Retiree Health Insurance: Erosion In Employer-Based Health Benefits for
Early Retirees (Letter Report, 07/11/97, GAO/HEHS-97-150).

Pursuant to a congressional request, GAO examined a number of issues
related to the private sector's provision of health benefits to
retirees, focusing on: (1) available private sector and government
surveys of changes in retiree access to and participation in
employer-based health coverage; (2) the Pabst Brewing Company health
benefit plan in effect during 1996; (3) data from health insurance
carriers on the cost of alternative sources of coverage for early
retirees in Wisconsin and other selected states; (4) applicable federal
and state laws and legal precedents; and (5) earlier GAO work.

GAO noted that: (1) the available data on employer-based retiree health
benefits paints a limited but consistent picture of eroding coverage;
(2) the data, primarily from employer or retiree surveys, demonstrate a
steady decline in the number of retirees with coverage through a former
employer--both for early retirees and those who are Medicare eligible;
(3) earlier employer survey data suggest that since 1988 the decline in
the number of large employers who offer retiree coverage has been
significant; (4) it is important to point out that the decline in the
availability of employer-based coverage has not resulted in as large an
increase in early retirees without private health insurance; (5) among
the reasons are that: (a) the decision to retire is often predicated on
the availability of health coverage; and (b) access to other sources of
private coverage appear to be filling a significant portion of the gap
created by fewer employers offering retiree health benefits; (6) retiree
surveys provide another important perspective on the erosion in retiree
health coverage; (7) comparing 1988 and 1994 data for all retirees aged
55 and older, the Labor Department reported that the number of
individuals who continued to receive employer-based health benefits into
retirement declined by 8 percentage points; in addition, the number
still covered sometime after retirement dropped by 10 percentage points;
(8) losing access to employer-based coverage poses three major
challenges for retirees: (a) higher costs in purchasing individual
coverage on their own; (b) a related problem, the potential for less
comprehensive coverage because of higher premiums; and (c) until
recently, the possibility that coverage will be denied or restricted by
a preexisting medical condition; (9) the impact of the termination of
health benefits on retirees varies from state to state, depending on the
nature of state laws governing the purchase of insurance by individuals;
(10) a key characteristic of America's voluntary, employer-based system
of health insurance is an employer's freedom to modify the conditions of
coverage or to terminate benefits; (11) while federal law requires that
the terms of an employee's health benefits be in writing, the intent was
not to prevent an employer from changing or terminating those benefits
for either active workers or retirees; (12) in cases involving the
termination of health benefits by an employer, federal courts have turn*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-150
     TITLE:  Retiree Health Insurance: Erosion In Employer-Based Health 
             Benefits for Early Retirees
      DATE:  07/11/97
   SUBJECT:  Health insurance
             Insurance premiums
             Non-government enterprises
             Retirement benefits
             Employee benefit plans
             Surveys
             Employee medical benefits
             Cost sharing (finance)
             Elderly persons
IDENTIFIER:  Medicare Program
             Wisconsin
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Honorable
Jerry Kleczka, House of Representatives

July 1997

RETIREE HEALTH INSURANCE - EROSION
IN EMPLOYER-BASED HEALTH BENEFITS
FOR EARLY RETIREES

GAO/HEHS-97-150

Retiree Health Benefits

(101553)


Abbreviations
=============================================================== ABBREV

  AIDS - Acquired Immune Deficiency Syndrome
  COBRA - Consolidated Omnibus Budget Reconciliation Act of 1986
  CPS - current population survey
  ERISA - Employee Retirement Income Security Act of 1974
  FAS - Financial Accounting Standards
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  HMO - health maintenance organization
  SPD - Summary Plan Description

Letter
=============================================================== LETTER


B-276540

July 11, 1997

The Honorable Jerry Kleczka
House of Representatives

Dear Mr.  Kleczka: 

In August 1996, the Pabst Brewing Company notified about 750 retirees
of its Milwaukee plant that it planned to terminate their health
benefits within a month.  Concerned about this abrupt cancellation,
especially for early retirees--those who are not yet eligible for
Medicare, you asked us to examine a number of issues related to the
private sector's provision of health benefits to retirees: 

  -- Has the number of private sector early retirees with health
     coverage declined since the late 1980s? 

  -- How are retirees affected by an employer's decision to terminate
     health benefits? 

  -- Do federal laws (1) prevent employers from reducing or
     terminating retirees' health benefits or (2) provide for
     continued group health coverage for retirees under age 65 years
     whose health plans are terminated? 

Beyond the specific questions raised by Pabst's termination of
retiree health benefits, you expressed concern about the fragility of
the current system for providing retiree health coverage.  Several
factors suggest that retiree coverage is becoming an important
national issue.  These factors include the downward drift in
employers' commitment to retiree coverage, the need to trim Medicare
cost growth, and the dramatic near-term increase in the number of
retirees as millions of baby-boomers approach retirement age. 

To address your specific questions, we reviewed (1) available private
sector and government surveys of changes in retiree access to and
participation in employer-based health coverage; (2) the Pabst health
benefit plan in effect during 1996; (3) data from health insurance
carriers on the cost of alternative sources of coverage for early
retirees in Wisconsin, where Pabst is located, and other selected
states; (4) applicable federal and state laws and legal precedents;
and (5) earlier GAO work.  Appendix I contains a discussion of the
sources of data on employer-sponsored coverage, the patchwork nature
of the evidence on retiree health care trends, and a cautionary note
on the strict comparability of the data.  We performed our work
during April and May 1997 in accordance with generally accepted
government auditing standards. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The available data on employer-based retiree health benefits paints a
limited but consistent picture of eroding coverage.  The data,
primarily from employer or retiree surveys, demonstrate a steady
decline in the number of retirees with coverage through a former
employer--both for early retirees and those who are Medicare
eligible.  Foster Higgins, a benefit consulting firm, reported in
1996 that only 40 percent of large employers with more than 500
employees offered health benefits to early retirees--a 6 percentage
point decline since 1993.  Even fewer small and medium-sized firms
offered retiree coverage.  Earlier employer survey data suggest that
since 1988 the decline in the number of large employers who offer
retiree coverage has been significant.  It is important to point out
that the decline in the availability of employer-based coverage has
not resulted in as large an increase in early retirees without
private health insurance.  Among the reasons are that (1) the
decision to retire is often predicated on the availability of health
coverage and (2) access to other sources of private coverage appear
to be filling a significant portion of the gap created by fewer
employers offering retiree health benefits.  For example, if
employer-based coverage is not available, early retirees may purchase
coverage themselves or obtain insurance through a working or retired
spouse. 

Retiree surveys provide another important perspective on the erosion
in retiree health coverage.  Comparing 1988 and 1994 data for all
retirees aged 55 and older, the Labor Department reported that the
number of individuals who continued to receive employer-based health
benefits into retirement declined by 8 percentage points; in
addition, the number still covered sometime after retirement dropped
by 10 percentage points.  There are several explanations for the
erosion in coverage during retirement.  First, some employers, much
like Pabst, have ceased to offer retiree health benefits.  Escalating
health care costs have spurred employers to look for ways to control
their benefit expenditures.  Among the cost-control techniques
adopted by employers are eliminating retiree coverage, increasing
cost sharing, and requiring those covered to choose more
cost-effective delivery systems.  In addition, a new financial
accounting standard developed in the late 1980s has changed
employers' perceptions of retiree health benefits and may have acted
as a catalyst for reductions in retiree coverage.  The new rule makes
employers much more aware of the future liability inherent in retiree
health benefits by requiring them to account for its estimated value
as a cost against earnings.  A second contributor to the erosion in
employer-based health coverage during retirement is retirees'
responses to changes in their coverage.  According to the Labor
Department, fewer retirees are choosing to participate in
employer-based coverage when offered because firms are asking them to
shoulder more of the costs.  At the same time, retirees who decline
employer-based benefits may have access to less expensive coverage
through a working or retired spouse. 

Losing access to employer-based coverage poses three major challenges
for retirees:  (1) higher costs in purchasing individual coverage on
their own; (2) a related problem, the potential for less
comprehensive coverage because of higher premiums; and (3) until
recently, the possibility that coverage will be denied or restricted
by a preexisting medical condition.  The impact of the termination of
health benefits on retirees varies from state to state, depending on
the nature of state laws governing the purchase of insurance by
individuals.  The cost impact is starkly illustrated for affected
Pabst early retirees by the nearly $8,200 annual cost of purchasing
standard family coverage in the individual insurance market--an
enormous increase given that the former Pabst plan required no
contribution on the part of the retiree for most plan options. 
Beginning July 1, 1997, the implementation of the Health Insurance
Portability and Accountability Act (HIPAA) will provide uniform
federal standards to ensure that individuals leaving employer-based
group plans can purchase insurance on their own if they can afford to
do so. 

A key characteristic of America's voluntary, employer-based system of
health insurance is an employer's freedom to modify the conditions of
coverage or to terminate benefits.  While federal law (the Employee
Retirement Income Security Act of 1974 or ERISA) requires that the
terms of an employee's health benefits be in writing, the intent was
not to prevent an employer from changing or terminating those
benefits for either active workers or retirees.  In cases involving
the termination of health benefits by an employer, federal courts
have turned to the nature of the written agreements and extrinsic
evidence covering the provision of retiree benefits.  In essence, the
issues before the court often come down to a matter of contract
interpretation.  If the employer has explicitly reserved the right in
plan documents to modify health benefits, the courts have generally
upheld the termination of coverage.  On the other hand, if the
contract leaves some doubt, courts will look to evidence such as
collective bargaining agreements and other written and oral
representations to determine the rights and obligations of the
parties.  Today, most companies have reserved the right in plan
documents to modify health benefits for current and future retirees. 
Finally, the right to purchase continuation coverage from an employer
is only guaranteed to workers in certain circumstances, for example,
if an employee is fired, laid off, quits, or retires.  Individuals
who are already retired when an employer terminates coverage are not
eligible to continue that firm's health plan at their own expense. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Although some Americans purchase health insurance individually for
themselves or their dependents, most receive coverage as a benefit
through their employer.  The former is commonly referred to as
individual coverage and the latter as employer-based group coverage. 
Complementing these two types of private insurance\1 are public
programs including Medicaid for the poor and Medicare for the elderly
and disabled.\2 With the exception of the long-term disabled,
Medicare is only available to individuals aged 65 and older.  The
lack of affordable health insurance for older Americans--either
employer based or purchased individually--was a key factor leading to
the establishment of Medicare in 1965.\3

The availability of employer-based health benefits is of particular
concern to older Americans approaching or at retirement
age--individuals who consume a higher level of medical services and
whose health care costs are commensurately more expensive.  For those
under age 65 and not yet eligible for Medicare, the decision to
retire may turn on the continuation of health benefits by an
employer.  For those 65 or older living on a fixed income,
employer-based benefits may help fill coverage gaps in Medicare such
as deductibles and copayments or the lack of a prescription drug
benefit.  (See app.  II for a description of Medicare benefits and
how they differ from employer-based coverage.) In 1994, about 75
percent of retirees were over age 65 and thus employer-based coverage
supplemented Medicare benefits; the remaining 25 percent were
ineligible for Medicare because they were between ages 55 and 65. 
For the latter group, employer-based benefits were a particularly
critical source of coverage.  Overall, about one-third of retirees 55
years and older received health benefits from a former employer. 
While Bureau of the Census data show that the number of retirees
increased from 18.5 million to 23.4 million between 1988 and 1994,
the first members of the baby boom generation are age 51 and poised
to enter retirement, an event that will begin to dramatically
increase the number of retirees. 

Before 1980, most employers that provided retiree health coverage did
so on a lifetime basis.  The trend, especially for firms with labor
unions, was to continue to improve retiree health benefits with each
successive labor contract.  Beginning in the 1980s, however, sharply
rising medical costs, heightened foreign competition, corporate
takeovers, the declining bargaining power of labor, and a change in
accounting standards gave rise to attempts by some employers to
modify or even eliminate retirees' health benefits.  New accounting
standards announced in 1990 changed employers' perception of retiree
coverage by making them more aware of the magnitude of their
liabilities. 

ERISA established safeguards governing the creation, operation, and
administration of most employer-based health benefits.\4 In addition,
ERISA requires group health plans covering 20 or more workers to
offer 18 to 36 months of continued health coverage in certain
circumstances, such as when an employee is fired, laid off, or
quits.\5 The mandate to offer such continuation coverage does not
oblige employers to share in its cost.  Finally, HIPAA has an impact
on those who are seeking to transition from employer-based group
benefits to individual coverage.  Effective after June 30, 1997, the
law provides uniform federal safeguards to ensure that individuals
who lose group health benefits and can afford to purchase individual
coverage have the right to do so.\6


--------------------
\1 A significant portion of employer-based private insurance is
provided by the public sector.  The federal government covers
civilian workers through its Federal Employees Health Benefit
Program, while the Department of Defense operates a health care
system for military personnel.  Similarly, state and local
governments also provide employee health benefits.  About 17 percent
of workers aged 18 to 64 have coverage provided though a public
sector employer. 

\2 Other public sources of health services include the Indian Health
Service, the Department of Veterans Affairs, and public clinics and
hospitals. 

\3 Insurance coverage as part of a retirement benefit was the
exception, not the rule, and private insurance companies had shown a
reluctance to offer coverage to older persons even when these
individuals could afford it.  See Marilyn Moon, Medicare Now and in
the Future (Washington, D.C.:  Urban Institute Press, 1993), p.  25. 

\4 P.L.  93-406, 29 U.S.C.  1001 et seq. 

\5 This provision was added to ERISA by the Consolidated Omnibus
Budget Reconciliation Act of 1986 (COBRA), 29 U.S.C.  1161 et seq. 
For this reason, continuation coverage is known by the acronym COBRA. 

\6 P.L.  104-191. 


   DECLINE IN ACCESS TO AND
   PARTICIPATION IN EMPLOYER-
   BASED RETIREE COVERAGE
------------------------------------------------------------ Letter :3

Since the late 1980s, retiree access to and participation in private
insurance through an employer has declined.  The drop in
coverage--both for those who retire early (before they are eligible
for Medicare) and to individuals who are Medicare eligible--has been
reported in periodic surveys sponsored by benefit consulting firms
and by the federal government.  The erosion in coverage has been
influenced not only by the discontinuation of employer-based health
benefits but also by the trend to require greater retiree cost
sharing--a factor contributing to lower participation rates.  Survey
data indicate that employers are more likely to offer coverage to
early retirees than to those who are Medicare eligible. 


      FEWER EMPLOYERS OFFERING
      RETIREE COVERAGE
---------------------------------------------------------- Letter :3.1

Data from an annual survey conducted by Foster Higgins suggest a
significant decline between 1988 and 1996 in the availability of
retiree coverage from large employers with over 500 workers.\7 The
data appear to be consistent across the entire period, but the
pre-1993 data should not be viewed as authoritative because of a
change in the survey methodology, described in appendix I.  The data
distinguish between early retirees and those who are Medicare
eligible.  Since 1993, coverage for both groups has declined by 6 to
7 percentage points, a continuation of a trend evident since 1988. 
As shown by figure 1, early retirees at large firms are more likely
than those who are Medicare eligible to be offered health benefits by
a former employer.  In 1996, for example, only 33 percent of
Medicare-eligible retirees were offered health benefits compared with
40 percent of early retirees. 

   Figure 1:  Percentage of Large
   Employers Offering Retiree
   Medical Coverage, 1988 and
   1992-96

   (See figure in printed
   edition.)

Note:  Data from 1988 and 1992 are not strictly comparable with data
collected after 1992. 

The two primary reasons cited for the decline in employer-based
retiree health coverage are (1) new accounting standards, which
highlight the magnitude of this liability over time; and (2) rapidly
rising benefit costs.  Since employers typically cover retiree health
costs as they are incurred, the liability represented by a commitment
to provide benefits to current and future retirees is largely
unfunded.  In 1990, the Financial Accounting Standards Board
announced the introduction of a new rule, referred to as FAS 106,
regarding these unfunded obligations.  Beginning in 1993, employers
were required to include the present value of future costs for
retiree health benefits as a liability on their balance sheets.  The
new standard does not require that employers set aside funds to pay
for these future costs and thus it does not affect their cash flow. 
However, many financial experts are concerned because these long-term
liabilities erode equity positions and will become current
obligations in future years.\8 On the other hand, by dropping retiree
coverage, a company can immediately improve its balance sheet.  As
shown in figure 1, a sharp drop in employer-based retiree coverage
occurred between 1992 and 1993.  It is difficult to determine the
extent to which this 6 percent decline in a single year stems from
the expected response to the FAS 106 rule or from the change in the
survey methodology.  In responding to benefit consultant surveys,
many companies cited the fact that FAS 106 results in reductions in
reported income and shareholder equity as a reason for modifying
retiree health benefits, including the phasing out of such coverage. 

The late 1980s was also a period of double-digit health care
inflation.  Although the growth in premiums has slowed dramatically
in the past few years, the percentage of large firms offering retiree
health benefits has continued to drop.  The decline between 1994 and
1996 was especially sharp for Medicare-eligible retirees.  Among the
reasons cited by Foster Higgins for the slowdown in the growth of
employers' health care costs are that more workers moved into managed
care plans--including retirees--and the fact that some employers
dropped retiree coverage.  The Medicare program is also facing cost
pressures.  In 1997, the Congress and the President reached a
tentative agreement to cut about $115 billion from the program over a
5-year period in order to reduce the program's rate of growth.  The
effect on those eligible for the program will become clearer as
legislation is debated and signed into law.  Although higher
beneficiary premiums have been discussed, they may be balanced by a
wider variety of managed care plans and increased preventive care
benefits. 

There are several potential explanations for higher levels of
employer coverage among early retirees.  First, individuals are not
as likely to seek early retirement unless they are able to continue
employer-based health benefits.  A RAND study of the effect of access
to post-retirement health insurance found that the offer of continued
coverage had a positive effect on the likelihood of retirement for
men aged 55 to 62.\9 Second, those who retired early through buyouts
may have been guaranteed health benefits as an enticement to do so. 
Third, COBRA provides 18 months of coverage, allowing individuals to
retire at age 63-1/2 and continue with employer-based group coverage
until Medicare eligibility kicks in at age 65.  Fourth, because of
higher managed care enrollment among early retirees, cost may be a
less important factor in an employer's decision to offer or withdraw
health benefits to this group.  While just over one-half of early
retirees are enrolled in a managed care plan, the corresponding
figure for Medicare-eligible retirees is only 29 percent.  Finally,
employers know that coverage is available to retirees aged 65 and
older through Medicare, an option not open to younger retirees. 

Other sources of private insurance appear to be filling a significant
portion of the gap created by the fact that fewer employers offer
retiree health benefits.  If employer-based coverage is not
available, early retirees may purchase coverage themselves or obtain
insurance through a working spouse.  Thus, between 1989 and 1995, the
percentage of early retirees with private coverage fell by only 7
percentage points compared with a much larger drop in the number of
employers offering retiree coverage.\10


--------------------
\7 National Survey of Employer Sponsored Health Plans 1996 (New York: 
Foster Higgins, 1997).  The Foster Higgins survey included both
public and private employers but only reported aggregated data on the
two sectors. 

\8 For additional information on the impact of FAS 106, see Retiree
Health Plans:  Health Benefits Not Secure Under Employer-Based System
(GAO/HRD-93-125, July 9, 1993). 

\9 Lynn Karoly and Jeannette Rugowski, The Effect of Access to
Post-Retirement Health Insurance on the Decision to Retire Early,
RAND Reprints:  94-13E (Santa Monica, Calif.:  1995). 

\10 GAO estimate based on Current Population Survey (CPS) data from
the Bureau of the Census.  See Private Health Insurance:  Continued
Erosion of Coverage Linked to Cost Pressures (GAO/HEHS-97-122, July
1997). 


      COVERAGE INFLUENCED BY
      FACTORS OTHER THAN
      AVAILABILITY
---------------------------------------------------------- Letter :3.2

While Foster Higgins surveys employers about the health benefits they
offer, CPS data emanate from interviews with individuals, in this
instance, retired workers.  As with the Foster Higgins survey, CPS
data include both the private and public sectors.  Analysis of CPS
data by the Labor Department's Pension and Welfare Benefits
Administration revealed a significant erosion between 1988 and 1994
in the number of individuals who retain employer-based health
coverage upon retirement.\11 As shown in table 1, only 42 percent of
retirees aged 55 and older continued such coverage into retirement in
1994, a decline of 8 percentage points since 1988.  Moreover, the
percentage of individuals with employer-based coverage continued to
decrease throughout retirement.  Only 34 percent still retained
coverage several years after retirement, and an even smaller
percentage believed that their employer-based health benefits would
be available until they die.  Although a smaller percentage of
retirees from the private sector have employer-based benefits at or
sometime after retirement, the decline in coverage between 1988 and
1994 can be seen in both the public and private sectors in a roughly
proportional manner.  Appendix III replicates the data in tables 1
and 2 for the private sector only. 



                                Table 1
                
                 Percentage of Retirees With Employer-
                     Based Coverage, 1988 and 1994

                                                         All retirees
                                                         (aged 55 and
                                                            older)
                                                        --------------
                                                          1988    1994
------------------------------------------------------  ------  ------
Active employees with coverage at time of retirement       69%     65%
Workers who continued coverage into retirement              50      42
Retirees currently covered by employer's plan               44      34
Retirees who believed their employer-based coverage         32      30
 could be continued for life
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 

Factors other than the actual availability of coverage are
responsible for an undetermined portion of the decline in retirees
with employer-based health benefits.  According to the Labor
Department, the propensity for retirees to enroll in employer-based
plans when they are offered has dropped because of the increased
costs retirees are being asked to shoulder by employers.  In both the
1988 and 1994 surveys, individuals who declined employer-based
coverage at retirement were asked to articulate the reasons for their
decision.  Of the approximately 5.3 million retirees who discontinued
employer-based benefits in 1994, 27 percent cited the expense as a
factor--an increase from 21 percent in the earlier survey.  Moreover,
there was a 6 percentage point increase over the same time period in
the number of such retirees who indicated that they still had health
insurance through a plan other than that of their former employer. 
For example, a retiree may have access to health benefits through a
working or retired spouse. 

Table 2 summarizes changes in employer/employee cost sharing for
retiree coverage.  Compared with 1988, in 1994, more employers were
requiring retirees to share in the cost of coverage, a fact reflected
in (1) the drop in the percentage of firms paying the entire premium
and (2) the increase in those sharing some of the premium costs. 
Overall, the employee's contribution to premiums rose about 10
percent faster than the inflation rate over that 6-year period. 
While this amount reflects the cost increase for both single and
family coverage, there was considerable variation between the two. 
The inflation-adjusted employee share for family coverage increased
by almost 23 percent, while the share for single coverage decreased
by about 9 percent.  Employers appear to be encouraging retired
employees to sign up for single coverage while hoping that spouses
will choose alternative sources of coverage if they are available,
for example, single coverage from their own former employer. 
Appendix IV summarizes changes from 1988 to 1994 in costs paid by
retirees for both single and family coverage from a former employer. 



                                Table 2
                
                  Costs Paid by Retirees for Employer-
                Based Coverage, 1988 and 1994 (includes
                    both single and family coverage)

                                                          1988    1994
------------------------------------------------------  ------  ------
Employee pays nothing                                      42%     37%
Employee pays some costs                                   33%     42%
Employee pays all costs                                    21%     19%
Don't know/no response                                      4%      2%
Median annual cost to retirees (1994 dollars adjusted     $874    $960
 for inflation)
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 

CPS data also contain insights on the characteristics of individuals
more and less likely to have employer-based coverage.  Those
characteristics are summarized in table 3. 



                                Table 3
                
                  Characteristics of Retirees More and
                   Less Likely to Have Employer-Based
                            Health Benefits

MORE likely to have coverage        LESS likely to have coverage
----------------------------------  ----------------------------------
Work for larger firms               Work for smaller firms

Have higher preretirement earnings  Have lower preretirement earnings

Belong to union                     Are nonunion

Work in manufacturing or            Work in retail sector or service
communications/public utilities     industries

Work for public sector              Work for private sector

Are men                             Are women

Are white                           Are black or other race
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 


--------------------
\11 U.S.  Department of Labor, Pension and Welfare Benefits
Administration, Retirement Benefits of American Workers:  New
Findings from the September 1994 Current Population Survey
(Washington, D.C.:  Department of Labor, Sept.  1995), p.  25. 


   EMPLOYERS' DECISIONS TO
   TERMINATE COVERAGE SUBJECTS
   RETIREES TO NEW COSTS AND RISKS
------------------------------------------------------------ Letter :4

If available, employer-based group health insurance provides two
important advantages to retirees:  (1) more affordable health
benefits and (2) access to benefits for those retirees whose health
status might otherwise impinge on their ability to obtain coverage in
the individual insurance market.  Such insurance is affordable
because many employers continue to finance all or a significant
amount of their retirees' health insurance costs, even though over
the last decade retirees have been required to pay an increasing
share of these costs.  In addition, the overall premiums for
employer-based health plans are generally lower than those in the
individual insurance market because the premiums charged to employers
are based on risks spread over an entire group of workers.  In
contrast, premiums in the individual insurance market reflect the
risk characteristics of each applicant.  These characteristics
include not only age and coverage type but also gender, health
status, and geographic differences in health care costs.\12 Unless
there is a state law prohibiting price differences by age, most
carriers charge higher premiums to older applicants. 

Consequently, retirees no longer covered by their former employer's
group health plan are likely to encounter higher premiums to obtain
similar coverage in the individual insurance market.  For example,
before its 1996 decision to terminate health benefits to retired
employees at its Milwaukee plant, Pabst financed the total cost of
practically all of the health plans it offered to its retired
workers.  With the elimination of these benefits, affected Pabst
retirees who want to obtain health coverage must now absorb its full
cost, which can be a significant amount of money.  Individual
retirees may be affected differently by the varying methods insurance
companies use to determine price and eligibility.  Table 4 provides
an example of the premiums Pabst retirees might face if they purchase
comprehensive coverage from a Wisconsin carrier to replace the
benefits terminated by Pabst. 



                          Table 4
          
          Comparison of Costs to Retiree Under Age
          65 Before and After Pabst's Termination
                 of Health Benefits in 1996

                                                 Potential
                                Annual cost    annual cost
                                 to retiree     to retiree
                                  for Pabst            for
                                     health     individual
                                 benefits\a       coverage
----------------------------  -------------  -------------
Family coverage (retiree and      $0-$1,444    $8,186.96\b
 spouse)
Single (male applicant)                  $0      $4,502.76
----------------------------------------------------------
\a Pabst offered its workers eight different plans and paid their
full cost with the exception of one of four plans that provided
family coverage.  Few employees selected the family option requiring
cost sharing.  The workers who did only had to pay the difference
between what Pabst paid for the other family plans and the cost of
this particular plan.  This difference was about $1,444 a year. 

\b Premium rate charged by one carrier in Milwaukee, Wisconsin, for a
standard plan for a nonsmoker with a $250 deductible.  Covering an
additional dependent would bring the cost to about $9,300.  A retiree
who smokes and also covers a spouse would pay about $11,000 for
coverage. 

Premiums in other states could be higher or lower given the high
geographic variability of health insurance rates in the individual
market.  For example, in 1996, a major carrier in New Jersey offered
family coverage with a $250 deductible at an annual price of
$11,825.\13 The price of similar family coverage in Maricopa County,
Arizona, was only $6,264 in 1996.  However, retirees in Arizona with
preexisting conditions can be denied coverage altogether, be charged
a premium much higher than the standard, or have a condition excluded
from coverage. 

Before the July 1, 1997, implementation of HIPAA, consumers,
including retirees entering the individual insurance market, often
discovered that they were not eligible for insurance or that their
coverage was conditioned upon the permanent exclusion of an existing
health problem.  Many with specific health problems found coverage
only at prohibitive prices.  For example, health insurance carriers
often declined coverage for Acquired Immune Deficiency Syndrome
(AIDS) and diabetes; offered coverage but excluded conditions such as
asthma, ulcers, and glaucoma; and charged higher premiums for plans
that covered problems like anemia and arteriosclerosis.\14 Although
HIPAA does not address the cost of health insurance, it will help
guarantee access to the individual market by those with qualifying
coverage from a former employer--regardless of their health
status--and will provide for the renewability of individual coverage. 
Although HIPAA offers no protection to Pabst retirees whose health
benefits were terminated in 1996 or to any retiree who lost
employer-based health benefits before July 1, 1997, it will protect
future retirees.  Wisconsin law requires insurers to accept
individual applicants who previously had employer-based insurance if
such insurance is not self-funded,\15 but it does not apply to Pabst
retirees because the firm self-funded its health benefits. 

Many states, including Wisconsin, offer a high-risk program, or
"pool," for people who have been denied coverage or have one of a
number of specified health conditions.  However, this safety net
option often has very limited coverage and lower lifetime limits. 
The cost of a high-risk pool can be 50 percent more than the average
or standard rate charged in the individual insurance market for a
comparable plan.  The annual premium for a single male aged 55 to 59
in Wisconsin's high-risk pool averaged $5,122 in 1996--over $500 more
than the cost in the individual insurance market, as shown in table
4.  Wisconsin offers subsidies to families with incomes of less than
$20,000. 


--------------------
\12 For details on the individual health insurance market, including
its structure, premium prices, the effect of demographic
characteristics, and health plans offered, see Private Health
Insurance:  Millions Relying on Individual Market Face Cost and
Coverage Trade-Offs (GAO/HEHS-97-8, Nov.  25, 1996). 

\13 This amount is for nonsmokers aged 55 to 59 with one child. 
Moreover, New Jersey restricts carriers' premium rating practices and
generally requires all carriers to set the same rate for all plan
participants within a community. 

\14 See GAO/HEHS-97-8, Nov.  25, 1996, for a discussion of the
evaluation process that health insurance companies have used in
providing access to the individual insurance market. 

\15 Self-funded plans are those in which employers bear much of the
financial risk for health claims.  Employers that self-fund are not
subject to state insurance regulation.  See Health Insurance
Regulation:  Varying State Requirements Affect Cost of Insurance
(GAO/HEHS-96-161, Aug.  19, 1996). 


   LIMITED FEDERAL PROTECTION OF
   EMPLOYER-BASED RETIREE HEALTH
   BENEFITS
------------------------------------------------------------ Letter :5

ERISA covers both the pension and health benefits of most private
sector workers.  The voluntary nature of these employer-based
benefits as well as the manner in which coverage is funded have
important regulatory implications.  Consistent with the lack of any
mandate to provide health benefits, nothing in federal law requires
an employer to offer coverage or prevents cutting or eliminating
those benefits.  In fact, an employer's freedom to modify the
conditions of coverage or to terminate benefits is a defining
characteristic of America's voluntary, employer-based system of
health insurance.\16 Moreover, employer-based health benefits are
funded on a pay-as-you-go basis.  In contrast, the sheer magnitude of
accumulated employer-employee contributions to retirement funds
necessitates a greater degree of regulation of pension benefits. 
Thus, ERISA not only requires employers to fund their pension plans
but gives employees vested rights upon meeting certain service
requirements.  Health benefits, on the other hand, were excluded from
such funding and vesting requirements.\17

Although ERISA was passed in response to concerns about the solvency
and security of pension plans, some of its provisions, including
federal preemption of state regulations, also apply to
employer-sponsored health coverage.  The preemption effectively
blocks states from directly regulating most employer-based health
plans, while allowing states to oversee the operation of health
insurers.\18 ERISA, however, does impose some federal requirements on
employer-based health plans.  For example, employers must

  -- file annual Summary Plan Descriptions (SPD) with the Department
     of Labor,

  -- provide participants and beneficiaries access to information
     about the plans,

  -- have a process for appealing claim denials,

  -- make available temporary continuation coverage for former
     employees and dependents, and

  -- meet specific fiduciary obligations. 

While ERISA protected the pension benefits of retired workers at the
Pabst Brewing Company, it offered only limited federal safeguards to
retirees participating in the firm's health benefit plan.  ERISA
requires companies such as Pabst to make an SPD available to health
plan participants within 90 days of enrolling.  For retirees, the SPD
that was in effect at the time of retirement is the controlling
document.  The SPD must clearly set out employee rights, including ". 
.  .  information concerning the provisions of the plan which govern
the circumstances under which the plan may be terminated." Employers
must file these documents with the Department of Labor, the agency
responsible for enforcing ERISA.  According to Labor, unless
employers have made a clear promise of specific health benefits for a
definite period of time or for life and have not reserved the right
to change those benefits, they are free to cut or terminate health
care coverage.  Appendix V contains an excerpt from a Labor brochure
outlining employer responsibilities/employee protections under ERISA. 

Because of the federal preemption of state regulation, the rights of
active and retired employees under ERISA are determined in federal
courts.  In reviewing cases involving changes to health benefit plans
by employers, several federal courts have focused on the actual
language used in plan documents and, if applicable, in collective
bargaining agreements.  Virtually all employers have reserved the
right to modify health benefits for current and future retirees in
such documents.  However, if the language leaves some doubt as to the
nature or duration of benefits, or if there are conflicts in the plan
documents, the courts have examined significant written and oral
representations made to employees to determine whether the employer
has the right to modify retiree health benefits. 

The temporary availability of health care coverage guaranteed by
COBRA to an individual who is fired, laid off, or leaves a job is not
available to retirees whose employer terminates their health care
coverage.  However, COBRA does allow covered individuals, upon
retirement, to continue employer-based coverage for 18 months if
their company does not offer health benefits to retirees.  Those
eligible for COBRA coverage may have to pay the entire premium plus
an additional 2 percent.  For many individuals, the cost of COBRA
coverage represents a rude awakening, considering that under
employer-based coverage large companies typically pay 70 to 80
percent of the premium. 

Retirees whose former employers terminate coverage are ineligible for
COBRA and they also may be too late to purchase a supplemental
Medigap policy to replace any lost employer coverage.  In 1994 and
again in 1996, we brought this "catch 22" situation to the attention
of the Congress.  An individual turning 65 has a 6-month
open-enrollment window in which to buy supplemental Medigap insurance
to cover Medicare deductibles and coinsurance and certain uncovered
services.  (See app.  II for a description of Medicare benefits.)
Medicare enrollees who seek a Medigap policy after this 6-month
period may be denied coverage because of a preexisting condition. 
For example, a diabetic might not be able to buy supplemental
prescription drug coverage, a benefit not available under Medicare. 
Similarly, if termination of employer coverage occurs after the
open-enrollment period, a retiree may be unable to obtain alternative
Medigap coverage.  We suggested that the Congress may wish to
consider amending the law to provide a mechanism for retirees to
obtain Medigap insurance under these circumstances.\19


--------------------
\16 The demise of traditional fee-for-service indemnity coverage and
the growth in managed care enrollment exemplifies the ability of
employers to modify their health benefit programs.  Between 1987 and
1996, employer-based managed care enrollment rose from 27 percent to
74 percent as employers (1) altered the type and mix of health plans
offered, sometimes eliminating the traditional fee-for-service
indemnity option; (2) changed employee financial incentives; and (3)
used the information provided to employees to influence their
selection of health plans.  See Health Insurance:  Management
Strategies Used by Large Employers to Control Costs (GAO/HEHS-97-71,
May 6, 1997) for a discussion of the flexibility of large employers
as well as the constraints they face in modifying their health
benefit purchasing strategies. 

\17 GAO/HRD-93-125, July 9, 1993. 

\18 Federal preemption is valued by employers who self-fund their
health benefit plans because they can avoid taxes, are exempt from
mandated state benefits, and can offer a uniform benefit plan to
company employees located in different states.  Because of the
sometimes obscure distinction between prohibiting states from
directly regulating employer health coverage but allowing them to set
rules for health insurers, the courts have had to determine many of
the actual implications of ERISA preemption.  See Employer-Based
Health Plans:  Issues, Trends, and Challenges Posed by ERISA
(GAO/HEHS-95-167, July 25, 1995). 

\19 Health Insurance for the Elderly:  Owning Duplicate Policies Is
Costly and Unnecessary (GAO/HEHS-94-185, Aug.  3, 1994).  See also
Medigap Insurance:  Alternatives for Medicare Beneficiaries to Avoid
Medical Underwriting (GAO/HEHS-96-180, Sept.  10, 1996). 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We sought comments on a draft of this report from private sector
experts and the Department of Labor's Pension and Welfare Benefits
Administration.  The reviewers generally agreed with our presentation
of the information but provided technical suggestions that we
included where appropriate. 


---------------------------------------------------------- Letter :6.1

As agreed with your office, we will make no further distribution of
this report until 30 days after the date of this letter.  At that
time, we will make copies of this report available to interested
parties who request them. 

Please call either Michael Gutowski, Assistant Director, at (202)
512-7128 or me at (202) 512-7029 if you or your staff have any
questions concerning this report.  Major contributors to this report
included John Dicken, Carmen Rivera-Lowitt, and Walter Ochinko. 

Sincerely yours,

Jonathan Ratner
Associate Director, Health Financing and
 Systems Issues


LIMITED BUT CONSISTENT DATA ON
TRENDS IN EMPLOYER-BASED RETIREE
HEALTH CARE COVERAGE
=========================================================== Appendix I

Despite the existence of a number of public and private surveys that
touch on the issue of employer-based retiree health coverage, only
limited trend data are available.  Two surveys that include data from
the late 1980s through the mid-1990s both demonstrate a downward
trend in such coverage, but the evidence was collected from different
vantage points and the survey methodologies were not consistent
across the entire time period.  The results are not strictly
comparable since one survey focused on employers, while the other was
based on retiree responses.  The former asks employers if they offer
coverage to retirees; the latter focuses on the decisions of
individual retirees, who may choose not to participate even when
employer-based insurance is available because of cost or the
availability of alternative coverage.  In addition, changes in the
methodologies used to conduct the surveys suggest that individual
numbers should be used cautiously even though the trends appear to be
consistent. 

Employer Survey by Foster Higgins.  Although the Foster Higgins
survey dates from 1986, the survey methodology was changed in 1993 so
that the results could be representative of all U.S.  employers
rather than just those who responded.  In addition, the survey was
expanded to include smaller employers with between 10 and 500
employees, an important group that provides health insurance to about
one-third of Americans with employer-based coverage and a group on
which there were little or no credible data.  As a result of the
revamped methodology, pre- and post-1993 data are not strictly
comparable even though the resulting trend line appears to be
consistent.  According to a Foster Higgins official, the earlier data
are not as "authoritative" as that collected after 1992.  Foster
Higgins focuses on large public and private sector employers, that
is, those with more than 500 workers.  Such large employers are more
likely than smaller firms to offer health benefits.  While Foster
Higgins reports separately with respect to early retirees versus
those who are Medicare eligible, it does not (1) provide an overall
estimate of the extent to which large employers provide retiree
coverage or (2) differentiate between the extent to which public
versus private sector employers provide benefits.  Finally, the
Foster Higgins data are considered proprietary, and only the data it
chooses to release in summary form are generally available. 

Retiree Survey Analyzed by Department of Labor.  In contrast to the
annual Foster Higgins surveys, data from public sources are more
sporadic and not as up to date.  In 1995, the Pension and Welfare
Benefits Administration in the Department of Labor released a
comparison of 1988 and 1994 Current Population Survey (CPS) data on
retirees.  The report is based on special supplements, sponsored by
the Labor Department, to the August 1988 and September 1994 CPS
surveys.  These supplements focused on retiree health benefits.  The
resulting data only provide a limited picture of employer trends
because (1) they are based on interviews with retired workers and (2)
they do not always clearly distinguish between the availability of
coverage and a worker's decision not to participate in employer-based
retiree coverage.  In addition, no 1988 to 1994 trend data were
reported on an important subset of workers--early retirees.  Finally,
questions about reasons for discontinuing coverage were expanded in
the 1994 survey, making a precise comparison across the period
difficult. 


COMPARISON OF MEDICARE BENEFITS
AND EMPLOYER-BASED GROUP COVERAGE
BY LARGE FIRMS
========================================================== Appendix II

Medicare benefits are more convoluted and contain more gaps than
those generally offered by large employers.  For example, standard
(fee-for-service) Medicare has separate benefits for hospitalization
(part A) and physician/outpatient services (part B), with different
copayments and deductibles.  Those eligible for Medicare are
automatically enrolled in part A but must pay a premium to elect part
B coverage.  Part A has a relatively high deductible for each
hospitalization and requires copayments for stays longer than 60
days;\20 part B has a separate deductible, requires 20 percent
coinsurance for physicians' bills, and does not cover prescription
drugs.  Neither part A nor part B has a limit on out-of-pocket costs. 
In order to cover some of the gaps in Medicare coverage,
beneficiaries may purchase so-called Medigap supplementary insurance
or may enroll in a health maintenance organization (HMO) offered
through Medicare if one is available in their area.  In contrast to
Medigap, some HMOs do not even charge a premium for the benefits
otherwise not covered by Medicare, but generally require
beneficiaries to use plan doctors and hospitals.  Large employer
coverage, on the other hand, generally offers a single, comprehensive
benefit with an associated deductible and copayment.  Normally,
annual out-of-pocket costs are capped, and health services beyond
that point are reimbursed at 100 percent.  In addition, benefits
provided by large employers typically include prescription drugs. 


--------------------
\20 The current deductible is $760.  The copayment of $190 per day
for more than 60 but fewer than 91 days of hospitalization rises to
$380 per day for the 91st though the 150th days. 


CPS DATA ON PRIVATE SECTOR RETIREE
COVERAGE AND COST SHARING
========================================================= Appendix III



                              Table III.1
                
                 Percentage of Private Sector Retirees
                 With Employer-Based Coverage, 1988 and
                                  1994

                                                         All retirees
                                                        (55 and older)
                                                        --------------
                                                          1988    1994
------------------------------------------------------  ------  ------
Active employees with coverage at time of retirement       65%     60%
Workers who continued coverage into retirement              42      35
Retirees currently covered by employer's plan               37      27
Retirees who believed their employer-based coverage         27      24
 could be continued for life
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 



                              Table III.2
                
                   Costs Paid by Retirees for Private
                Sector Employer-Based Coverage, 1988 and
                 1994 (includes both single and family
                               coverage)

                                                          1988    1994
------------------------------------------------------  ------  ------
Employee pays nothing                                      50%     42%
Employee pays some costs                                   28%     36%
Employee pays all costs                                    22%     21%
Don't know/no response                                      0%      1%
Median annual cost to retirees (1994 dollars adjusted     $778    $840
 for inflation)
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 


CPS DATA ON COSTS TO RETIREES FOR
SINGLE AND FAMILY COVERAGE THROUGH
A FORMER EMPLOYER
========================================================== Appendix IV



                               Table IV.1
                
                 Single Coverage--Costs to Retirees for
                Employer-Based Health Benefits, 1988 and
                                  1994

                                                          1988    1994
------------------------------------------------------  ------  ------
Employee pays nothing                                      42%     34%
Employee pays some costs                                   37%     39%
Employee pays all costs                                    27%     25%
Don't know/no response                                      4%      2%
Median annual cost to retirees (1994 dollars adjusted     $753    $684
 for inflation)
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 



                               Table IV.2
                
                 Family Coverage--Costs to Retirees for
                Employer-Based Health Benefits, 1988 and
                                  1994

                                                          1988    1994
------------------------------------------------------  ------  ------
Employee pays nothing                                      42%     40%
Employee pays some costs                                   38%     44%
Employee pays all costs                                    17%     14%
Don't know/no response                                      3%      2%
Median annual cost to retirees (1994 dollars adjusted     $979  $1,200
 for inflation)
----------------------------------------------------------------------
Source:  Department of Labor, Pension and Welfare Benefits
Administration. 


EXCERPT FROM DEPARTMENT OF LABOR
BROCHURE ON EMPLOYER
RESPONSIBILITIES UNDER ERISA
=========================================================== Appendix V

     "Can the Retiree Health Benefits Provided by Your Employer Be
     Cut? 

     "You should know--coverage can change. 

     "If your employer has reserved the right in the SPD and
     controlling plan document to change the terms of the plan, you
     may lose coverage at any time during your retirement.  If your
     employer made a clear promise that you will have specific health
     care benefits for a definite period of time or for life, and did
     not reserve the right to change the plan, you should be covered. 

[Text omitted.]

     "--Do the SPD or other plan documents promise that health
     benefits after retirement will continue at a specified level for
     a certain period of time? 

     "--If there is no specific language describing retiree health
     benefits in your plan documents, it is unlikely that you have
     coverage. 

     "--If there is such language, how specific is it? 

     "Sometimes language covering retiree health benefits is included
     in the documents, but it is too vague to stand up to a test in
     the courts.  Conversely, there is language on employee health
     benefits that has held up in court.  Here is an example: 

     " `Basic health care coverage will be provided at the company's
     expense for your lifetime.'

     "--Even if a specific promise is made, is there also language
     that gives your former employer the right to change or terminate
     that specific promise or to amend or terminate the entire plan? 

     "Typical language giving the employer that right might read: 

     " `The company reserves the right to modify, revoke, suspend,
     terminate, or change the program, in whole or in part, at any
     time.'

     "This is an actual example, but other similar language may be
     found anywhere in the plan documents. 

     "If you are an employee reviewing the current plan, it is
     important to remember that it can change in the future.  The
     documents in effect when you retire are the ones that will
     determine your health benefits, if any, in your retirement."\21


--------------------
\21 U.S.  Department of Labor, Pension and Welfare Benefits
Administration, Division of Technical Assistance and Inquiries. 


*** End of document. ***