based Health Benefits, by Age Group, 1995-2005
35

Abbreviations

CMS Centers for Medicare & Medicaid Services
CPS Current Population Survey
FEHBP Federal Employees Health Benefits Program
GASB Governmental Accounting Standards Board
HRA health reimbursement arrangement
HRET Health Research and Educational Trust
HSA health savings account
MA-PD Medicare Advantage prescription drug MCBS Medicare Current
  Beneficiary Survey
MEPS Medical Expenditure Panel Survey
MMA Medicare Prescription Drug, Improvement, and Modernization Act
  of 2003
MSA medical savings account
OPM Office of Personnel Management
PDP prescription drug plan
RDS retiree drug subsidy
VEBA voluntary employees' beneficiary association

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United States Government Accountability Office

Washington, DC 20548

May 31, 2007

Congressional Committees

Before 2006, Medicare, the federal program that finances health care
benefits for nearly 43 million elderly and disabled beneficiaries, did not
generally provide coverage for outpatient prescription drugs. If Medicare
beneficiaries had such coverage at all, it was typically obtained outside
of the program--for example, through policies with drug coverage that
supplemented Medicare or through Medicaid. In particular, Medicare
beneficiaries who were retired could enroll in health plans with
prescription drug coverage offered through former employers or other
employment-based groups, such as unions. To help Medicare beneficiaries
with increasing prescription drug costs and encourage employment-based
health care coverage, especially for prescription drug coverage for
retirees, Congress passed the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA). Among its provisions, the MMA established
an outpatient prescription drug benefit, known as Medicare Part D,
beginning January 1, 2006.1 The MMA also resulted in various options to
encourage retiree health benefit sponsors2 to offer prescription drug
benefits to retired Medicare beneficiaries.

Specifically, among the options resulting from the MMA, which in this
report we refer to as MMA options, sponsors can

           o offer health plans for retirees that provide comprehensive
           prescription drug coverage, which retirees can use in lieu of
           Medicare Part D; sponsors with plans that offer prescription drug
           benefits meeting certain MMA requirements will receive a federal
           subsidy payment, known as the retiree drug subsidy (RDS);
			  
1Pub. L. No. 108-173, S101, 117 Stat. 2066, 2071-2152.

2In this report, we use the term sponsor to refer to a sponsor of
employment-based retiree group health coverage, including private sector
employers; public sector employers (federal, state, or local governments);
sponsors of church plans; and sponsors of plans (including multiemployer
plans) offered under collectively bargained agreements. In some instances,
when reporting data from surveys of various sponsors, we use the term
employer instead of sponsor to describe a specific subset of sponsors.			  

           o offer health plans for retirees that supplement--or "wrap
           around"--retirees' Part D prescription drug benefit;

           o offer their own Medicare Part D plan;

           o contract with private plans that provide Medicare Part D
           benefits; or

           o pay for some or all of the Part D premiums for their eligible
           retirees.

           The MMA required that we conduct two studies on trends in
           employment-based retiree health coverage and the MMA options
           sponsors selected for providing employment-based prescription drug
           coverage for retirees.3 In our first study, published in 2005, we
           reported that the percentage of employers offering retiree health
           coverage had declined beginning in the early 1990s but had leveled
           off by the early 2000s.4 We also reported that many sponsors had
           not made final decisions about which MMA prescription drug options
           they would choose for their Medicare-eligible retirees,5 although
           many sponsors were considering accepting the RDS as a primary
           option. In this study, we are reporting on (1) which MMA
           prescription drug coverage options sponsors selected, (2) the
           factors they considered in selecting these options, and (3) the
           effect these decisions may have on sponsors' provision of
           employment-based health benefits for retirees. The MMA also
           required us to report information on employment-based retiree
           health coverage, including information updated since our first
           study. We are including this information in appendix I. In
           addition, the MMA required us to describe alternative approaches
           for the provision of employment-based retiree health coverage that
           sponsors and others say may help maintain, expand, or improve upon
           retiree health coverage. We are including this information in
           appendix II.

           To determine which MMA prescription drug coverage options sponsors
           selected, we reviewed survey data collected by benefit consulting
           firms on the options that sponsors reported selecting for 2006 and
           the options that sponsors reported that they planned to select for
           2007. The surveys we reviewed included a survey conducted by
           Mercer Health & Benefits of employers--including large employers,
           defined as those with at least 500 employees--that offered
           employment-based health benefits. The Mercer survey, which was
           based on a random sample of private and public employers, can be
           projected nationwide.6 We also reviewed data from a survey
           conducted by the Kaiser Family Foundation and Hewitt Associates
           for a nonrandom sample of large private sector employers--those
           with 1,000 or more employees.7 We also reviewed one survey of
           multiemployer plans8 and one survey of state and local public
           sector sponsors conducted by The Segal Company.9 The data from the
           surveys provided us with information on sponsors' reported
           selections for 2006 and their plans pertaining to the MMA options
           for 2007. In addition, we obtained and analyzed data on the number
           and characteristics of sponsors that were approved for the RDS for
           these 2 years. We obtained these data from the Centers for
           Medicare & Medicaid Services (CMS), the federal agency that
           administers Medicare and that is responsible for implementing and
           administering the RDS program.

3MMA, S111, 117 Stat. 2174-2176.

4See GAO, Retiree Health Benefits: Options for Employment-Based
Prescription Drug Benefits under the Medicare Modernization Act,
[44]GAO-05-205 (Washington, D.C.: Feb. 14, 2005).

5For this report, we specify when information is for Medicare-eligible
retirees (primarily those aged 65 or older) and when it is for retirees
under the age of 65. If information is not specific to Medicare-eligible
retirees or to those under the age of 65, we use the term retirees to
refer to those that may be Medicare-eligible, under 65, or both.

6Mercer Health & Benefits, National Survey of Employer-Sponsored Health
Plans: 2006 Survey Report (New York, N.Y.: Mercer Health & Benefits, LLC,
2007).

7Frank McArdle, Amy Atchison, and Dale Yamamoto, Hewitt Associates; and
Michelle Kitchman Strollo and Tricia Neuman, The Kaiser Family Foundation,
Retiree Health Benefits Examined: Findings from the Kaiser/Hewitt 2006
Survey on Retiree Health Benefits (Menlo Park, Calif.: The Henry J. Kaiser
Family Foundation; Lincolnshire, Ill.: Hewitt Associates, December 2006).

8A multiemployer plan is a pension, health, or other employee benefit plan
to which more than one employer is required to contribute; that is
maintained under one or more collective bargaining agreements between one
or more employee organizations, such as a union, and more than one
employer; and that satisfies such other requirements the Secretary of
Labor may prescribe by regulation. 29 U.S.C. S 1002(37) (2000).

9The Segal Company, Results of the Segal Survey of Multiemployer Health
Funds' Response to the Initial Availability of Medicare Part D Coverage
(New York, N.Y.: Spring 2006), and Results of the Segal Medicare Part D
Survey of Public Sector Plans (New York, N.Y.: Summer 2006).

           To describe both the factors that sponsors considered in selecting
           the MMA options and the effect that sponsors' decisions about the
           MMA options may have on the provision of health benefits for
           retirees, we relied on the Mercer and Kaiser/Hewitt surveys of
           private and public sector employers.10 We reviewed documents from
           the literature, including CMS documents, on the factors that
           sponsors may consider in selecting the MMA options. We also
           interviewed officials from 13 of the 15 private and public
           sponsors of retiree health benefits that we reported on in 2005,
           including the Office of Personnel Management (OPM), which
           administers the Federal Employees Health Benefits Program
           (FEHBP).11 We also interviewed 2 sponsors that chose to offer
           their own Medicare Part D plan in 2006 instead of implementing the
           RDS or another MMA option. We did not interview these sponsors for
           our 2005 report. In addition, we interviewed several experts on
           sponsors' decisions regarding the MMA options, including experts
           from five firms providing benefit consulting services primarily
           for large public and private sector sponsors; six organizations,
           including one representing unions, one representing multiemployer
           plans, two representing large employers, and two representing
           health plans; one professional organization for actuaries; and
           other research organizations. In our interviews with sponsor
           officials and experts, we asked open-ended questions about the
           factors sponsors considered in making decisions about the MMA
           options for 2006 and future years, as well as the effect of these
           decisions on the provision of health benefits for retirees.
           Because we asked the officials and experts we interviewed
           open-ended questions, the frequency of our interviewees' responses
           is not comparable. Therefore, we report interviewees' responses
           without reporting the total number of officials or experts
           associated with each response.

           We assessed the reliability of the data from the employer benefit
           surveys, CMS, and three large federal surveys and determined that
           the data were sufficiently reliable for the purposes of our study.
           (App. III provides more detailed information on our methodology.)
           We performed our work from April 2006 through May 2007 in
           accordance with generally accepted government auditing standards.
			  
10Mercer Health & Benefits, National Survey of Employer-Sponsored Health
Plans: 2005 Survey Report (New York, N.Y.: Mercer Health & Benefits, LLC,
2006), and Kaiser/Hewitt, Retiree Health Benefits Examined: Findings from
the Kaiser/Hewitt 2006 Survey on Retiree Health Benefits.

11In addition to OPM, the 13 sponsors included 10 Fortune 500 employers
and two state retirement systems.

           Results in Brief

           According to survey data we reviewed, a majority of retiree health
           benefit sponsors reported that for 2006 they continued to offer
           prescription drug coverage and accepted the RDS. However, the size
           of the reported majority differed across the surveys. For example,
           the 2006 Kaiser/Hewitt survey of private sector employers with
           1,000 or more employees found that 82 percent of these employers
           continued to offer prescription drug coverage and accepted the RDS
           for 2006. Another survey, the 2006 Mercer survey of private and
           public employers, found that 51 percent of surveyed employers with
           500 or more employees continued to offer prescription drug
           coverage and accepted the RDS for 2006. Data from CMS showed that
           more than 3,900 sponsors, representing about 7 million retirees,
           were approved for the RDS for 2006. According to the surveys we
           reviewed, much smaller percentages of sponsors reported selecting
           other MMA options. For example, the percentage of sponsors that
           reported offering supplemental, or "wrap-around," coverage ranged
           from 0 to 13 percent across the surveys. For 2007, according to
           the Kaiser/Hewitt survey, 78 percent of surveyed employers
           reported that they planned to apply for the RDS for that year. CMS
           data showed that about 3,600 sponsors were approved for the RDS
           for 2007.

           Public and private sponsors we interviewed reported considering a
           variety of factors when selecting MMA prescription drug coverage
           options, including whether they could offer the same retiree
           health benefits they offered prior to the MMA and their ability to
           save on costs. In general, in order to implement most MMA options
           other than the RDS, sponsors would likely have to change the
           prescription drug benefits they offer. For example, sponsors that
           offer their own Medicare Part D plan must generally meet all CMS
           requirements for Part D plans, such as providing coverage for
           specific categories of prescription drugs. In contrast, sponsors
           that select the RDS option are able to offer the same retiree
           health benefits they offered prior to the MMA, as long as a
           sponsor's coverage remains at least actuarially equivalent to the
           standard Part D benefit. Most sponsors we interviewed told us that
           the ability to offer the same retiree health benefits they offered
           prior to the MMA was an advantage of the RDS. Sponsors also
           reported that when selecting an MMA option, they considered how
           the RDS and the other MMA options would affect their ability to
           save on costs.

           While, in the short term, sponsors' decisions regarding the
           various MMA options appear to have resulted in the provision of
           retiree health benefits remaining relatively unchanged, the effect
           over the longer term is unclear. The short-term effect of
           sponsors' decisions appears to have resulted in benefits remaining
           relatively unchanged, in part because a majority of surveyed
           sponsors reported that they continued to offer prescription drug
           benefits and accepted the RDS for the first 2 years the RDS was
           offered. In addition, according to the 2005 Mercer survey, 72
           percent of respondents reported that their decisions about the MMA
           options would have no effect on their ability to provide retiree
           health coverage. Similarly, many sponsors we interviewed told us
           that they did not make changes to their retiree health
           benefits--including decreasing coverage--in direct response to
           their decisions in selecting MMA options. Over the longer term,
           some experts we interviewed indicated that the MMA may extend the
           amount of time that sponsors offer benefits without reducing
           coverage. Other experts said that it was possible the availability
           of the Medicare Part D benefit may make it more likely that
           sponsors will stop offering prescription drug benefits for
           retirees. In addition, it is unclear to what extent sponsors will
           continue to select the same MMA option in the future. If sponsors
           that have accepted the RDS thus far select other MMA options in
           subsequent years, their future provision of retiree health
           benefits may change.

           In commenting on a draft of this report, CMS and four experts
           agreed with the report's findings.
			  
			  Background

           For retirees aged 65 and older, Medicare is typically the primary
           source of health insurance coverage. Medicare covers nearly 43
           million beneficiaries. The program covers hospital care as well as
           physician office visits and outpatient services and, effective
           January 1, 2006, prescription drugs.
			  
			  Private Supplemental Insurance for Medicare Beneficiaries

           Medicare beneficiaries may rely on private retiree health coverage
           through former employment or through individually purchased
           Medicare supplemental insurance (known as Medigap) to cover some
           or all of the costs Medicare does not cover, such as deductibles,
           copayments, and coinsurance. For 2004, the most recent data
           available, the Medicare Current Beneficiary Survey (MCBS) found
           that about one-third of Medicare-eligible beneficiaries obtained
           supplemental coverage from a former employer or union.12
           Employment-based retiree health benefits are typically offered as
           a voluntary benefit to retirees, thereby giving sponsors of these
           benefits the option of decreasing or eliminating benefits.
           However, some sponsors may be prevented from making immediate
           changes to coverage because of union contracts, for example.
           Benefit surveys have found that the percentage of employers
           offering retiree health benefits has decreased, beginning in the
           early 1990s. For example, according to a series of surveys
           conducted by Mercer, the percentage of employers with 500 or more
           employees offering health insurance to Medicare-eligible retirees
           declined from 44 percent in 1993 to 29 percent in 2006, although
           this trend had leveled off from 2001 through 2006.13 (See app. I
           for more information on employment-based retiree health coverage.)
			  
12Other sources of supplemental coverage for Medicare-eligible
beneficiaries may include individually purchased coverage or Medicaid.
Some Medicare-eligible beneficiaries have a combination of
employment-based and individually purchased coverage.

13See, for example, Mercer Health & Benefits, National Survey of
Employer-Sponsored Health Plans: 2006 Survey Report.

           Sponsors typically integrate their retiree health benefits with
           Medicare once retirees reach age 65, with Medicare as the primary
           payer and the sponsor as the secondary payer. Several types of
           integration occur between sponsors and Medicare. For example, some
           sponsors coordinate through a carve out approach, in which the
           sponsor calculates its normal benefit and then subtracts (or
           carves out) the Medicare benefit, generally leaving the retiree
           with out-of-pocket costs comparable to having the employment-based
           plan without Medicare. Another approach used by sponsors is full
           coordination of benefits, in which the plan pays the difference
           between the total health care charges and the Medicare
           reimbursement amount, often providing retirees complete coverage
           and protection from out-of-pocket costs.

           The provision of employment-based retiree health benefits may vary
           depending on a variety of factors, including whether the sponsor
           is in the private or public sector, and by industry type. The 2006
           Kaiser Family Foundation and Health Research and Educational Trust
           (HRET) survey, for example, showed that 82 percent of state and
           local government employers with 200 or more employees offered
           coverage to retirees, compared with 35 percent of employers with
           200 or more employees across all employer industries that offered
           coverage to retirees.14 Coverage can also differ between retirees
           under age 65 and those eligible for Medicare, although sponsors
           often cover both groups of retirees. For example, some sponsors
           offer retirees under age 65 a preferred provider organization plan
           but offer a fee-for-service plan for retirees eligible for
           Medicare. While the provision of employment-based retiree health
           benefits varies by employer size, plan type, industry, and whether
           retirees are Medicare-eligible, these benefits almost always
           include coverage of prescription drugs.
			  
14Gary Claxton and others, Kaiser Family Foundation; Samantha Hawkins,
HRET; and Jeremy Pickreign, Heidi Whitmore, and Jon Gabel, Center for
Studying Health System Change, Employer Health Benefits: 2006 Annual
Survey (Menlo Park, Calif.: The Henry J. Kaiser Family Foundation;
Chicago, Ill.: HRET, 2006).	

           The MMA Prescription Drug Benefit		  
			  
           MMA created a prescription drug benefit for beneficiaries, called
           Medicare Part D, which became effective January 1, 2006. This
           voluntary benefit is available to all Medicare beneficiaries and
           is the first comprehensive prescription drug benefit ever offered
           under the Medicare program.15 In January 2007 (the most recent
           data available) CMS reported that approximately 39 million
           beneficiaries were receiving prescription drug coverage from a
           combination of Medicare Part D, employment-based coverage, and
           other sources, such as the Department of Veterans Affairs.16

           The drug benefit is offered primarily through two types of private
           plans created as a result of the MMA: stand-alone prescription
           drug plans (PDP) that supplement fee-for-service Medicare, and
           Medicare Advantage prescription drug (MA-PD) plans, such as
           coordinated care plans, that cover drugs and other Medicare
           benefits.17 To be in operation for 2006, prospective PDPs and
           MA-PD plans had to apply by March 2005 and were approved in
           September 2005. At a minimum, these plans were required to offer
           the standard Medicare Part D benefit or alternative coverage that
           was at least equal in value.18 According to the Kaiser Family
           Foundation, plans approved for 2006 often varied from the standard
           Part D benefit in benefit design and covered drugs. For example,
           although the standard Part D benefit had a $250 deductible for
           2006, Kaiser reported that 58 percent of PDPs and 79 percent of
           MA-PD plans approved for 2006 had no deductible requirement. In
           2007, a total of 1,875 PDPs are offered nationally across 34 PDP
           regions.
			  
15Enrollment in the program is voluntary for most beneficiaries, except
dual eligibles--low-income Medicare beneficiaries who also qualify for
full Medicaid benefits. All dual eligibles were automatically enrolled in
a Medicare Part D plan by December 31, 2005, to ensure that these
beneficiaries continued to have prescription drug coverage when their
Medicaid coverage ended on December 31, 2005. However, these individuals
had the option to opt out of the Medicare Part D benefit.

16Specifically, a January 30, 2007, CMS press release reported that these
Medicare beneficiaries, totaling approximately 39 million, received
prescription drug coverage through the following sources: Medicare
prescription drug plans or Medicare Advantage prescription drug plans
(nearly 24 million); sponsors approved for the RDS (7 million); federal
retiree programs, such as FEHBP or TRICARE, the Department of Defense's
health system (3 million); and other sources, such as the Department of
Veterans Affairs (5 million).

           The standard Medicare Part D benefit in 2007 has a $265 deductible
           (up from $250 in 2006) and 25 percent coinsurance up to an initial
           coverage limit of $2,400 in total drug costs ($2,250 in 2006),
           followed by a coverage gap in which enrollees pay 100 percent of
           their drug costs until they have spent $3,850 out of pocket
           ($3,600 in 2006). Thereafter, the plan pays approximately 95
           percent of total drug costs. The standard benefit amounts are set
           to increase annually by the rate of per capita Part D spending
           growth. Assistance with drug benefit premiums and cost-sharing is
           available for certain low-income beneficiaries.
			  
           Options Available to Sponsors under Medicare Part D

           The MMA resulted in several options for sponsors of
           employment-based retiree health plans to provide prescription drug
           coverage to Medicare-eligible retirees. These options are as
           follows:

           Retiree Drug Subsidy (RDS). Sponsors with plans ending in 2007
           that offer prescription drug coverage that is actuarially
           equivalent to that under Part D can receive a federal tax-free
           subsidy equal to 28 percent of the allowable gross retiree
           prescription drug costs19 over $265 (up from $250 for plans ending
           in 2006) through $5,350 (up from $5,000 for plans ending in 2006),
           with a maximum subsidy of $1,423 per beneficiary for each
           individual eligible for Part D who is enrolled in the
           employment-based plan instead of Part D. Actuarial equivalence,
           which is attested to by a qualified actuary, is intended to
           certify that a retiree health benefit sponsor's coverage is at
           least as generous as the standard Part D coverage.20 Sponsors must
           demonstrate actuarial equivalence to qualify for the RDS, and
           sponsors will only receive the RDS for those Medicare
           beneficiaries who do not enroll in the Part D benefit. Sponsors
           may opt to receive RDS payments on a monthly, quarterly, or annual
           basis.
			  
17The MMA created the Medicare Advantage program to replace the
Medicare+Choice program (MMA S 201, 117 Stat. 2176). Medicare+Choice was
established in the Balanced Budget Act of 1997 (Pub. L. No. 105-33, sec.
4001, SS 1851-1859, 111 Stat. 251, 275-327 (codified at 42 U.S.C. SS
1395w-21-1395w-28)) to expand Medicare beneficiaries' health plan options
and encourage wider availability of health maintenance organizations and
other types of health plans, such as preferred provider organizations, as
an alternative to traditional fee-for-service. H.R. Conf. Rep. No.
108-391, at 524 (2003). While retaining many of the same provisions in
Medicare+Choice, including the eligibility, enrollment, grievance, and
appeals provisions, Medicare Advantage provides additional features, such
as increased payment rates and a new option for Medicare
beneficiaries--regional preferred provider organizations. MMA S 221, 117
Stat. 2180-93.

18Plans could also offer enhanced benefits.

19Allowable costs are nonadministrative costs actually paid for any
prescription drugs that would be covered under the Part D benefit, net of
any discounts, rebates, and similar price concessions.

20To demonstrate actuarial equivalence sponsors must satisfy a two-prong
test. The first prong is a gross value test, in which the expected amount
of paid claims for Medicare beneficiaries in the sponsor's plan must be at
least equal to the expected amount of paid claims for the same
beneficiaries under Part D standard coverage. The second prong is a net
value test, which takes into account the impact of retiree contributions
to the plan, as well as the impact that sponsors' supplemental coverage,
if provided, has on the value of the standard Part D benefit.
			  
           In order to receive the RDS, sponsors must apply to and receive
           approval from CMS. For 2007 and subsequent years, sponsors are
           required to apply for the RDS no later than 90 days prior to the
           beginning of the plan year.21 For example, sponsors that applied
           for a calendar year 2007 plan would have had to apply no later
           than midnight on October 2, 2006. Additional steps involved in
           applying for and receiving the RDS include

           o submitting a qualified actuary's attestation that the plan meets
           the RDS actuarial equivalence standard;
			  
21Sponsors can also request an automatic 30-day extension of this
deadline.

           o certifying that the creditable coverage status of the plan has
           been or will be disclosed to plan participants and CMS;22

           o electronically submitting and periodically updating enrollment
           information about retirees and dependents; and

           o electronically submitting aggregate data about drug costs
           incurred and reconciling costs at year-end.

           Provide Supplemental Coverage. Sponsors can set up their own
           separate plans that supplement, or wrap around, Part D coverage.

           Apply to Offer Own PDP or MA-PD Plan. Sponsors can apply to CMS to
           offer their own PDP or MA-PD plan for retirees.23 CMS has waived
           or modified Part D requirements added by the MMA that hinder the
           design of, the offering of, or the enrollment in a Part D plan
           offered by a sponsor. For example, CMS has issued guidance that
           allows sponsors to limit coverage to retirees only, whereas other
           Part D plans must offer coverage to all eligible individuals
           residing within a certain location.

           Contract with a PDP or MA-PD Plan. Sponsors can contract with a
           PDP or MA-PD plan to offer the standard Part D prescription drug
           benefits or enhanced benefits to the sponsors' retirees who are
           eligible for Medicare. For example, an enhanced benefit could
           allow retirees to pay a lower deductible or lower copayment than
           the standard Part D benefit requires. As with the previous MMA
           option, CMS has waived or modified Part D requirements that hinder
           the design of, the offering of, or the enrollment in these types
           of arrangements.

           Payment of Part D Premiums. Sponsors can pay for some or all of
           the Part D premiums for their eligible retirees.
			  
22With certain exceptions, sponsors must disclose to all of their
Medicare-eligible retirees whether their prescription drug coverage is
considered "creditable" as compared to the Part D benefit. To be
creditable, the expected amount of paid claims under the sponsor's drug
coverage generally must be at least equal to the expected amount of paid
claims under the standard Part D benefit. A Part D eligible individual
must pay a late enrollment penalty if there is a continuous period of 63
days or longer during which the individual was not covered under any
creditable prescription drug coverage. This disclosure can be incorporated
into other plan communications and is required to be sent to retirees
prior to certain events, such as the first day of the Part D annual
enrollment period.

23Others have referred to this option as "becoming a PDP or MA-PD plan."		

           Majority of Sponsors Reported Continuing to Offer Prescription
			  Drug Coverage and Accepting the RDS
	  
	        According to survey data we reviewed, the majority of surveyed
           retiree health benefit sponsors reported that they continued to
           offer prescription drug coverage and accepted the RDS for 2006.
           Survey data also indicated that much smaller percentages of
           sponsors took other MMA options--such as offering supplemental, or
           wrap-around, prescription drug coverage or contracting with a PDP
           or MA-PD plan.
			  
			  Majority of Sponsors Reported Accepting the RDS

           According to survey data we reviewed, the majority of surveyed
           sponsors reported that they continued to offer prescription drug
           coverage and accepted the RDS for plans ending in 2006. However,
           the size of the reported majority differed across the surveys. For
           example, the 2006 Kaiser/Hewitt survey, which surveyed private
           sector employers that offered retiree health benefits and had
           1,000 or more employees, found that 82 percent of these employers
           accepted the RDS for 2006.24 In contrast, the 2006 Mercer survey
           found that 51 percent of surveyed private and public employers
           that offered retiree health benefits and had 500 or more employees
           continued to offer prescription drug coverage and accepted the RDS
           for 2006.25 Another survey of state and local public sector
           sponsors that offered retiree health benefits found that 79
           percent reported accepting the RDS for 2006.26 Similarly, a survey
           of multiemployer plan sponsors that offered retiree health
           benefits found that 71 percent reported accepting the RDS for
           2006.27

           According to representatives from both Kaiser/Hewitt and Mercer,
           the percentages of surveyed employers that reported accepting the
           RDS-- 82 percent and 51 percent, respectively--may be different
           because the employers surveyed differed in size between the two
           surveys. According to the 2005 Mercer survey, smaller employers
           may have such a limited number of Medicare-eligible retirees that
           they do not believe the RDS would be worth the cost and
           administrative burden associated with applying for the RDS.28
           Furthermore, experts we interviewed told us that a minimum of 50
           to 100 retirees is needed to make it worthwhile for employers to
           apply for the RDS.29

24Kaiser/Hewitt, Retiree Health Benefits Examined: Findings from the
Kaiser/Hewitt 2006 Survey on Retiree Health Benefits.

25Mercer Health & Benefits, National Survey of Employer-Sponsored Health
Plans: 2006 Survey Report.

26Segal, Results of the Segal Medicare Part D Survey of Public Sector
Plans.

27Segal, Results of the Segal Survey of Multiemployer Health Funds'
Response to the Initial Availability of Medicare Part D Coverage.

28Mercer Health & Benefits, National Survey of Employer-Sponsored Health
Plans: 2005 Survey Report. In its survey results, Mercer reported that
larger employers were more likely than smaller employers offering retiree
health benefits to take the RDS for 2006. For example, 30 percent of
employers with 500 to 999 employees planned to take the RDS for 2006,
while 61 percent of employers with 5,000 to 9,999 employees planned to
take the RDS for 2006.

29According to CMS data, about 78 percent of sponsors that were approved
for the RDS for 2007 represented more than 50 retirees and about 63
percent of sponsors that were approved for the RDS for 2007 represented
more than 100 retirees.

           Data from CMS show that more than 3,900 sponsors, representing
           approximately 7 million retirees, were approved for the RDS for
           2006.30 The number of retirees represented by sponsors that year
           ranged widely, from 1 to 444,818, with a median of 174 retirees.
           According to CMS data, commercial and government sponsors31 made
           up approximately 70 percent of sponsors approved for the RDS and
           represented approximately 90 percent of retirees covered by the
           RDS for 2006. Nonprofit, religious, and union sponsors made up the
           remaining approximately 30 percent of sponsors and approximately
           10 percent of retirees covered by the RDS for 2006.

           For 2007, the Kaiser/Hewitt survey reported that the majority of
           surveyed employers planned to take the RDS. Specifically, 78
           percent of surveyed private sector employers that offered retiree
           health benefits and had 1,000 or more employees planned to take
           the RDS for 2007--compared with 82 percent that took the RDS for
           2006. CMS preliminary data for 2007 showed that the number of
           sponsors approved for the RDS decreased somewhat from 2006, to
           about 3,600 sponsors.32 CMS officials indicated that the decrease
           in the number of sponsors between 2006 and 2007 could be explained
           by a combination of several factors, including mergers by sponsors
           offering retiree health benefits, differences in the time of year
           when data were extracted,33 and the movement of some sponsors from
           the RDS to other MMA options. According to CMS data, in 2007 the
           number of retirees represented by sponsors approved for the RDS
           continued to show a wide range as in 2006, from 1 to 196,840, with
           a median of 169 retirees. The percentage of sponsors approved for
           the RDS by sponsor type, such as commercial or government,
           remained relatively consistent from 2006 to 2007. (See table 1.)

30According to CMS officials, these approximately 7 million retirees
represent the number of retirees covered by the RDS as of June 11, 2006,
and may include retirees enrolled in plans approved for the RDS for 2007.
As a result, these 7 million retirees are not necessarily linked to the
3,900 sponsors approved for the RDS for 2006. According to CMS officials,
the RDS program has no current business or operational need to calculate
the unique number of retirees linked to the number of sponsors that were
approved for the RDS for plans ending in 2006, and therefore CMS has not
expended the RDS system development resources it has to code its system to
allow for this calculation.

31The sponsor categories "commercial" and "government" are used by CMS on
the RDS application and are self-reported by applicants.
Table 1: Number and Percentage of Sponsors Approved for the RDS, and
Percentage of Retirees Affected, by Sponsor Type, for 2006 and 2007

32As was the case with 2006 data, CMS did not provide a unique number of
retirees linked to the number of sponsors that were approved for the RDS
for plans ending in 2007. However, in January 2007, CMS published a press
release that again reported that approximately 7 million Medicare-eligible
retirees received coverage through sponsors approved for the RDS.

33CMS officials told us that because the 2006 data were compiled late in
the year (September), most of the technical difficulties sponsors
experienced had been resolved by that time and their applications had been
approved, and therefore the approved application total by that time of the
year was close to the final total for the year. In contrast, the
preliminary 2007 approved application data were compiled early in the year
(February) when some sponsors, especially those participating in the RDS
program for the first time, were still experiencing technical
difficulties, and therefore their applications had not yet been approved.

                             2006a                           2007b
                                                       Number of              
Sponsor       Number of sponsors   Percentage        sponsors   Percentage 
typec              (percentage)d of retireese   (percentage)d of retireese 
Commercial            1,433 (36)           58      1,287 (36)           53 
Government            1,307 (33)           30      1,220 (34)           33 
Nonprofit               566 (14)            5        515 (14)            5 
Religious                107 (3)            1          93 (3)            1 
Union                   526 (13)            6        492 (14)            8 
Total (100%)               3,939                        3,607              

Source: GAO analysis of CMS data.

aData on the characteristics of sponsors that were approved for the RDS
for 2006 are based on all complete applications that were accepted by CMS
for the RDS as of September 11, 2006.

bPreliminary data on the characteristics of sponsors that were approved
for the RDS for 2007 are based on all complete applications that were
accepted by CMS for the RDS as of February 16, 2007.

cSponsor types are self-reported on the RDS application using the
categories listed in the table.

dPercentages do not add to 100 because of rounding.

eThis percentage is based on the number of retirees covered by plans whose
sponsors were approved for the RDS. We only report percentages of retirees
because CMS data by sponsor type double counts certain types of retirees,
such as those who have duplicate coverage and those who switch plans
midyear. CMS did not provide a unique number of retirees linked to the
number of sponsors that were approved for the RDS for plans ending in 2006
and 2007. According to CMS officials, the RDS program has no current
business or operational need to calculate the unique number of retirees
linked to the number of sponsors that were approved for the RDS for plans
ending in 2006 and 2007 and therefore CMS has not expended the RDS system
development resources it has to code its system to allow for this
calculation.

Smaller Percentages of Sponsors Reported Selecting MMA Options Other than the
RDS

All of the surveys we reviewed reported much smaller percentages of
sponsors taking MMA options other than the RDS for 2006. In these surveys,
the percentage of sponsors that reported offering supplemental, or
"wrap-around," prescription drug coverage in 2006 ranged from 0 to 13
percent. For example, the Mercer survey of private and public employers
that offered retiree health benefits and had 500 or more employees
reported that 13 percent offered supplemental coverage in 2006. Similarly,
among the surveys we reviewed, the percentage of sponsors that reported
contracting with a PDP or MA-PD plan ranged from 3 percent to 7 percent.
For example, the Kaiser/Hewitt survey reported that 3 percent of surveyed
private sector employers that offered retiree health benefits and had
1,000 or more employees contracted with a PDP or MA-PD plan in 2006. In
addition, CMS reported that few sponsors applied to offer their own PDP or
MA-PD plan for 2006 and 2007. Specifically, CMS reported that for the 2006
and 2007 contract years, there were 10 approved sponsors that offered
their own PDP and none that offered their own MA-PD plan.

Sponsors Considered a Variety of Factors When Selecting MMA Prescription Drug
Coverage Options

Public and private sponsors we interviewed reported considering a variety
of factors when selecting MMA prescription drug coverage options. Sponsors
cited factors such as whether they could offer the same retiree health
benefits they offered prior to the MMA, their ability to save on costs,
the ease of explaining the option to retirees, the administrative
requirements associated with each option, and the extent of information
available on the options. When making decisions about which, if any, MMA
option to pursue, public sponsors we interviewed were affected by some
factors that private sponsors did not face.

Sponsors Considered Ability to Offer the Same Retiree Health Benefits

Sponsors we interviewed told us that when selecting an MMA prescription
drug coverage option, they considered the extent to which they would be
able to continue to offer the same retiree health benefits they had
offered before implementing the MMA option. In general, in order to
implement most MMA options other than the RDS, sponsors would likely have
to change the prescription drug benefits they offer. For example, sponsors
that offer their own PDP or MA-PD plan must generally meet all CMS
requirements for Part D plans,34 such as including specific categories of
prescription drugs on their formularies.35 One sponsor we interviewed also
told us that it did not consider the option of paying Part D premiums
because that option alone would result in a reduction in the level of
prescription drug coverage offered to retirees, compared with coverage
offered through the sponsor. In contrast, sponsors that select the RDS
option are able to offer the same retiree health benefits they offered
prior to the MMA, as long as a sponsor's coverage remains at least as
generous as the standard Part D benefit, thus meeting the actuarial
equivalence standard to qualify for the RDS.36 In addition, the final rule
implementing the MMA prescription drug benefit that was published in
January 2005 gave sponsors flexibility in terms of how they could meet the
actuarial equivalence standard.37 Some of the sponsors and experts we
interviewed credited this flexibility with allowing sponsors to meet
actuarial equivalence without having to change the retiree health benefits
they offered. For example, one sponsor told us that it was able to combine
multiple benefit options to meet actuarial equivalence, which allowed the
sponsor to collect the RDS for most retirees--including those paying the
full cost of their coverage--without making changes to the benefits
offered. Prior to the final rule, this sponsor did not plan on collecting
the RDS for the group of retirees paying the full cost of coverage because
the coverage would not have met the actuarial equivalence standard on its
own. Most sponsors we interviewed told us that the ability to offer the
same retiree health benefits they offered prior to the MMA was an
advantage of the RDS. In addition, experts we interviewed reported that
some sponsors are unable to change the benefits they offer in the short
term because union contracts prevent them from doing so, thus making the
RDS the only MMA option for which they likely would qualify.

34CMS has issued guidance for multiple MMA options to waive or modify Part
D requirements added by the MMA that hinder the design of, the offering
of, or the enrollment in an employer- or union-sponsored Part D retiree
plan (including a PDP or MA-PD plan). For example, sponsors that contract
with CMS to offer their own PDP or MA-PD plan can limit coverage to
retirees only, while other Part D plans must offer coverage to all
individuals who reside in one or more specified regions. According to CMS,
the guidance was needed to ensure that certain MMA options, such as a
sponsor's option to contract with or offer its own PDP, are viable options
for sponsors seeking to retain high-quality retiree coverage.

35A formulary is a preferred list of drug products that typically limits
the number of drugs available within a therapeutic class for purposes of
drug purchasing, dispensing, reimbursement, or for all three purposes.
According to CMS, the Part D formulary must include at least two drugs in
each approved drug category and class (unless only one drug is available
for a particular category or class), regardless of the classification
system used.

36According to a 2005 Kaiser/Hewitt survey on retiree health benefits, 94
percent of surveyed employers indicated that their 2005 benefits had an
actuarial value that was equal to or greater than the standard Medicare
prescription drug benefit for 2006. See Frank McArdle, Amy Atchison, and
Dale Yamamoto, Hewitt Associates; and Michelle Kitchman Strollo and Tricia
Neuman, The Kaiser Family Foundation, Prospects for Retiree Health
Benefits as Medicare Prescription Drug Coverage Begins: Findings from the
Kaiser/Hewitt 2005 Survey on Retiree Health Benefits (Menlo Park, Calif.:
The Henry J. Kaiser Family Foundation; Lincolnshire, Ill.: Hewitt
Associates, December 2005).

37As we stated earlier, each health benefit option offered by sponsors has
to pass both a gross and a net value test to meet actuarial equivalence.
The final rule gave sponsors with multiple benefit options the ability to
aggregate benefit options to pass the net test or to pass the net test
separately for each benefit option. 70 Fed. Reg. 4194, 4579 (Jan. 28,
2005) (codified at 42 C.F.R. S884 (d)(5)(iv)). As a result, sponsors that
have benefit options that would not be able to meet the actuarial
equivalence standard on their own can aggregate these options with other
benefit options that are more generous than the standard Part D benefit,
which may allow sponsors to collect the RDS for all of the options. In
addition, sponsors that include both medical and drug coverage and have a
single premium for this coverage have the discretion and flexibility to
allocate a portion of the premium to the drug coverage for the purpose of
the net value test of actuarial attestation. 70 Fed. Reg. 4579 (codified
at 42 C.F.R. S884 (d)(ii)(B)). For example, a sponsor of an integrated
medical and drug plan that has a premium of $30 can attribute a small
portion of that amount to drug coverage when it does the calculations for
the net value test. Experts we interviewed told us that this flexibility
was helpful to sponsors in meeting the actuarial equivalence standard.

Sponsors Considered Their Ability to Save on Costs

Sponsors reported that when selecting an MMA option, they considered how
the various options would affect their ability to save on costs. While all
of the MMA prescription drug coverage options may provide sponsors with an
opportunity for cost savings, the amount of savings may vary based on a
sponsor's tax status. For example, in guidance to employers, CMS estimated
that the average cost savings to a sponsor that offers its own PDP or
MA-PD plan for 2006 would be close to $900 per participating retiree, and
the average tax-free payment for sponsors that took the RDS would be $668
per participating retiree. Because RDS payments are tax-exempt, CMS
estimates indicate that the relative value of savings from the RDS as
compared with savings from offering a PDP or MA-PD plan would be greater
for private, tax-paying sponsors than it would be for public,
non-tax-paying sponsors.

In addition, some sponsors said they considered the trade-off between the
cost savings associated with the different MMA options and the effect the
options would have on the prescription drug benefits sponsors would be
able to offer. For example, depending on their tax status, some sponsors
might save more money by taking the RDS, while others might save more by
offering or contracting with a PDP or MA-PD plan. However, as previously
discussed, while most MMA options likely require a change of benefits, the
RDS allows sponsors to continue offering the benefits they offered prior
to the implementation of the MMA as long as the benefit is at least
actuarially equivalent to the Part D benefit. In one case, a sponsor we
interviewed reported that it chose the RDS, even though the sponsor could
have reduced costs by choosing one of the other MMA options. As one expert
explained, the RDS allows sponsors to save money without significantly
changing their retiree health plans.

Sponsors Considered the Ease of Explaining MMA Options to Retirees

Sponsors also reported considering how easy it would be to explain an
option to retirees. In particular, sponsors we interviewed told us that
they considered how benefit changes made as a result of implementing the
various MMA options would complicate communications with retirees. For
example, one sponsor we interviewed indicated that a disadvantage of some
MMA options was that they would require a great effort to communicate
changes to retirees, who range in age from 50 to 105 and who might find
benefit changes difficult to understand. Conversely, sponsors that take
the RDS are able to preserve their benefit structure and may find it
easier to communicate this option to retirees, according to CMS.

In addition, depending on the option they choose, sponsors have to meet
different MMA requirements for communicating information about the options
to retirees. For example, sponsors that take the RDS are required to
explain how their prescription drug coverage compares to the Medicare Part
D benefit.38 In contrast, sponsors that offer their own PDP or MA-PD plan
are required to meet more strict CMS communication requirements on Part D
plans--such as developing and sending more detailed information about
prescription drug coverage to retirees.39

Sponsors Considered the Administrative Requirements Associated with Each MMA
Option

According to CMS and the experts and sponsors we interviewed, each option
has different administrative requirements--some of which take up a
considerable amount of time and resources, so sponsors also considered
these requirements when selecting an option. For example, according to
CMS, sponsors that offer their own PDP or MA-PD plan are required to
calculate "true out-of-pocket" costs40 and adjust premiums for low-income
retirees,41 among other administrative requirements. One sponsor we
interviewed that offered its own PDP for 2006 indicated that it took 11
full-time employees and 13 part-time employees over 15,000 hours to
implement the PDP.42 Conversely, according to CMS, sponsors that take the
RDS are not required to calculate true out-of-pocket costs, adjust
premiums for low-income retirees, or meet many of the other administrative
requirements required of other options. Some sponsors we interviewed told
us that the RDS would be administratively easy or easier than other MMA
options, although many reported some first-year implementation issues,
such as issues in submitting a list of eligible retirees to CMS, which
made administration of the RDS more difficult than originally
anticipated.43

38With certain exceptions, sponsors that provide prescription drug
coverage to Medicare Part D-eligible individuals must disclose to retirees
whether the coverage is or is not "creditable prescription drug coverage"
(i.e., the coverage would be able to pass the gross benefit test used in
calculating actuarial equivalence).

39Among other CMS communication requirements, sponsors that offer their
own PDP or MA-PD plan are required to send retirees certain
marketing-related communications, such as the Annual Notice of Change,
Summary of Benefits, and Evidence of Coverage. The Annual Notice of Change
explains changes that a PDP or MA-PD plan has made to its coverage from
the previous year. The Summary of Benefits provides benefit design
details. The Evidence of Coverage explains the rights, benefits, and
responsibilities of plan members.

40Part D enrollees with standard coverage must have $3,850 in true
out-of-pocket costs in 2007 before Part D catastrophic coverage begins.
True out-of-pocket costs include only those payments made by the
individual; made by another person (which may include another family
member, individual, corporation, or charity) on behalf of the individual;
made on behalf of the individual under the low-income subsidy provisions;
or made under a state pharmaceutical assistance program. Payments by
insurance, a group health plan, a government-funded health program, or
other third-party payment arrangement, such as those from employers and
other retiree health benefit sponsors, do not count toward this limit.

41Sponsors that contract with or become a PDP or MA-PD are required to
adjust premiums for retirees eligible for the low-income subsidy. For most
beneficiaries entitled to the low-income subsidy, CMS pays the
beneficiary's premium (up to the low-income premium subsidy amount). CMS
requires that the low-income premium subsidy first be used to reduce the
portion of the monthly beneficiary premium paid for by the beneficiary,
with any remainder then used to reduce the employer's premium
contribution. For example, if, under the terms of the retiree plan, the
beneficiary is responsible for paying $20 of a $40 monthly premium with
the employer paying the remaining $20, a monthly low-income premium
subsidy of $35 would be used first to reduce the beneficiary's liability
to $0 and then to reduce the employer's liability from $20 to $5.

42This sponsor told us that these additional resources were needed to
address a number of issues related to offering its own PDP, such as
researching and keeping up with CMS guidance in a timely manner. This
sponsor, however, also said that most of the issues had been resolved for
2007.

43For example, sponsors applying for the RDS must submit a retiree file to
CMS that contains data about the retirees for whom a sponsor has applied
for the subsidy and that CMS uses to determine whether the submitted
retirees are eligible for the subsidy. Several sponsors we interviewed
told us they experienced difficulties when they submitted the retiree
file, such as having some of their submitted retirees rejected by CMS
without an explanation for why this occurred. According to one sponsor,
retirees were rejected for reasons such as an incorrect Social Security
number or a name misspelling, and it was the responsibility of the sponsor
to determine why the retirees were rejected. Another sponsor we
interviewed had difficulty with the online application, indicating that it
was slow and nonintuitive. Several of the sponsors we interviewed expected
that these implementation issues would be fixed by the second year of the
RDS. Other RDS-related administrative issues, such as difficulties in
determining whether a drug should be submitted for reimbursement under
Medicare Part B or Medicare Part D, may be longer lasting. According to
the 2006 Kaiser/Hewitt survey, the operational and administrative issues
associated with the RDS were among the reasons some employers cited for
not planning to take the RDS in the future.

Sponsors Considered the Extent of Available Information Regarding MMA Options

Sponsors also reported that the extent of available information regarding
the MMA options at the time they needed to make decisions was a factor
they considered in selecting an option. CMS did not approve PDP and MA-PD
plans until September 2005--the same month in which sponsors had to apply
for the RDS for plans ending in 2006.44 Some sponsors we interviewed
reported that they did not have enough information about the PDP and MA-PD
plan options at the time they had to make their decision for 2006. For
example, one sponsor we interviewed that took the RDS told us that there
were too many unknowns at the time it had to make its decision for 2006
and that if the sponsor wanted to make changes to its retiree health
benefits, it would need to provide a transition period for retirees in
order to prepare them for plan changes. In addition, according to the 2005
Mercer survey, the timing of the plan and rate information available from
health plans in the Medicare market was a key factor that led many
employers to seek the RDS or to delay taking any action for 2006.

When selecting an option for 2007, sponsors we interviewed continued to
have concerns about the extent of the information available about the PDP
and MA-PD plans. For example, one sponsor we interviewed told us that
while there was better information available when it had to make its
decision for 2007 compared with 2006, the sponsor still did not have a
full year's worth of data on PDPs when it had to make its decision. As the
markets for PDPs and MA-PD plans mature and more detailed information
becomes available, the availability of information on the various MMA
prescription drug coverage options may become less of a factor in future
years. According to one expert we interviewed, when employers are making
their decisions for 2008, there should be a full year of information on
the MMA prescription drug coverage options so that sponsors will be able
to make more fully informed decisions.

Public Sponsors May Have to Consider Unique Factors

When making decisions about which, if any, MMA option to pursue, public
sponsors may have to consider some factors that private sponsors do not.
For example, some public sponsors may be influenced at the state level to
either offer health insurance or choose a certain MMA option. One public
sponsor we interviewed was directed by the budget committee of its state
legislature to take the RDS in 2007 even though the sponsor--a state
retirement system--had concluded that contracting with a PDP would allow
the sponsor to decrease premiums for the state, contracting agencies, and
some enrollees; decrease prescription drug copayments for enrollees; or
both. As we stated earlier in this report, CMS estimates indicate that the
relative value of savings from the tax-free RDS, as compared with savings
from offering a PDP or MA-PD plan, for example, would be greater for
private, tax-paying sponsors than it would be for public, non-tax-paying
sponsors. In addition, OPM, which administers FEHBP, opted to continue
offering prescription drug coverage to retirees without taking the RDS or
any of the other MMA options. We reported previously that OPM officials
told us OPM did not apply for the RDS for FEHBP because they said the
intent of the RDS was to encourage sponsors to continue offering
prescription drug coverage to enrolled Medicare beneficiaries, which all
FEHBP plans were already doing.45 As such, OPM officials told us, the
government would be subsidizing itself to provide coverage for
prescription drugs to Medicare-eligible federal employees and retirees.

44After CMS published its final rule implementing the MMA prescription
drug benefit, in January 2005, the various companies that planned to issue
private PDPs began to assess the feasibility of entering the market and
what products they should offer, but most of these companies focused on
signing up individual beneficiaries for Part D rather than on developing
the alternative employer options created by the MMA, such as contracting
with employers to offer a PDP or MA-PD plan. See Dale H. Yamamoto, "What
Comes After the Retiree Drug Subsidy?" Benefits Quarterly, vol. 22, no. 3
(2006).

45In a recent report, we discussed the potential effect of the RDS on
FEHBP premiums. Specifically, we reported that "plan officials differed on
whether the subsidy would have affected growth in FEHBP premiums in 2006
had OPM applied for the subsidy and used it to mitigate premium growth.
Most plan officials we interviewed stated that the subsidy would have had
a small effect on premium growth. Officials from two large plans with
higher-than-average shares of retirees stated that the subsidy would have
lowered their plans' premium growth--officials from one plan claimed by at
least 3.5 to 4 percentage points for their plan. We estimated that the
subsidy would have lowered the growth in premiums across all FEHBP plans
for 2006 by more than 2 percentage points on average, from 6.4 percent to
about 4 percent." See GAO, Federal Employees Health Benefits Program:
Premium Growth Has Recently Slowed, and Varies among Participating Plans,
[45]GAO-07-141 (Washington, D.C.: Dec. 22, 2006).

In the Short Term, Sponsors' Decisions Regarding MMA Options Resulted in
Benefits Remaining Relatively Unchanged, but over the Longer Term the Effect Is
Unclear

Sponsors' decisions regarding the various MMA options appear to have
resulted in the provision of retiree health benefits remaining relatively
unchanged in the short term, although the effect over the longer term on
the provision of health benefits to retirees is unclear. The short-term
effect of sponsors' decisions appears to have resulted in benefits
remaining relatively unchanged, in part because the majority of sponsors
continued to offer prescription drug benefits and accepted the RDS during
the first 2 years this option was offered. In addition, according to the
2005 Mercer survey, 72 percent of employers with 500 or more employees
reported that the MMA options would have no effect on their ability to
provide retiree health coverage. Similarly, many sponsors we interviewed
told us that they did not make changes to their retiree health
benefits--including decreasing coverage--in direct response to the MMA.
Only one of the sponsors we interviewed that selected the RDS for 2006
reported making any changes to its benefits to meet the RDS actuarial
equivalence standard. This sponsor told us it eliminated one of its plans
that did not meet CMS's actuarial equivalence standard for the RDS, but
the sponsor said it moved all affected Medicare-eligible retirees into
coverage that did qualify for the RDS. In addition, some sponsors we
interviewed told us that they shared part of the subsidy they received
from accepting the RDS with retirees by reducing retiree premiums.
Furthermore, the 2005 Mercer survey reported that only 3 percent of
employers with 500 or more employees indicated they were likely to
terminate drug coverage for Medicare-eligible retirees--rather than
choosing one of the MMA options--in response to the availability of the
Part D prescription drug benefit.

While, in the short term, sponsors' decisions regarding the MMA options
resulted in benefits remaining relatively unchanged, the effect over the
longer term of sponsors' decisions on the provision of employment-based
retiree health benefits is unclear. Experts we interviewed differed in
their assessments of what the effect is likely to be over the longer term.
In particular, some experts we interviewed indicated that the MMA may
extend the amount of time that sponsors offer benefits without reducing
coverage. Furthermore, one sponsor we interviewed indicated that the RDS
increased the number of years that its retiree health benefits program
would be solvent. On the other hand, other experts said that it was
possible that the availability of the Medicare Part D benefit may make it
more likely that sponsors will stop offering prescription drug benefits
for retirees. Nearly all experts we interviewed told us that it was
unlikely that an employer or other potential sponsor that did not offer
retiree prescription drug coverage prior to the MMA would begin sponsoring
these benefits in response to the new options resulting from the MMA.
According to experts, employers are not planning to improve or expand
retiree health coverage and do not want the additional financial liability
of providing these benefits.

Furthermore, it is unclear to what extent sponsors will continue to select
the same MMA option in the future. For example, the 2006 Kaiser/Hewitt
survey reported that of those respondents that accepted the RDS for 2006,
only 54 percent said they were very or somewhat likely to accept the RDS
for 2010. Furthermore, 25 percent said they did not know whether they
would accept the RDS for 2010. Most of the sponsors that we interviewed
that took the RDS for 2006 and planned to take the RDS for 2007 said they
were unsure which option they would be taking for 2008. The 2006
Kaiser/Hewitt survey also reported that employers that are unlikely to
take the RDS in the future are considering a number of other MMA options,
including contracting with a PDP to offer enhanced coverage.46 To the
extent that sponsors that have accepted the RDS select other MMA options
in subsequent years, sponsors' provision of retiree health benefits may
change.

In addition to the MMA options, a host of other long-standing factors may
affect a sponsor's provision of health benefits to retirees. These include
the existence of union contracts that may require the provision of certain
health benefits, increasing costs for health care, the degree of industry
competition, and the strength of sponsors' financial conditions. For
example, in 2005 we reported that sponsors that negotiated retiree health
benefits with unions might not have as much flexibility to change these
benefits prior to negotiations.47 Sponsors we interviewed also cited the
competitiveness of the industry as another factor that affected retiree
coverage, with one sponsor stating that it strove to have benefit packages
that were in line with the overall market as well as the specific
industry.

46Sponsors we interviewed told us that they were considering alternative
options other than the RDS for the future, such as offering MA-PD
plans--which may have lower premiums than sponsors' current plans. Some
sponsors also told us they may be forced to move away from the RDS in the
future because limits on their contributions to retiree health plans
jeopardize their ability to meet CMS's actuarial equivalence standard for
the RDS. For public sponsors, experts we interviewed told us that
requirements published in June 2006 by the Governmental Accounting
Standards Board (GASB) that limit the ability of public sector sponsors to
account for future RDS payments on their financial statements may affect
the long-term MMA options selected by public sponsors. See GASB Technical
Bulletin No. 2006-1, Accounting and Financial Reporting by Employers for
Payments from the Federal Government Pursuant to the Retiree Drug Subsidy
Provisions of Medicare Part D (Norwalk, Conn.: GASB, June 30, 2006).

47 [46]GAO-05-205 .

Agency and Other External Comments

We provided a draft of this report to CMS and experts on retiree health
benefits at the Employee Benefit Research Institute, Hewitt Associates,
Mercer Health & Benefits, and the National Opinion Research Center.48

In its written comments on a draft of this report, CMS stated that the
report provided an excellent summary of available information concerning
the choices sponsors made among MMA options. (CMS's comments are included
in app. IV.)

CMS agreed with the finding that the majority of sponsors reported
continuing to offer prescription drug coverage and accepting the RDS for
2006, with smaller percentages of sponsors reporting selecting other MMA
options. In commenting on the draft report's identification of several
factors that may have contributed to the differences in the surveys'
reported percentages of employers accepting the RDS for 2006, CMS
suggested an additional factor that may have contributed to the
differences in the survey finding. Specifically, CMS said that some of the
surveys reported what sponsors said they intended to do or were
considering doing at the time of the survey, and it was possible that a
portion ultimately decided not to pursue those options. However, both the
2006 Kaiser/Hewitt survey--which reported that 82 percent of surveyed
employers accepted the RDS for 2006--and the 2006 Mercer survey--which
reported that 51 percent of surveyed employers accepted the RDS for
2006--were reporting decisions surveyed employers said they had already
made, not what they planned to do. Therefore, it is not likely this factor
would explain the difference in the survey results. CMS also agreed with
the draft report's related finding regarding the number of sponsors
participating in the RDS program. CMS suggested that we identify the 2007
data as preliminary, since it was compiled in February. We have made this
clarification to the final report.

CMS stated that it agreed with the report's second finding, that sponsors
considered a variety of factors when selecting which MMA prescription drug
coverage options to pursue, with one clarification. The draft report
stated that, in general, in order to implement most MMA options other than
the RDS, sponsors would likely have to change the prescription drug
benefits they offer. CMS stated that the report did not fully acknowledge
that CMS has used its statutory waiver authority for several MMA options
to afford flexibility in benefit design, and as a result, MMA options may
require minimal (if any) adjustments to premiums, cost-sharing, and other
primary elements of benefit design. The draft report did describe CMS's
authority to waive or modify Part D requirements added by the MMA that
hinder the design of, offering of, or enrollment in certain employer- or
union-sponsored Part D retiree plans. In response to CMS's comments, we
have included additional information clarifying that CMS has waived or
modified Part D requirements for multiple MMA options. However, while CMS
has used this waiver authority, our report notes that sponsors may still
need to make changes to benefits--such as changing the drugs included on
their formularies--and, according to sponsors we interviewed, any changes
to benefits can complicate communications with retirees.

48The researcher with the National Opinion Research Center who reviewed
our report is also an author of the 2006 Kaiser/HRET survey.

CMS also agreed with the draft report's finding that in the short term
sponsors' decisions regarding MMA options resulted in benefits remaining
relatively unchanged, but over the longer term the effect is unclear.
However, CMS stated that the examples of differing experts' assessments of
the likely effect over the longer term lacked sufficient context to be
included in the findings. CMS also stated that there was no indication in
the finding of the preponderance of expert opinion in favor of one or the
other point of view. Our report states that the effect over the longer
term is unclear and that experts we interviewed differed in their
assessments of what the effect was likely to be. The report describes both
the opinions of experts who said the MMA may extend the amount of time
that sponsors offer benefits without reducing coverage and those who said
the Medicare Part D benefit may make it more likely that sponsors will
stop offering prescription drug benefits for retirees, and there was not a
preponderance of opinion for either perspective.

The experts who reviewed the draft report generally indicated that the
report provided an accurate portrayal of employment-based retiree health
benefits and sponsors' decisions about the options available under the
MMA.

CMS and several of these experts also provided technical comments, which
we incorporated into the report as appropriate.

We will send copies of this report to the Administrator of CMS and
interested congressional committees. We will also provide copies to others
on request. In addition, the report is available at no charge on GAO's Web
site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact
me at (202) 512-7119 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are listed in appendix V.

John E. Dicken
Director, Health Care

List of Committees

The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate

The Honorable Edward M. Kennedy
Chairman
The Honorable Michael B. Enzi
Ranking Member
Committee on Health, Education, Labor, and Pensions
United States Senate

The Honorable George Miller
Chairman
The Honorable Howard P. "Buck" McKeon
Ranking Member
Committee on Education and Labor
House of Representatives

The Honorable John D. Dingell
Chairman
The Honorable Joe Barton
Ranking Member
Committee on Energy and Commerce
House of Representatives

The Honorable Charles B. Rangel
Chairman
The Honorable Jim McCrery
Ranking Member
Committee on Ways and Means
House of Representatives

Appendix I: Information on Employment-Based Retiree Health
Coverage, Updated since GAO's 2005 Report

This appendix describes information on employment-based retiree health
coverage since the initial mandated GAO study, published in 2005.1 We
reported in 2005 that the long-term decline in employment-based retiree
health coverage had leveled off, and retirees were paying an increasing
share of the costs. We reported that the percentage of employers offering
health benefits to retirees, including those who are Medicare-eligible,
had decreased beginning in the early 1990s, but had leveled off by the
early 2000s. This leveling off has continued since the initial mandated
study. We also reported in 2005 that the percentage of Medicare-eligible
retirees aged 65 and older with employment-based coverage remained
relatively consistent from 1995 through 2003. Since issuance of our 2005
report, we received data for 2004 and 2005 showing that the overall
percentage remained relatively consistent from 2003 through 2005 at about
31 percent, although some modest changes occurred within specific age
cohorts. Sponsors continued to respond to increasing costs by implementing
strategies that required retirees to pay more for coverage and thus
contributed to a gradual erosion of the value and availability of
benefits. For example, one employer benefit survey reported that over half
of surveyed employers reported increases in retiree contributions to
premiums between 2005 and 2006.

Employer Benefit Surveys Showed a Decline, then a Leveling Off, in Share of
Employers Offering Health Benefits to Retirees; New Data Showed Continuation of
Leveling-Off Trend

According to surveys of sponsors of retiree health benefits, the
percentage of employers offering health benefits to retirees declined
beginning in the early 1990s and then remained relatively stable by the
early 2000s through 2005. In our 2005 report, we reported that a series of
surveys conducted by Mercer Human Resource Consulting indicated that the
percentage of employers with 500 or more employees offering health
insurance to retirees who are eligible for Medicare2 declined from 1993 to
2001, although this decline had leveled off from 2001 through 2004. Data
obtained after the publication of our 2005 report showed that this
leveling-off trend continued, with approximately 29 percent of employers
with 500 or more employees offering the benefits to Medicare-eligible
retirees in 2006.3 (See fig. 1.)

1See GAO, Retiree Health Benefits: Options for Employment-Based
Prescription Drug Benefits under the Medicare Modernization Act,
[48]GAO-05-205 (Washington, D.C.: Feb. 14, 2005).

2Medicare-eligible generally refers to retirees aged 65 and over.

3See Mercer Health & Benefits, National Survey of Employer-Sponsored
Health Plans: 2006 Survey Report (New York, N.Y.: Mercer Health &
Benefits, LLC, 2007). Mercer Health & Benefits is a business of Mercer
Human Resource Consulting.

Figure 1: Mercer Survey Results--Percentage of Employers with 500 or More
Employees Offering Health Benefits to Medicare-Eligible Retirees,
1993-2006

Note: Based on employer benefit surveys from 1993 through 2006. The Mercer
data include employers that offer coverage on a continuing basis to newly
hired employees as well as employers that may limit coverage to
individuals who were hired or who retired before a specified year. The
dotted line from 2001 to 2003 indicates that comparable 2002 data were not
available because of a wording change on the 2002 survey questionnaire. In
2003, Mercer modified the survey questionnaire again to make the data
comparable to prior years (except 2002). Thus, consistent with the Mercer
2003 survey, we have excluded data for 2002.

We also reported in our 2005 report that a series of surveys conducted by
the Kaiser Family Foundation and Health Research and Educational Trust
(HRET) estimated that the percentage of employers with 200 or more
employees offering retiree health coverage decreased from 46 percent in
1991 to 36 percent in 1993. This decline leveled off from 1993 through
2004, with approximately 36 percent of employers with 200 or more
employees offering coverage to these groups in 2004.4 Data obtained after
our 2005 report showed that this trend continued. According to the
Kaiser/HRET survey, approximately 33 percent and 35 percent of employers
with 200 or more employees offered retiree health benefits in 2005 and
2006, respectively. For Medicare-eligible retirees specifically, the
percentage of employers reporting that they offered health benefits to
this group has generally not changed since our 2005 report, in which we
reported that 27 percent of employers with 200 or more employees offered
coverage, according to Kaiser/HRET. (See fig. 2.)

4Gary Claxton and others, Kaiser Family Foundation; Samantha Hawkins,
HRET; and Jeremy Pickreign, Heidi Whitmore, and Jon Gabel, Center for
Studying Health System Change, Employer Health Benefits: 2006 Annual
Survey (Menlo Park, Calif.: The Henry J. Kaiser Family Foundation;
Chicago, Ill.: HRET, 2006).

Figure 2: Kaiser/HRET Survey Results--Percentage of Employers with 200 or
More Employees Offering Health Benefits to All Retirees and to
Medicare-Eligible Retirees, 1991-2006

Notes: Based on KPMG Peat Marwick surveys from 1991 through 1998 and
Kaiser/HRET surveys from 1999 through 2006. The data for "all" retirees
may include employers that offer health benefits to Medicare-eligible
retirees, retirees under age 65, or both. Data for all retirees were
unavailable for 1994 and 1996. Data for Medicare-eligible retirees were
unavailable from 1991 through 1994 and for 1996.

In 2003, Kaiser/HRET made changes to its survey methodology that resulted
in adjustments to some of the estimates reported in prior-year reports.
The differences resulting from these adjustments for the retiree health
benefits data were not statistically different.

For retirees under age 65, we reported in our 2005 report that coverage
showed a steady decline from 1993, when 50 percent of employers with 500
or more employees offered coverage to this group of retirees, to 2001,
although this percentage generally leveled off from 2001 through 2004.5
New data reported by Mercer showed that 39 percent of employers with 500
or more employees offered coverage to these retirees in 2006.

The survey data we reviewed for our current report indicated that some
types of employers are more likely to provide health benefits to retirees
than others. Data on retiree health coverage showed that larger employers,
for example, are more likely than smaller employers to offer coverage to
retirees, including Medicare-eligible retirees. The 2006 Mercer survey
reported that 56 percent of employers with 20,000 or more employees
offered coverage to Medicare-eligible retirees, compared with about 22
percent of employers with 500 to 999 employees. The 2006 Kaiser/HRET
survey also showed that 54 percent of employers with 5,000 or more
employees offered health benefits to retirees, while 35 percent of
employers with 200 or more employees offered health benefits to retirees.
For smaller employers in the Kaiser/HRET survey--those with 3 to 199
employees--approximately 9 percent offered retiree health benefits. These
data are similar to the data reported in our 2005 report, although the
percentage of employers with 5,000 or more employees offering health
benefits to retirees is slightly lower than in previous surveys.

In addition, employers with a union presence continued to be more likely
to offer retiree health coverage than employers without a union presence.
For example, in the 2006 Kaiser/HRET survey, among employers with 200 or
more employees, 50 percent of those employers that had union employees
offered health coverage to retirees, compared with 27 percent without
union employees.

According to federal and employer benefit surveys, certain industries
continued to be more likely to offer retiree health coverage than others.
For example, the most recent Agency for Healthcare Research and Quality's
Medical Expenditure Panel Survey (MEPS) data showed that approximately 88
percent of state entities offered health insurance for retirees aged 65
and older.6 In addition, new data released from Kaiser/HRET in 2006 showed
that 82 percent of state and local government employers with 200 or more
employees offered coverage to retirees.7 Furthermore, these data are
similar to the data reported in our 2005 report. Recent data released by
Kaiser/HRET continued to list the transportation/communication/utility
industry as the second likeliest industry, after government, to offer
health benefits to its retirees, with 52 percent of all employers with 200
or more employees in this industry sector offering health benefits to
their retirees.8 This survey also continued to show, as we reported in
2005, that the industries least likely to offer coverage were health care
and retail, with 15 percent and 11 percent, respectively, of employers
with 200 or more employees in these industry sectors offering retiree
health benefits.

5Data based on Mercer surveys from 1993 through 2004.

6MEPS data are for 2004.

Percentage of Medicare-Eligible Retirees with Employment-Based Health Coverage
Remained Consistent

In our 2005 report, we stated that the overall percentage of
Medicare-eligible retirees and their insured dependents aged 65 and older
obtaining employment-based health benefits through a former employer
remained relatively consistent from 1995 through 2003, based on data from
the U.S. Census Bureau's Current Population Survey (CPS). Since issuance
of that report, we received subsequent data for 2004 and 2005 showing that
the overall percentage remained relatively consistent from 2003 through
2005, although some modest changes occurred within specific age cohorts
(see fig. 3).

7As we reported in 2005, there continues to be a concern that standards
adopted by the Governmental Accounting Standards Board (GASB) in 2004,
which affect the reporting of postretirement benefit obligations, may put
new pressures on public sector funding of retiree health care benefits.
The 2005 Mercer survey reported that although the GASB changes do not
require sponsors to fund health plan liabilities, it is possible that the
changes will prompt a decline in coverage in the public sector. GASB
Statement No. 43: Financial Reporting for Postemployment Benefit Plans
other than Pension Plans (Norwalk, Conn.: GASB, April 2004) and GASB
Statement No. 45: Accounting and Financial Reporting by Employers for
Postemployment Benefits other than Pensions (Norwalk, Conn.: GASB, June
2004). The standards are effective in three phases, depending on a public
sector entity's total annual revenues. For the largest employers, the
effective date for Statements No. 43 and No. 45 began in the first period
after December 15, 2005, and December 15, 2006, respectively.

8Kaiser/HRET, Employer Health Benefits: 2006 Annual Survey.

Figure 3: Percentage of Medicare-Eligible Retirees and Their Insured
Dependents with Employment-Based Health Benefits, by Age Group, 1995-2005

Notes: Based on the March CPS Supplement from 1996 through 2002 and the
Annual Social and Economic Supplement to the CPS from 2003 through 2006.
The age categories for insured dependents are based on the age of the
actual individual, not the primary policyholder. For example, an
80-year-old insured dependent is counted as 80 years of age regardless of
the age of the primary policyholder. Differences for ages 65 to 69 and age
80 and older are statistically significant.

As noted in Census Bureau press release dated March 23, 2007, the Census
Bureau will be revising the historical health insurance coverage estimates
from the CPS due to an identified programming error. According to the
Census Bureau, the impact of the required revisions is small--the original
and revised estimates for 2004 and 2005 differ by less than 1 percent--and
the Census Bureau's assessment is that the impact of the required
revisions is relatively constant from one year to the next.

According to our analysis of CPS data, for those aged 65 and older,
approximately 32 percent had coverage in 1995 and approximately 31 percent
had coverage in 2005 (no change from last report). Medicare-eligible
retirees and their insured dependents for two groups--those aged 65
through 69 and those aged 80 and older--continued to show approximately
the same modest decline and increase, respectively, in the percentage with
employment-based health coverage. For those aged 70 through 79, the modest
decline reported in our initial report was no longer statistically
significant.9

Employer Strategies Implemented to Mitigate Increased Costs of Providing
Coverage Continued to Require Greater Retiree Contribution

According to employer benefit surveys and our interviews with sponsors and
experts, sponsors have continued to rely on various strategies, as we
noted in our 2005 report, for mitigating the increasing costs of providing
health benefits to retirees that have contributed to a gradual erosion of
the value and availability of health benefits. These strategies included
the same strategies identified in our 2005 report: restricting retirees'
eligibility for health benefits; limiting sponsors' contributions to
retirees' health benefits; and increasing retirees' copayments,
coinsurance, and premiums.

Sponsors Have Limited Retirees' Eligibility for Benefits

Employers participating in the 2006 Kaiser/Hewitt Associates survey
reported that between 2005 and 2006 they limited retiree eligibility for
health benefits by restricting eligibility to certain groups of retirees
and by increasing age, years of service, or both, needed to be eligible
for such benefits. For example, according to 2006 Kaiser/Hewitt survey
data, 11 percent of employers that currently offer retiree health benefits
reported that they would not provide future employer-subsidized health
benefits to a particular group of individuals, such as those hired after
January 1, 2006, if they retire under the age of 65.10 Nine percent of the
surveyed employers reported that they would not provide future
employer-subsidized health benefits to a particular group of individuals
if they retire at age 65 or older. In addition, 4 percent of surveyed
employers reported that they raised the age requirements, years of service
requirements, or both, for retiree health benefit eligibility for retirees
under the age of 65, and 2 percent made such changes for retirees at age
65 or older. Similarly, one sponsor we interviewed told us about changes
the sponsor had made to coverage for future retirees since our 2005
report. This sponsor told us about coverage beginning January 1, 2007, in
which future retirees will have the option to receive a lump sum of money
that can then be used to purchase coverage in the individual market at the
time of retirement.

9In our 2005 report, we reported a modest decline for those aged 70
through 79 from 1995 through 2003 (33 percent in 1995; 31 percent in 2003)
that was statistically significant. When updated with the 2005 CPS data,
the change from 1995 to 2005 was no longer statistically significant.

10In the survey, nearly half of the employers that terminated subsidized
coverage for future retirees indicated that they provide a form of
access-only coverage--where retirees have the option to buy into a health
plan at a group rate, but without any financial assistance from a sponsor.

Sponsors Have Limited Their Contributions to Retirees' Health Benefits

Data from the 2006 Mercer survey showed that 20 percent of employers with
500 or more employees have implemented limits--often referred to as
caps--on contributions to retirees' health benefits. The survey data also
showed that an additional 8 percent of such employers were considering
such caps. Caps were most common among the employers in the Mercer study
with the largest number of employees; 47 percent of employers with 20,000
or more employees had implemented caps and 4 percent were considering
implementing caps. Data from the 2006 Kaiser/Hewitt survey showed that 50
percent of employers with 1,000 or more employees reported having capped
contributions to the health benefits for Medicare-eligible retirees. Of
these employers, 61 percent reported hitting the cap and another 20
percent expected to hit the cap within the next 1 to 3 years. One sponsor
we interviewed with financial caps in place but not yet reached told us
that sponsors generally have two options once they reach these spending
limits: (1) negotiate plan design changes to bring spending under the
limits or (2) pass costs on to retirees through higher premiums.

Sponsors Have Increased Retirees' Copayments, Coinsurance, and Premiums

More than one-fourth of employers participating in the 2006 Kaiser/Hewitt
survey reported that between 2005 and 2006 they increased required
out-of-pocket contributions from retirees and increased the use of other
cost-sharing strategies. In addition, some of these strategies were
intended to address the costs of providing prescription drug coverage to
retirees.11 For example, according to the 2006 Kaiser/Hewitt survey, 25
percent of employers raised copayments or coinsurance for prescription
drugs for retirees aged 65 and older, and 10 percent of employers replaced
fixed dollar copayments for prescription drugs with coinsurance, which can
increase retirees' out-of-pocket expenses as the total cost of the benefit
rises.12

11In 2005 we reported that, according to 2001 Medicare Current Beneficiary
Survey (MCBS) data, prescription drug expenditures for retired Medicare
beneficiaries that were paid by employment-based insurance accounted for
45 percent of all health care expenditures for these beneficiaries. See
[49]GAO-05-205 . In 2004, these costs accounted for 52 percent of all
health care expenditures for these beneficiaries, based on MCBS data.

More than one-half of employers in the 2006 Kaiser/Hewitt survey also
reported that between 2005 and 2006 they increased retiree contributions
to health care premiums for retirees aged 65 and older.13 However, the
survey reported a lower rate of increase in the amount that retirees aged
65 and older contributed to premiums as compared to the amount that
retirees under age 65 contributed to premiums, which the survey largely
attributed to the Medicare Part D program. Sponsors we interviewed also
told us that they had increased retiree premiums to compensate for the
trend in increasing health care costs.14 For example, one public sponsor
told us that premiums for its coverage designed for active workers and
retirees under the age of 65 increased 9 percent for 2005 and 2006.
Finally, according to the 2006 Mercer survey, about 41 percent of retiree
health plans for employers with 500 or more employees required
Medicare-eligible retirees to pay the full cost of their employment-based
health benefits plan.15

12Coinsurance requires beneficiaries to pay a percentage of benefit costs
as opposed to a fixed amount, such as a copayment.

13In a previous survey, Kaiser/Hewitt also reported how the increase in
retiree contributions to premiums compared to the rate of increase for
total health care premium costs. In the 2005 Kaiser/Hewitt survey, 42
percent of surveyed employers with 1,000 or more employees increased
retiree premiums for retirees aged 65 or older at a rate that was higher
than the reported increase in total premium costs, suggesting an increase
in the share of premiums these retirees were required to pay. However, the
survey researchers noted that this subgroup of employers tended to require
retirees to contribute a lower share of premiums than other surveyed
employers in that year. Comparable information is not reported in the 2006
Kaiser/Hewitt survey.

14Benefit surveys also reported increased health care costs for retirees.
The 2006 Kaiser/Hewitt survey reported that the total cost of providing
health benefits to all retirees for surveyed employers increased, on
average, by an estimated 6.8 percent between 2005 and 2006. Respondents to
the 2006 Mercer survey were asked about their retiree costs for both 2005
and 2006, and Mercer used this information to estimate an average annual
cost increase of approximately 2.6 percent per Medicare-eligible retiree
from 2005 to 2006. Because of the low response rate for this part of the
survey, these results are not projectable nationwide and should be viewed
only as a general indicator of retiree medical plan cost.

15Data reflect retiree contributions for health plans for retiree-only
coverage.

Appendix II: Alternative Approaches to Providing Retiree Health Coverage
Suggested by Sponsors and Experts

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) required GAO to describe both (1) alternative approaches to
providing employment-based retiree health coverage suggested by retiree
health benefit sponsors and (2) recommendations by sponsors and other
experts for improving and expanding such coverage. In this appendix we
present a range of alternative approaches to providing employment-based
retiree health coverage and options for expanding and improving these
alternative approaches, as described by retiree health benefit sponsors
and experts we interviewed. To obtain this information, we interviewed
officials from 15 private and public sponsors of retiree health benefits
and several experts on areas relating to the provision of employment-based
retiree health coverage, including five benefit consulting firms; six
organizations, including one representing unions, one representing
multiemployer plans, two representing large employers, and two
representing health plans; one professional organization for actuaries;
and other research organizations. The alternative approaches we describe
are not intended to be a comprehensive list but rather represent the
approaches that were mentioned by the sponsors and experts we spoke with.

Many of the alternative approaches to providing employment-based retiree
health coverage that were described to us rely on tax advantages that
provide an incentive for a sponsor, an employee, or both to set aside
funds for future health care needs. Some of these tax-advantaged
approaches are made available as part of consumer-directed health plans,
which usually consist of a savings account--such as a health savings
account (HSA) or health reimbursement arrangement (HRA)--and a health plan
with a high deductible. In addition to consumer-directed health plans,
there are other tax-advantaged accounts and trusts that do not require
enrollment in a high-deductible health plan, such as a voluntary
employees' beneficiary association (VEBA). Some sponsors and experts
described a third category of arrangement, generally without tax
advantages, that assists sponsors in providing retiree health care
coverage, such as establishing savings accounts that provide a sponsor's
match to the employee's contribution. Although there is no requirement
that retiree health benefit sponsors prefund their retiree health benefit
plans, many of the approaches sponsors and experts described are prefunded
vehicles--wherein the sponsor directly contributes, rather than earmarks,
dedicated funds to an account or trust. The alternative approaches these
sponsors and experts described are listed in table 2.

Table 2: Alternative Approaches to Providing Employment-Based Retiree
Health Coverage Described by Sponsors and Experts

                           Funding/tax                                        
Approach                advantage status   Details                         
Consumer-directed                                                          
health plans                                                               
Health savings account  Prefunded/tax         o Allows limited individual  
(HSA)                   advantaged            (tax-deductible) or          
                                                 sponsor-based (tax-exempt)   
                                                 contributions; however,      
                                                 Medicare enrollees are not   
                                                 eligible to make             
                                                 contributions.               
                                                 o Requires a minimum         
                                                 deductible amount and a      
                                                 maximum limit on enrollee    
                                                 out-of-pocket spending.      
                                                 o Allows tax-free            
                                                 withdrawals for qualifying   
                                                 medical expenses.            
                                                 o Is portable from job to    
                                                 job.                         
Health reimbursement    Not prefundedb/tax    o Allows sponsors to         
arrangementa (HRA)      advantaged            establish accounts that are  
                                                 not prefunded; however,      
                                                 individuals are not eligible 
                                                 to make contributions.       
                                                 o Distributions for medical  
                                                 care expenses are tax-free.  
                                                 o Provides that sponsors'    
                                                 credits to an HRA may        
                                                 accumulate tax-free on an    
                                                 annual basis.                
                                                 o Places no limit on         
                                                 contributions.               
                                                 o Is not required to be      
                                                 portable from job to job.    
Medical savings account Prefunded/tax         o Was designed for small     
(MSA)                   advantaged            businesses (with 50 or fewer 
                                                 employees) and the           
                                                 self-employed.               
                                                 o Allows limited individual  
                                                 (tax-deductible) or          
                                                 sponsor-based (tax-exempt)   
                                                 contributions, but not both  
                                                 in the same year.            
                                                 o Is portable from job to    
                                                 job.                         
Other tax-advantaged                                                       
arrangements                                                               
Retiree medical account Not prefundedb/tax    o Allows sponsors to         
                           advantaged            establish accounts that are  
                                                 not prefunded to track       
                                                 dollars that will be         
                                                 available for an employee to 
                                                 spend on health benefits in  
                                                 retirement.                  
                                                 o Allows individual          
                                                 contributions on an          
                                                 after-tax basis.             
                                                 o Distributions for retiree  
                                                 health benefits are          
                                                 tax-free.                    
                                                 o Is dedicated exclusively   
                                                 to the use of medical        
                                                 expenses during retirement.  
Voluntary employees'    Prefunded/tax         o Employs a trust to fund    
beneficiary association advantaged            certain benefit plans.       
(VEBA)                                        o Must be based on voluntary 
                                                 membership.                  
                                                 o Allows limited sponsor     
                                                 contributions, which are     
                                                 tax-deductible.              
                                                 o Allows the tax-free        
                                                 withdrawal of funds by       
                                                 retirees for qualifying      
                                                 health care expenses.        
Section 420             Prefunded/tax         o Permits the transfer of    
transfer/401(h)         advantaged            excess pension assets of an  
subaccount                                    overfunded defined benefit   
                                                 plan (the "Section 420       
                                                 transfer") into a 401(h)     
                                                 subaccount for the payment   
                                                 of retiree health benefits.  
                                                 o Has certain restrictions   
                                                 to the subaccount relative   
                                                 to the size and method of    
                                                 the defined benefit plan.    
                                                 Medical benefits, together   
                                                 with life insurance          
                                                 benefits, must be            
                                                 subordinate to the defined   
                                                 plan's retirement benefits.  
Sponsor/industry                                                           
arrangementsc                                                              
Employer-sponsored      Prefunded/tax         o Specifies a                
savings account         advantaged            sponsor-provided match       
                                                 (e.g., dollar-for-dollar) to 
                                                 an employee contribution.    
                                                 o Is available upon          
                                                 retirement to pay for        
                                                 retiree medical premiums.    
                                                 o Earnings and sponsor match 
                                                 are not taxed upon           
                                                 withdrawal.                  
Purchasing coalition    Not prefunded/not     o Used to increase leverage  
                           tax advantaged        in the marketplace to gain   
                                                 better prices for both       
                                                 active and retired employees 
                                                 of certain trades.           
Premium reimbursement   Not prefunded/not     o Provides capped premium    
                           tax advantaged        reimbursement to retirees    
                                                 who purchase health care     
                                                 coverage outside of the      
                                                 sponsor's plan.              

Source: GAO interviews with retiree health benefit sponsors and other
experts.

aAlthough HRAs are usually combined with a high-deductible health
insurance plan, this is not required.

bThese accounts are generally set up as notional accounts, which means
they do not require prefunding, although sponsors may choose to do so.

cThe details of these arrangements were provided by sponsors and experts
we interviewed. The specific details of these arrangements may vary across
sponsors.

In addition to describing examples of the alternative approaches to
traditional employment-based retiree health coverage, sponsors and experts
we interviewed provided a variety of recommendations for improving and
expanding these approaches. For example, some sponsors and experts
recommended permitting tax-advantaged contributions by Medicare-eligible
retirees to HSAs and allowing stand-alone HSAs that do not require an
accompanying high-deductible health plan.1 Another expert also suggested
increasing the maximum annual contribution that is currently allowed for
an HSA and expanding the ability of retirees to use HSA funds to pay for
health insurance premiums.2 One sponsor we interviewed highlighted the
increased portability of an HSA as a factor in the sponsor's decision to
stop offering an HRA at the end of 2006 and to begin instead to offer an
HSA option for early retirees and active workers. In addition, according
to one expert we interviewed, because sponsors are not required to make
unused HRA balances available to employees when they change jobs,
individuals may have an incentive to spend down accumulated funds.3
Several sponsors and other experts also suggested creating additional
tax-advantaged arrangements for retiree health benefit sponsors. For
example, one expert suggested allowing the tax-free transfer of funds from
individual tax-preferred vehicles--such as 401(k) retirement accounts--and
pensions to pay for health care costs, including health care premiums.

1Under current law, ongoing contributions to HSAs must be accompanied by
active enrollment in a high-deductible health plan.

2The Health Opportunity Patient Empowerment Act of 2006 makes several
adjustments to federal policy regarding HSAs. First, the annual deductible
limit on contributions to HSAs was repealed. Second, individuals can now
make a onetime transfer of funds from their HRA or flexible spending
account (an annual employer-sponsored "use-it-or-lose-it" fund for medical
expenses not covered by health insurance) to their HSA. However, the
contribution must be made prior to 2012. Finally, individuals can now also
make a onetime transfer of funds from retirement accounts such as
individual retirement accounts, subject to certain penalties, taxes, and
limitations, to their HSA. Pub. L. No. 109-432, SS 302, 303, 307, 120
Stat. 2922, 2948, 2949, 2951.

Overall, a majority of the sponsors we interviewed indicated that sponsors
are willing to use or consider alternative approaches, such as the ones
described above, to assist retirees with their future health care needs
without increasing their costs. Indeed, one sponsor indicated that it
would support anything that would expand its ability to offer and fund
retiree health coverage, such as additional subsidies or favorable tax
treatment. Moreover, one expert indicated that alternative approaches such
as HSAs offer a level of predictability that allows sponsors to sustain
their retiree benefit packages. One reason for this predictability is that
contributions by the sponsor in many of these alternative approaches are
limited to a defined contribution.

Most alternatives that sponsors and experts described in our interviews
were established (or are currently under consideration) for active
employees to use for current and future expenses rather than for those who
are currently retired. For example, among the alternative approaches
described, few of the sponsors we interviewed indicated that they make
such approaches available to current retirees. Specifically, only one
sponsor we interviewed told us that it makes consumer-directed health
plans available to current retirees.4 Seven sponsors told us that their
current use (or consideration) of consumer-directed health plans is
targeted to active employees for current and future health care costs. Two
experts we interviewed, however, noted flaws with using consumer-directed
health plans as adequate savings mechanisms for retiree health care costs
because this approach assumes that active employees will not need the
account funds for current health care expenses. Similarly, one sponsor
noted that because many of the alternative approaches are geared toward
active employees, they were less likely to be effective solutions for
retiree health care needs.

3Currently, employers are not required to make unused HRA balances
available to employees upon job separation.

4According to the 2006 Kaiser/Hewitt survey on retiree health benefits, 10
percent of those surveyed among large private sector employers (defined as
those with 1,000 or more employees) offering retiree health benefits
offered retirees under age 65 an account-based retiree health plan such as
an HSA or HRA in 2006, whereas fewer (3 percent) did so for retirees aged
65 and older.

Appendix III: Scope and Methodology

This appendix describes in detail the scope and methodology used to
address the three report objectives--(1) which MMA prescription drug
coverage options sponsors selected, (2) the factors they considered in
selecting these options, and (3) the effect these decisions may have on
sponsors' provision of employment-based health benefits for retirees. It
also addresses the mandated update on employment-based retiree health
coverage since our 2005 report (reported in app. I) and sponsors' and
others' views on alternative approaches for the provision of
employment-based retiree health coverage that may help maintain, expand,
or improve retiree health coverage (reported in app. II). Because some of
the methodologies apply to more than one objective or appendix, we have
organized this appendix by data source. Specifically, this appendix
briefly describes the methodologies by objective and then discusses (1)
surveys of employment-based health benefits, (2) federal surveys, (3) data
from the Centers for Medicare & Medicaid Services (CMS), and (4)
interviews with sponsors and other experts.

Methodology by Objective

To determine which MMA prescription drug coverage options sponsors
selected, we reviewed data from four surveys collected by three benefit
consulting firms on the options that sponsors reported selecting for 2006
and the options that sponsors reported that they planned to select for
2007. One survey is an annual survey of employer health benefits,
including private and public sector employers, conducted since the early
1990s through 2006, and one is a private sector survey on retiree health
benefits conducted in 2006. We obtained and analyzed data provided by CMS
on the number and characteristics of sponsors that were approved for the
retiree drug subsidy (RDS) for plans ending in 2006 and 2007. To describe
the factors that sponsors considered in selecting the MMA options and the
effect their decisions about the options may have on the provision of
benefits for retirees, we relied on two of the employer benefit surveys
and reviewed documents from the literature on the factors that sponsors
may consider in selecting the MMA options. We also interviewed private and
public sponsors and experts on sponsors' decisions regarding the MMA
options and employment-based retiree health benefits, including benefit
consultants and officials at health plans, groups representing large
employers, and other organizations.

To update information on employment-based retiree health coverage since
our 2005 report, we reviewed data from employer benefit surveys and data
from three large federal surveys that contained information either on
Medicare beneficiaries or on the percentage of public sector employers
that offer retiree health benefits. We also obtained this information in
our interviews with sponsors and experts. We focused on trends
particularly affecting Medicare-eligible retirees, but in some cases when
information specific to Medicare-eligible beneficiaries was not available,
we reported on trends affecting all retirees, including those who were
under age 65 and those who were eligible for Medicare. To describe
alternative approaches for the provision of employment-based retiree
health coverage, we reviewed data from several of the same sources used to
address the other report objectives, including employer benefit surveys,
reports and analyses from the literature, and interviews with sponsors and
experts.

Surveys of Employment-Based Health Benefits

We relied on data from annual surveys of employment-based health benefit
plans. Kaiser/HRET and Mercer each conduct an annual survey of
employment-based health benefits, including a section on retiree health
benefits. Each survey has been conducted for at least the past decade,
including 2006.1 We also used data from a survey focused solely on retiree
health benefits that Kaiser/Hewitt conducted in 2006. For each of these
surveys of employment-based benefits, we reviewed the survey instruments
and discussed the data's reliability with the sponsors' researchers and
determined that the data were sufficiently reliable for our purposes. We
also reviewed two 2006 surveys by The Segal Company. The first represented
a nonrandom sample of multiemployer plans from a range of industries and
geographic regions; the second collected data from a nonrandom sample of
public sponsors that offered prescription drug coverage to
Medicare-eligible retirees.

Kaiser/HRET

Since 1999, Kaiser/HRET has surveyed a sample of employers each year
through telephone interviews with human resource and benefits managers and
published the results in its annual report--Employer Health Benefits.2
Kaiser/HRET selects a random sample from a Dun & Bradstreet list of
private and public sector employers with three or more employees,
stratified by industry and employer size. It attempts to repeat interviews
with some of the same employers that responded in prior years. For the
most recently completed annual survey--conducted from January to May 2006
and published in September 2006--2,122 employers responded to the full
survey, giving the survey a 48 percent response rate. In addition,
Kaiser/HRET asked at least one question of all employers it
contacted--"Does your company offer or contribute to a health insurance
program as a benefit to your employees?"--to which an additional 1,037
employers, or cumulatively about 72 percent of the sample, responded. By
using statistical weights, Kaiser/HRET is able to project its results
nationwide. Kaiser/HRET uses the following definitions for employer size:
(1) small--3 to 199 employees--and (2) large--200 and more employees. In
some cases, Kaiser/HRET reported information for additional categories of
small and large employer sizes.

1Year-to-year fluctuations in these employer benefit survey results need
to be interpreted with caution. These surveys are based on random samples
designed to be representative of a broader employer population and are
used widely, but may not have the precision needed to distinguish small
changes in coverage from year to year because of their response rates and
the number of firms surveyed.

2Kaiser/HRET has been conducting the survey of small and large employers
beginning in 1999. From 1991 through 1998, KPMG Peat Marwick conducted the
survey using the same instrument. However, data for all sizes of employers
are not available for all years. For example, KPMG Peat Marwick sampled
only large employers in 1991, 1992, 1994, and 1997 and sampled both large
and small employers in 1993, 1995, 1996, and 1998.

Mercer

Since 1993, Mercer has surveyed a stratified random sample of employers
each year through mail questionnaires and telephone interviews and
published the results in its annual report--National Survey of
Employer-Sponsored Health Plans.3 Mercer selects a random sample of
private sector employers from a Dun & Bradstreet database, stratified into
eight categories, and randomly selects public sector employers--state,
county, and local governments--from the Census of Governments. The random
sample of private sector and government employers represents employers
with 10 or more employees. For the 2006 survey, which was published in
2007, Mercer mailed questionnaires to employers with 500 or more employees
in July 2006 along with instructions for accessing a Web-based version of
the survey instrument, another option for participation. Employers with
fewer than 500 employees, which, according to Mercer, historically have
been less likely to respond using a paper questionnaire, were contacted by
phone only. Telephone follow-up was conducted with employers with 500 or
more employees in the random sample and some mail and Web respondents were
contacted by phone to clear up inconsistent or incomplete data. A total of
2,136 employers responded to the complete survey, yielding a response rate
of 24 percent. By using statistical weights, Mercer projects its results
nationwide and for four geographic regions.4 The Mercer survey report
contains information for large employers--500 or more employees--and for
categories of large employers with certain numbers of employees as well as
information for small employers (fewer than 500 employees). We have
excluded from our analysis Mercer's 2002 data on the percentage of
employers that offer retiree health plans because Mercer stated in its
2003 survey report that the 2002 data were not comparable to data
collected in other years because of a wording change on the 2002 survey
questionnaire. In 2003, Mercer modified the survey questionnaire again to
make the data comparable to prior years (except 2002).

3Foster Higgins, which later merged with Mercer Human Resource Consulting,
began conducting the survey in 1986. Mercer Health & Benefits, a business
of Mercer Human Resource Consulting, conducted the 2005 and 2006 surveys.

Kaiser/Hewitt

The 2006 Kaiser/Hewitt study--Retiree Health Benefits Examined: Findings
from the Kaiser/Hewitt 2006 Survey on Retiree Health Benefits--is based on
a nonrandom sample of employers because there is no database that
identifies all private sector employers offering retiree health benefits
from which a random sample could be drawn. Kaiser/Hewitt used previous
Hewitt survey respondents and its proprietary client databases, which list
private sector employers potentially offering retiree health benefits.
Kaiser/Hewitt conducted the survey online from June through October 2006
and obtained data from 302 large (1,000 or more employees) employers. Its
results were published in December 2006. According to the survey, these
employers represented 36 percent of all Fortune 100 companies and 22
percent of all Fortune 500 companies. They accounted for more than one
quarter of the Fortune 100 companies with the largest retiree health
liability in 2005. Because the sample is nonrandom and does not include
the same sample of companies and plans each year, survey results for 2006
cannot be compared with results from prior years.

Segal

We reviewed two nonrandom surveys conducted and published by The Segal
Company in 2006 that report on responses by non-private-sector sponsors to
the availability of prescription drug coverage under Medicare Part D. The
first survey, which was published in spring 2006, was based on data
collected in January and February 2006 from a nonrandom sample of 273
multiemployer plans that provided prescription drug coverage to
Medicare-eligible retirees.5 The 273 multiemployer plans that participated
in the survey are Segal clients and, according to Segal, represented a
range of industries and geographic regions. The second survey, which was
published in summer 2006, was conducted by Segal in conjunction with the
Public Sector HealthCare Roundtable, a national coalition of public sector
health care purchasers.6 This survey was based on data collected in May
2006 from a nonrandom sample of 109 public sponsors, including state and
local sponsors, 82 of which offered prescription drug coverage to
Medicare-eligible retirees.

4However, the 2006 Mercer report stated that the average annual cost
increase data cited for Medicare-eligible retirees are not projectable.

Federal Surveys

We analyzed three federal surveys containing information either on
Medicare beneficiaries or on the percentage of public sector employers
that offer retiree health benefits. We obtained information on retired
Medicare beneficiaries' sources of health benefits coverage--including
former employers and unions--from the CPS, conducted by the U.S. Census
Bureau for the Bureau of Labor Statistics. 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 CMS. We obtained data on the
percentage of public sector employers that offer retiree health benefits
from the Medical Expenditure Panel Survey (MEPS), sponsored by the Agency
for Healthcare Research and Quality. Each of these federal surveys is
widely used for policy research, and we reviewed documentation on the
surveys to determine that they were sufficiently reliable for our
purposes.

Current Population Survey

We analyzed the Annual Supplement of the CPS for information on the
demographic characteristics of Medicare-eligible retirees and their access
to insurance.7 The survey is based on a sample designed to represent a
cross section of the nation's civilian noninstitutionalized population. In
the 2006 CPS Annual Supplement, about 83,800 households were included in
the sample for the survey, a significant increase in sample size from
about 60,000 households prior to 2002. The total response rate for the
2006 CPS Annual Supplement was about 83 percent. We present only those
differences that were statistically significant at the 95 percent
confidence level.

5A multiemployer plan is a pension, health, or other employee benefit plan
to which more than one employer is required to contribute; that is
maintained under one or more collective bargaining agreements between one
or more employee organizations, such as a union, and more than one
employer; and that satisfies such other requirements the Secretary of
Labor may prescribe by regulation. 29 U.S.C. S 1002(37) (2000).

6According to the survey, the goal of the Public Sector HealthCare
Roundtable is to represent the interests of the public sector during the
formulation and debate of federal health care reform initiatives.

The CPS asked whether a respondent was covered by employer- or
union-sponsored, Medicare, Medicaid, private individual, or certain other
types of health insurance in the last year. The CPS questions that we used
for employment status, such as whether an individual is retired, are
similar to the questions on insurance status. Respondents were considered
employed if they worked at all in the previous year and not employed only
if they did not work at all during the previous year.

The CPS asked whether individuals had been provided employment-based
insurance "in their own name" or as dependents of other policyholders. We
selected Medicare-eligible retirees aged 65 and older who had
employment-based health insurance coverage in their own names because this
coverage could most directly be considered health coverage from a former
employer. For these individuals, we also identified any retired
Medicare-eligible dependents aged 65 or older, such as a spouse, who were
linked to this policy. We used two criteria to determine that these
policies were linked to the primary policyholder: (1) the dependent lived
in the same household and had the same family type as the primary
policyholder and (2) the dependent had employment-based health insurance
coverage that was "not in his or her own name."

Medicare Current Beneficiary Survey

MCBS is a nationally representative sample of Medicare beneficiaries that
is designed to determine for Medicare beneficiaries (1) expenditures and
payment sources for all health care services, including noncovered
services, and (2) all types of health insurance coverage.8 The survey also
relates coverage to payment sources. The MCBS Cost and Use file links
Medicare claims to survey-reported events and provides expenditure and
payment source data on all health care services, including those not
covered by Medicare. We used the 2004 MCBS Cost and Use file, the most
current data available, to determine the percentage of Medicare-eligible
beneficiaries obtaining supplemental coverage from a former employer or
union. We also used the MCBS data to determine the percentage of all
health care expenditures for retired Medicare beneficiaries paid by
employment-based insurance for prescription drug expenditures.

7See www.census.gov/hhes/www/income/p60_231sa.pdf (downloaded Apr. 3,
2007) for additional information. We analyzed data from the March CPS
Supplement from 1996 through 2002 and the Annual Social and Economic
Supplement to the CPS from 2003 through 2006.

8See http://www.cms.hhs.gov/apps/mcbs/Overview.asp (downloaded Feb. 21,
2007) for additional information.

Medical Expenditure Panel Survey

MEPS consists of four surveys and is designed to provide nationally
representative data on health care use and expenditures for U.S. civilian
noninstitutionalized individuals.9 We used data from one of the surveys,
the MEPS Insurance Component, to identify the percentage of state entities
that offered retiree health benefits in 2004. Insurance Component data are
collected through two samples. The first, known as the "household sample,"
is a sample of employers and other insurance providers (such as unions and
insurance companies) that were identified by respondents in the MEPS
Household Component, another of the four surveys, as their source of
health insurance. The second sample, known as the "list sample," is drawn
from separate lists of private and public employers. The combined samples
provide a nationally representative sample of employers. The target size
of the list sample is approximately 40,000 employers each year.

CMS Data

We analyzed data provided by CMS on the number and characteristics of
sponsors approved for the RDS for plans ending in 2006 and of sponsors
approved for the RDS for plans ending in 2007. The data include selected
variables from applications that were approved for the RDS. For plans
ending in 2006, the CMS data are current as of September 11, 2006; for
plans ending in 2007, the CMS data are current as of February 16, 2007.
Based on conversations with CMS and data reliability checks that we
performed, we have determined that these data were sufficiently reliable
for our purposes.

9See http://www.meps.ahrq.gov/mepsweb/about_meps/survey_back.jsp
(downloaded Apr. 4, 2007) for additional information.

Interviews with Sponsors and Experts

To learn more about retiree health benefit trends, the factors that
sponsors considered in selecting the MMA options, the effect that
sponsors' decisions about the MMA options may have on the provision of
health benefits for retirees, and alternative approaches for the provision
of employment-based retiree health coverage, we interviewed 13 of the 15
private and public sector sponsors of employment-based retiree health
benefits that we interviewed for the initial mandated study published in
2005.10 In our 2005 study, we interviewed officials of 12 Fortune 500
employers that provided retiree health benefits; the Office of Personnel
Management, which administers the Federal Employees Health Benefits
Program; and two state retirement systems. To select the 12 Fortune 500
employers in our 2005 study, we judgmentally selected 10 employers from a
stratified random sample of 50 Fortune 500 employers. We interviewed at
least 1 employer from each of the five groups of 100 Fortune 500 employers
that were stratified on the basis of annual revenues. In addition to
considering revenues, where data were available, we considered each
employer's industry, number of employees, postretirement benefit
obligations, preliminary MMA option decision as reported on its annual
financial statement, and union presence when making our selection. We also
interviewed officials at two additional Fortune 500 employers at the
recommendation of a benefit consultant. In our 2005 study, we judgmentally
selected two large states' retiree health benefits systems on the basis of
a review of selected state data and referrals from a benefit consultant
that works with public sector clients. For our current study, we also
interviewed 2 sponsors that chose to offer their own Medicare Part D plans
instead of implementing the RDS or another MMA option. These sponsors were
not interviewed for our 2005 report.

To obtain broader-based information about retiree health benefit trends,
MMA options, and alternative approaches for the provision of
employment-based retiree health coverage, we interviewed benefit
consultants and other experts at several other organizations.
Specifically, we interviewed representatives of five large employer
benefit consulting firms. Benefit consultants help their clients, which
include private sector employers, public sector employers, or both,
develop and implement human resource programs, including retiree health
benefit plans. While most of these benefit consulting firms' clients were
large Fortune 500 or Fortune 1,000 employers, some also had smaller
employers as clients. One benefit consulting firm that we interviewed, in
particular, provided actuarial, employee benefit, and other services to a
range of public sector clients, including state and local governments,
statewide retirement systems and health plans, and federal government
agencies. It also provided consulting services to multiemployer plans. We
also interviewed officials from the American Academy of Actuaries,
America's Health Insurance Plans and its members, AARP, the American
Benefits Council, the BlueCross BlueShield Association and its members,
the Employee Benefit Research Institute, the National Business Group on
Health, and the National Coordinating Committee for Multiemployer Plans.
Finally, we reviewed other available literature on retiree health benefit
trends, factors affecting sponsors' decisions about the MMA options, and
alternative approaches for the provision of employment-based retiree
health coverage.

10See [50]GAO-05-205 . Two private sector employers that participated in
the 2005 study declined to be interviewed for this study.

Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Appendix V: GAO Contact and Staff Acknowledgments

Contact

John E. Dicken, (202) 512-7119 or [email protected]

Acknowledgments

In addition to the contact named above, Kristi A. Peterson, Assistant
Director; George Bogart; Kevin Dietz; Laura Sutton Elsberg; Krister
Friday; Gregory Giusto; Elizabeth T. Morrison; Giao N. Nguyen; and Suzanne
Worth made key contributions to this report.

(290541)

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Highlights of [58]GAO-07-572 , a report to congressional committees

May 2007

RETIREE HEALTH BENEFITS

Majority of Sponsors Continued to Offer Prescription Drug Coverage and
Chose the Retiree Drug Subsidy

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 resulted in options
for sponsors of employment-based prescription drug benefits, such as a
federal subsidy payment--the retiree drug subsidy (RDS)--when sponsors
provide benefits meeting certain MMA requirements to Medicare-eligible
retirees. The MMA required GAO to conduct two studies on trends in
employment-based retiree health coverage and the MMA options available to
sponsors. The first study, Retiree Health Benefits: Options for
Employment-Based Prescription Drug Benefits under the Medicare
Modernization Act (GAO-05-205), was published February 14, 2005. In this
second study, GAO determined which MMA prescription drug coverage options
sponsors selected, the factors they considered in selecting these options,
and the effect these decisions may have on the provision of
employment-based health benefits for retirees.

GAO identified options that sponsors selected using data from employer
benefit surveys and the Centers for Medicare & Medicaid Services (CMS),
the federal agency that administers Medicare. To obtain sponsors' views
about the factors they considered and the effects of their decisions, GAO
also interviewed private and public sector sponsors and experts.

According to survey data GAO reviewed, a majority of retiree health
benefit sponsors reported that for 2006 they continued to offer
prescription drug coverage and accepted the RDS. However, the size of the
reported majority differed across the surveys. For example, one survey of
private sector sponsors with 1,000 or more employees found that 82 percent
of these sponsors accepted the RDS for 2006. Another survey of private and
public sponsors found that 51 percent of surveyed sponsors with 500 or
more employees accepted the RDS for 2006. Data from CMS showed that more
than 3,900 sponsors, representing about 7 million retirees, were approved
for the RDS for 2006. According to the surveys GAO reviewed, much smaller
percentages of sponsors reported selecting other MMA options for 2006. For
2007, according to one survey, 78 percent of surveyed employers reported
that they planned to apply for the RDS for that year. CMS data showed that
about 3,600 sponsors were approved for the RDS for 2007.

Public and private sponsors GAO interviewed reported considering a variety
of factors when selecting MMA prescription drug coverage options,
including whether they could offer the same retiree health benefits they
offered prior to the MMA and their ability to save on costs. In general,
in order to implement most MMA options, sponsors would likely have to
change the prescription drug benefits they offer. For example, sponsors
that offer their own Medicare Part D plan must generally meet all CMS
requirements for Part D plans, such as providing coverage for specific
categories of prescription drugs. In contrast, sponsors that select the
RDS option can offer the same retiree health benefits they offered prior
to the MMA, as long as a sponsor's coverage remains at least actuarially
equivalent to the standard Part D benefit. When deciding which, if any,
options to pursue, public sponsors were affected by some factors that did
not affect private sponsors.

In the short term, sponsors' decisions regarding the MMA options appear to
have resulted in benefits remaining relatively unchanged, in part because
a majority of surveyed sponsors reported that they continued to offer
prescription drug benefits and accepted the RDS the first 2 years the RDS
was offered. Over the longer term, the effect of sponsors' decisions about
the MMA options is unclear. For example, some experts GAO interviewed
indicated that the MMA may extend the amount of time that sponsors offer
benefits without reducing coverage, while other experts said the
availability of the Medicare Part D benefit may make it more likely that
sponsors will stop offering prescription drug benefits for retirees. In
addition, it is unclear to what extent sponsors will continue to select
the same MMA option in the future. To the extent that sponsors that have
accepted the RDS select other MMA options, sponsors' provision of retiree
health benefits may change.

In commenting on a draft of this report, CMS and four experts agreed with
the report's findings.

References

Visible links
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-05-205
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-07-141
  46. http://www.gao.gov/cgi-bin/getrpt?GAO-05-205
  48. http://www.gao.gov/cgi-bin/getrpt?GAO-05-205
  49. http://www.gao.gov/cgi-bin/getrpt?GAO-05-205
  50. http://www.gao.gov/cgi-bin/getrpt?GAO-05-205
  58. http://www.gao.gov/cgi-bin/getrpt?GAO-07-572
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