Private Health Insurance: Declining Employer Coverage May Affect Access
for 55- to 64-Year-Olds (Chapter Report, 06/01/98, GAO/HEHS-98-133).

Pursuant to a congressional request, GAO reviewed the ability of
Americans aged 55 to 64 to obtain health benefits through the private
market--either employer-based or individually purchased, focusing on the
near elderly's: (1) health, employment, income, and health insurance
status; (2) ability to obtain employer-based health insurance if they
retire before they are eligible for Medicare; and (3) use of costs
associated with purchasing coverage through the individual market or
employer-based continuation insurance.

GAO noted that: (1) though the near elderly access health insurance
differently than other segments of the under-65 population, their
overall insurance picture is no worse and is better than that of some
younger age groups; (2) since fewer employers are offering health
coverage as a benefit to future retirees, the proportion of near elderly
with access to affordable health insurance could decline; (3) the
resulting increase in uninsured near elderly would be exacerbated by
demographic trends, since 55- to 64-year-olds represent one of the
fastest growing segments of the U.S population; (4) the current
insurance status of the near elderly is largely due to: (a) the fact
that many current retirees still have access to employer-based health
benefits; (b) the willingness of near-elderly Americans to devote a
significant portion of their income to health insurance purchased
through the individual market; and (c) the availability of public
programs to disabled 55- to 64-year-olds; (5) the individual market and
Medicare and Medicaid for the disabled often mitigate declining access
to employer-based coverage for near-elderly Americans and may prevent a
larger portion of this age group from becoming uninsured; (6) the steady
decline in the proportion of large employers who offer health benefits
to early retirees, however, clouds the outlook for future retirees; (7)
in the absence of countervailing trends, it is even less likely that
future 55- to 64-year-olds will be offered health insurance as a
retirement benefit, and those who are will bear an increased share of
the cost; (8) although trends in employers' required retiree cost
sharing are more difficult to decipher than the decisions of firms not
to offer retiree health benefits, the effects may be just as troublesome
for future retirees; (9) moreover, access and affordability problems may
prevent future early retirees who lose employer-based health benefits
from obtaining comprehensive private insurance; (10) furthermore,
significant variation exists among the states that limit premiums: a few
require insurers to community-rate the coverage they sell--that is, all
those covered pay the same premium--while other states allow insurers to
vary premiums up to 300 percent; and (11) the Consolidated Omnibus
Budget Reconciliation Act is only available to retirees whose employers
offer health benefits to active workers, and coverage is only temporary,
ranging from 18 to 36 months.

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

 REPORTNUM:  HEHS-98-133
     TITLE:  Private Health Insurance: Declining Employer Coverage May 
             Affect Access for 55- to 64-Year-Olds
      DATE:  06/01/98
   SUBJECT:  Employee medical benefits
             Health insurance cost control
             Insurance premiums
             Insurance regulation
             Health insurance
             Health care services
             Elderly persons
             Retirement benefits
             Surveys
IDENTIFIER:  Medicare Program
             Medicaid Program
             Census Bureau Current Population Survey
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Labor and Human Resources, U.S. 
Senate

June 1998

PRIVATE HEALTH INSURANCE -
DECLINING EMPLOYER COVERAGE MAY
AFFECT ACCESS FOR 55- TO
64-YEAR-OLDS

GAO/HEHS-98-133

Insurance Access for 55- to 64-Year-Olds

(101592)


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

  AHCPR - Agency for Health Care Policy and Research
  BLS - Bureau of Labor Statistics
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  COBRA - Consolidated Omnibus Budget Reconciliation Act of 1985
  CPS - Current Population Survey
  DOD - Department of Defense
  EBRI - Employee Benefit Research Institute
  ERISA - Employee Retirement Income Security Act of 1974
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  HMO - health maintenance organization
  HRS - Health and Retirement Survey
  MEPS - Medical Expenditure Panel Survey
  MSA - medical savings account
  NAMCS - National Ambulatory Medical Care Survey
  NCHS - National Center for Health Statistics
  NHAMCS - National Hospital Ambulatory Medical Care Survey
  NHDS - National Hospital Discharge Survey
  NHIS - National Health Interview Survey
  NMES - National Medical Expenditure Survey
  POS - point of service
  PPO - preferred provider organization
  PSU - primary sampling unit
  SIPP - Survey of Income and Program Participation
  SPD - Summary Plan Description
  WBGH - Washington Business Group on Health

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


B-278559

June 1, 1998

The Honorable James M.  Jeffords
Chairman, Committee on Labor and
 Human Resources
United States Senate

Dear Mr.  Chairman: 

At your request, this report examines the access of near-elderly
Americans, aged 55 to 64, to health benefits through private
insurance--either employer-based or individually purchased. 
Specifically, the report discusses the near elderly's health,
employment, income, and health insurance status; ability to obtain
employer-based health insurance if they retire before becoming
eligible for Medicare; and use of and costs associated with
purchasing coverage through the individual market or employer-based
continuation insurance. 

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date.  At that time, we will make copies available to
interested parties on request. 

If you or your staff have any questions, please call me at (202)
512-7114.  Major contributors to this report are listed in appendix
IX. 

Sincerely yours,

William J.  Scanlon
Director, Health Financing and
 Systems Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

A series of age-related transitions heighten the importance of health
insurance to 55- to 64-year-old (near elderly) Americans and could
place them at greater risk of losing, or paying considerably more
for, coverage.  Too young to qualify for Medicare, many near elderly
are considering retirement or gradually moving out of the workforce. 
These events may be related to worsening health, job displacement, or
simply the desire for more leisure time.  Since health insurance for
most Americans is an employment-related benefit, retirement may
necessitate looking for another source of affordable coverage. 
However, insurance purchased directly in the individual market or
temporary continuation coverage purchased through an employer are
typically expensive alternatives and may not always be available. 
Their affordability, moreover, may be exacerbated by both declining
health and the reduction in income associated with retirement.  For
some near elderly, an alternative to retiring without insurance is
simply to continue working. 

The Chairman, Senate Committee on Labor and Human Resources,
requested GAO to assess the ability of Americans aged 55 to 64 to
obtain health benefits through the private market--either
employer-based or individually purchased.  In particular, he
requested an examination of the available evidence on the near
elderly's

  -- health, employment, income, and health insurance status;

  -- ability to obtain employer-based health insurance if they retire
     before becoming eligible for Medicare; and

  -- use of and costs associated with purchasing coverage through the
     individual market or employer-based continuation insurance. 

To provide the Congress with information about the near elderly and
their ability to obtain health insurance, GAO analyzed the March 1997
Current Population Survey (CPS), a source widely used by researchers;
reviewed the literature on employer-based health benefits for early
retirees; interviewed employers, benefit consultants, insurers, and
other experts knowledgeable about retiree health issues and the
individual insurance market; and updated information provided in
previous GAO reports. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Like most Americans, over 80 percent of the near elderly have access
to some type of health insurance--either comprehensive or partial. 
Nevertheless, continued access to health insurance is a primary
concern for some 55- to 64-year-olds who retire early or who lose
access to employer-based coverage.  First, Medicare is not generally
available until one reaches age 65.  Second, most Americans under age
65 rely on coverage provided by an employer--a link that may be
severed by retirement, a voluntary reduction in hours, or job
displacement.  The existing alternatives to employer-based coverage
for the near elderly are (1) individually purchased insurance, (2)
temporary continuation coverage from a former employer, (3) public
programs such as Medicare and Medicaid, and (4) becoming uninsured. 
Among those aged 55 to 64, Medicare or Medicaid are available only to
the very poor or the disabled. 

Some near elderly may encounter difficulty in obtaining
comprehensive, affordable coverage through the individual market or
in obtaining any health coverage at all.  The high cost of individual
insurance often mirrors the near elderly's greater use of medical
services compared with younger age groups.  Moreover, some
individuals may be denied individual insurance because of preexisting
health conditions.  Retirees whose jobs provided health benefits that
ended at retirement, however, may continue temporary coverage for up
to 18 months under the Consolidated Omnibus Budget Reconciliation Act
of 1985 (COBRA).  Only firms with 20 or more employees who offer
health insurance to active workers are required to provide COBRA
continuation coverage.  When available, COBRA coverage may entail
substantial out-of-pocket costs, because the employer is not required
to pay any portion of the premium.  For eligible individuals leaving
group coverage who exhaust any available COBRA or other conversion
coverage, the Health Insurance Portability and Accountability Act of
1996 (HIPAA) guarantees access to the individual market, regardless
of health status and without coverage exclusions.  The premiums faced
by some individuals eligible for a HIPAA guaranteed access product,
however, may be substantially higher than the prices charged to those
in the individual market who are healthy. 

Persons seeking an alternative to employer-based coverage may go
through a common mental calculus in which health status and cost play
a prominent role.  For someone healthy, there are no access barriers
to the individual market and the cost may be lower than COBRA,
especially if he or she buys a policy with a higher deductible.  For
someone with a health condition who wants comprehensive coverage, the
individual market may not be an option because of health screening by
insurers--a process that can result in the denial of coverage or the
exclusion of preexisiting conditions.  However, COBRA, if available,
has no such screening and should be more affordable than individually
purchased insurance because of economies of scale and reduced
administrative costs that result in lower premiums for group
coverage.  HIPAA's group-to-individual portability now provides a
link between COBRA and the individual market for those who are
eligible, but it is too early to judge the extent to which unhealthy
consumers will utilize this option. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Though the near elderly access health insurance differently than
other segments of the under-65 population, their overall insurance
picture is no worse and is better than that of some younger age
groups.  These differences, however, may not portend well for the
future.  Since fewer employers are offering health coverage as a
benefit to future retirees, the proportion of near elderly with
access to affordable health insurance could decline.  The resulting
increase in uninsured near elderly would be exacerbated by
demographic trends, since 55- to 64-year-olds represent one of the
fastest growing segments of the U.S.  population. 

The current insurance status of the near elderly is largely due to
(1) the fact that many current retirees still have access to
employer-based health benefits, (2) the willingness of near-elderly
Americans to devote a significant portion of their income to health
insurance purchased through the individual market, and (3) the
availability of public programs to disabled 55- to 64-year-olds. 
Today, the individual market and Medicare and Medicaid for the
disabled often mitigate declining access to employer-based coverage
for near-elderly Americans and may prevent a larger portion of this
age group from becoming uninsured.  The steady decline in the
proportion of large employers who offer health benefits to early
retirees, however, clouds the outlook for future retirees.  In the
absence of countervailing trends, it is even less likely that future
55- to 64-year-olds will be offered health insurance as a retirement
benefit, and those who are will bear an increased share of the cost. 
Although trends in employers' required retiree cost sharing are more
difficult to decipher than the decisions of firms not to offer
retiree health benefits, the effects may be just as troublesome for
future retirees.  Thus, some additional employers have tied cost
sharing to years of service; consequently, retirees who changed jobs
frequently may be responsible for most of the premium. 

Moreover, access and affordability problems may prevent future early
retirees who lose employer-based health benefits from obtaining
comprehensive private insurance.  The two principal private insurance
alternatives are the individual market and COBRA continuation
coverage.  With respect to individual insurance, the cost may put it
out of reach of some 55- to 64-year-olds--an age group whose health
and income are in decline.  For example, the premiums for popular
health insurance products available in the individual markets of
Colorado and Vermont are at least 10 percent and 8.4 percent,
respectively, of the 1996 median family income for the married near
elderly.  In contrast, the average retiree contribution for employer
subsidized family coverage is about one-half of these percentages. 
The near elderly who are in poorer health run the risk of paying even
higher premiums, having less comprehensive coverage offered, or being
denied coverage altogether.  Thirteen states require insurers to sell
some individual market products to all who apply, and about 20 states
limit the variation among premiums that insurers may offer to
individuals.  GAO found that conditions such as chronic back pain and
glaucoma are commonly excluded from coverage or result in higher
premiums.  Furthermore, significant variation exists among the states
that limit premiums:  A few require insurers to community-rate the
coverage they sell--that is, all those covered pay the same
premium--while other states allow insurers to vary premiums up to 300
percent or more. 

COBRA is only available to retirees whose employers offer health
benefits to active workers, and coverage is only temporary, ranging
from 18 to 36 months.  Information on the use of COBRA by Americans
is spotty.  Although 55- to 64-year-olds who become eligible for
COBRA are more likely than younger age groups to enroll, the use of
continuation coverage by early retirees appears to be relatively low. 
Since new federal protections under HIPAA--ensuring access to
individual insurance for qualifying individuals who leave group
coverage--hinge on exhausting COBRA, the incentives for enrolling and
the length of time enrolled could change.  Because employers
generally do not contribute toward the premium, the cost of COBRA may
be a factor in the low enrollment, even though similar coverage in
the individual market may be more expensive.  In 1997, the average
insurance premium for employer-based coverage was about $3,800. 
However, there is significant variation in premiums due to firm size,
benefit structure, locale, demographics, or aggressiveness in
negotiating rates.  For one company, total health plan premiums in
1996 for early retirees ranged from about $5,600 to almost $8,000 for
family coverage.  Since this firm paid the total cost of practically
all of the health plans it offered to current workers, the COBRA cost
would have come as a rude awakening to retirees. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      CHANGES IN EMPLOYMENT,
      HEALTH, INCOME, AND
      INSURANCE STATUS TYPIFY THE
      NEAR ELDERLY
-------------------------------------------------------- Chapter 0:4.1

Currently, about 14 percent of the near elderly are uninsured--a rate
comparable to that of 45- to 54-year-olds and lower than that among
the entire nonelderly population.  However, differences in health
status, labor force attachment, and family income distinguish the
near elderly from younger Americans and foreshadow some of the
difficulties this age cohort could have in accessing health insurance
other than that offered by an employer.  The near elderly are a group
in transition from the active workforce to retirement.  Almost
three-quarters of those between the ages of 55 and 61 were employed
in 1996, and about half worked full-time.  In contrast, however, less
than one-half of those between the ages of 62 and 64 were employed at
all during 1996, with only about one-quarter working full time. 
Concurrent with leaving the workforce, both the health and income of
this group are beginning to decline.  Compared with individuals
between the ages of 45 and 54, the near elderly are more likely to
experience health conditions such as diabetes, hypertension, and
heart disease.  Furthermore, their expenditures on health care
services are estimated to be about 45 percent higher than those of
the younger group, while their median family income is about 25
percent less. 

The near elderly are no more likely to be uninsured than younger age
groups and, in fact, their rate of uninsurance is lower than for the
entire under-65 population.  A key difference between the near
elderly and younger age groups is their source of insurance. 
Sixty-five percent of 55- to 64-year-olds had employer-based
insurance in 1996, compared with about 74 percent of the next younger
cohort.  As the near elderly transition out of the workforce, they
may sever the link to employer-based health insurance.  As a result,
compared with younger age groups, the near elderly were the most
likely to obtain health insurance through the individual market and
Medicare. 

Whether the near elderly obtained their health insurance through the
individual market or through public sources was related to their
employment, health, and income status.  For example, a relatively
high percentage of the near elderly with individual insurance
reported that they worked (67 percent) and had excellent or good
health (85 percent).  In contrast, those with public sources of
coverage were more likely to report that they were unemployed (87
percent) or in poor health (69 percent).  And compared to those who
purchased individual insurance, twice as many with public coverage
had incomes under $20,000.  The link between insurance status and
income is not perfect, however, since about 20 percent of the
uninsured near elderly had family incomes of $50,000 or more, yet
almost one-third of those with individual insurance earned less than
$20,000.  The cost of comprehensive coverage in the individual market
suggests that those at lower incomes may be purchasing less
expensive, limited-benefit products.  At the same time, however, the
measure of income may not include other resources available to
individuals. 


      FUTURE DECLINE EXPECTED IN
      EMPLOYER-BASED HEALTH
      INSURANCE FOR 55- TO
      64-YEAR-OLDS
-------------------------------------------------------- Chapter 0:4.2

While an estimated 60 to 70 percent of large employers offered
retiree health coverage during the 1980s, fewer than 40 percent do so
today, and that number is continuing to decline despite the recent
period of strong economic growth.  According to surveys conducted by
two benefit consulting firms, coverage offered to early retirees
dropped by 8 to 9 percentage points between 1991 and 1997. 
Concurrently, employment has shifted away from firms more likely to
offer coverage, that is, from manufacturing to service industries. 
The decision by some large employers not to offer retiree health
benefits will primarily affect future retirees.  In fact, one survey
sponsored by the Labor Department suggests that only very few of
those who were retired in 1994--about 2 percent--had lost coverage as
a result of an employer's subsequent decision to amend the retiree
health benefit plan. 

The dramatic cost growth during the 1980s and early 1990s stimulated
employers to become more aggressive in controlling their health care
spending.  Consequently, the decline in the number of large firms
that offer retiree health benefits has been accompanied by efforts to
control costs.  Three commonly cited changes involve cost sharing,
plan choice, and eligibility requirements.  Although firms often made
similar changes for active employees, the limited evidence available
indicates that retirees are being asked to shoulder a higher portion
of the health benefits premium when they leave the workforce.  On
average, retirees contributed $655 more for the cost of family
coverage than did active workers in 1995.  The retiree contribution
is 4.7 percent of the 1996 median family income of 55- to 64-year-old
married couples.  Typically, Americans under age 65 spent about 4
percent of household income in 1994 on health care--an amount that
includes not only insurance premiums or employer-required cost
sharing but also out-of-pocket expenses for copayments, deductibles,
and services not covered by health insurance.  At the same time
employers have increased retiree cost sharing, they have also
tightened the eligibility requirements for participation in
postemployment health benefits.  Most firms now have a minimum
service and age requirement and some tie their own contribution to
these minimums.  For example, one employer GAO interviewed required
retirees to have 35 years of service to qualify for the maximum
employer contribution of 75 percent.  In contrast, retirees with 19
years of service are eligible for only a 30-percent contribution.  If
workers change jobs frequently, especially as they become older, they
may not qualify for retiree health benefits in the future. 

According to surveys sponsored by the Labor Department in 1988 and
1994, higher costs for individuals could result in fewer
participating in employer-based retiree health plans when such
coverage is available.  Between 1988 and 1994, the proportion of
workers who continued coverage into retirement declined by 8
percentage points.  Among those already retired, the proportion
covered also declined, falling 10 percentage points over the same
6-year period.  Of the approximately 5.3 million retirees who
discontinued employer-based benefits in 1994, an estimated 27 percent
cited the expense as a factor--up by over one-fifth from the earlier
survey.  For some retirees, coverage with lower cost sharing through
a working or retired spouse may have influenced their decision to
decline a former employer's offer of health benefits. 


      AGE AND HEALTH STATUS MAY
      LIMIT ACCESS OF NEAR ELDERLY
      TO INDIVIDUAL COVERAGE
-------------------------------------------------------- Chapter 0:4.3

In the majority of states, some individuals aged 55 to 64 may be
denied coverage in the individual insurance market, may have certain
conditions or body parts excluded from coverage, or may pay premiums
that are significantly higher than the standard rate.  Unlike
employer-sponsored coverage, in which risk is spread over the entire
group, premiums in the individual markets of many states reflect each
individual's demographic characteristics and health status.  For
example, on the basis of experience, carriers anticipate that the
likelihood of requiring medical care increases with age.  Thus, a
60-year-old in the individual market of most states pays more than a
30-year-old for the same coverage.  Likewise, carriers may also
adjust premiums on the basis of a carrier's determination of the
applicant's health status.  This latter process is called medical
underwriting. 

Since health status tends to decline with age, some near elderly may
face serious obstacles in their efforts to obtain needed coverage
through the individual market.  On the basis of the underwriting
results, a carrier may deny coverage to an applicant determined to be
in poorer health.  Individuals with serious health conditions such as
heart disease and diabetes are frequently denied coverage, as are
those with such non-life-threatening conditions as chronic back pain
and migraine headaches.  The most recent denial rates for carriers
with whom GAO spoke ranged from zero in states where guaranteed issue
is required to about 23 percent, with these carriers typically
denying coverage to about 15 percent of all applicants.  Carriers may
also offer coverage that excludes a certain condition or part of the
body.  A person with asthma or glaucoma may have all costs associated
with treatment of those conditions excluded from coverage. 

A number of states as well as the federal government have undertaken
a wide range of initiatives to increase access to the individual
market, but obtaining coverage under these options may remain
expensive, especially for less healthy individuals with high expected
costs.  For example, 20 states have enacted individual market
insurance reforms that attempt to limit premium rate variation and
the characteristics that insurers use to vary these rates, and 13
states require carriers to guarantee-issue certain products to all
applicants.  Even in the states that have enacted rate restrictions,
however, premiums may still vary considerably.  One state that
restricts rates permits variation of 300 percent or more.  Given the
median income of the near elderly, rates in the individual market may
pose an affordability problem to some.  For example, the premiums for
popular health insurance products available in the individual markets
of Colorado and Vermont are at least 10 percent and 8.4 percent,
respectively, of the 1996 median family income of married
near-elderly couples.  While at least 27 states have high-risk
insurance pools that act as a safety net to ensure that those who
need coverage can obtain it, the cost is generally 125 to 200 percent
of the average or standard rate charged to healthy individuals in the
individual market for a comparable plan.\1 Those who have been
rejected for coverage by at least one carrier generally qualify for
their state's high-risk pool.  However, participation in some state
pools is limited by enrollment caps. 

In addition, HIPAA guarantees some people leaving group coverage
access to the individual market--group-to-individual portability. 
Carriers must offer individual market coverage to these "HIPAA
eligibles," regardless of their health status, and may not impose
coverage exclusions.  To be eligible for a portability product,
however, an individual must have had at least 18 months of coverage
under a group plan without a break of more than 63 days, and have
exhausted any COBRA or other conversion coverage available.  One
survey estimates that 61- to 64-year-olds typically remain enrolled
in COBRA for only 12 months--6 to 24 months short of the maximum
allowable coverage.  Since HIPAA changes the incentives for electing
and exhausting COBRA coverage, past evidence may not be a guide to
future use.  However, the premiums faced by unhealthy individuals who
are eligible for a HIPAA product, like those faced by unhealthy
individuals who have always relied on the individual market for
coverage, may be very expensive. 


--------------------
\1 The premium in a high-risk pool, however, may still fall short of
covering the expected cost of high-risk enrollees.  A subsidy
mechanism is commonly in place to cover these shortfalls. 


      COBRA PROVIDES TEMPORARY
      ACCESS FOR SOME NEAR ELDERLY
-------------------------------------------------------- Chapter 0:4.4

Federal legislation enacted in 1986 provides temporary access to
employer-based health insurance under certain circumstances.  Though
access to such continuation coverage, which is known by the acronym
COBRA, is not limited to the near elderly, it may be particularly
valuable to 55- to 64-year-olds who lose access to employer-based
coverage before they become eligible for Medicare.  Categories of
near-elderly individuals who could benefit from continuation coverage
include those who (1) are laid off, (2) experience a cut-back in
hours that makes them ineligible for health benefits, (3) retire, or
(4) lose benefits when their spouse becomes Medicare eligible.  The
near elderly and others in such circumstances are eligible to elect
continuation coverage if their former employer had 20 or more workers
and offered health insurance. 

Because the employer is not required to pay any portion of the
premium, COBRA may be an expensive alternative for the near
elderly--especially since the loss in employer-based coverage is
probably accompanied by a decrease in earnings.  The limited
information available on eligibility for and use of COBRA by
Americans in general and the near elderly in particular is based on
past experience and may not reflect incentives to elect and exhaust
continuation coverage created by the implementation of HIPAA. 
Moreover, the information leaves many important questions unanswered. 
Nonetheless, the data suggest that relatively few near elderly use
COBRA.  In general, however, the near elderly appear to be more
likely to elect COBRA than younger age groups.  Results from an
analysis of a proprietary database that cannot be generalized to the
whole population suggest that, on average, 61- to 64-year-olds only
keep continuation coverage for a year. 

Although it makes sense for the near elderly who lack an alternate
source of coverage and can afford the premium to elect COBRA, there
is no systematically collected evidence on the extent to which such
elections affect employer costs.  Employers contend that COBRA's
voluntary nature and high costs due to the lack of an employer
subsidy or contribution could result in the enrollment of only those
individuals who expect their health care costs to exceed the premium. 
The costs of near elderly COBRA enrollees in excess of the premium
would in turn push up the employer's overall health care
expenditures.  However, the election of COBRA coverage by some near
elderly as well as younger individuals may simply reflect an
antipathy to living without health insurance.  On the other hand,
since COBRA election is associated with job turnover, the
demographics of a firm or industry will also affect an employer's
insurance costs.  For example, a firm with an older workforce that
does not offer retiree health benefits may indeed experience higher
insurance costs as a result of COBRA elections. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report contains no recommendations. 


   COMMENTS FROM REVIEWERS
---------------------------------------------------------- Chapter 0:6

Experts on retiree health benefits and insurance markets reviewed a
draft of this report.  They generally agreed with the presentation of
the evidence on the near elderly's access to health insurance. 


INTRODUCTION
============================================================ Chapter 1

Increasingly, public attention has focused on the health insurance
status of Americans between the ages of 55 and 64.  Although federal
legislation establishes the normal retirement age for full pension
benefits at 65, many individuals leave the labor force 5 to 10 years
earlier.\2 Labor force participation rates among 55- to 64-year-old
men have declined since at least the 1960s.\3 For those who retire
before becoming eligible for Medicare, the availability of health
benefits is of particular concern.  Coverage for most Americans is
tied to employment--the very link that is severed by retirement or
loosened by a person's gradual detachment from the labor force. 
Since 55- to 64-year-olds are more likely to use medical services,
insurance they purchase directly in the individual market may be
expensive and harder to pay for, considering the decline in income as
a result of retirement.  Because fewer employers offer retiree health
coverage as a benefit and individually purchased insurance, when
available, may be prohibitively expensive, the proportion of this age
group that is uninsured may rise.\4


--------------------
\2 The Employee Retirement Income Security Act of 1974 (ERISA)
requires private pension plans to set the normal retirement age
(retirement with full pension benefits) at no later than age 65. 

\3 In an April 1997 Issue Brief, the Employee Benefit Research
Institute (EBRI) reported that 65.5 percent of men aged 55 to 64
participated in the labor force in 1995 compared with 84.6 percent in
1965.  In contrast, participation rates for women of the same age
cohort have been rising steadily.  The decline in labor force
participation among men has been attributed to (1) Social Security
coverage, (2) early retirement benefits provided by private pension
plans, (3) buyouts offered by employers seeking to pare down their
workforces, and (4) desire for more leisure that is now affordable
because of increased financial security. 

\4 Over the past decade, proposals have been introduced in the
Congress to provide the near elderly with access to the Federal
Employees Health Benefits Program, to Medicare, or to expanded COBRA
coverage.  Such proposals continue to be debated. 


   ELIGIBILITY, ACCESS, AND
   COVERAGE DIFFER BY SOURCE OF
   INSURANCE
---------------------------------------------------------- Chapter 1:1

Although most of the near elderly receive coverage as a benefit
through their employer, some purchase health insurance on their own. 
The former is commonly referred to as employer-based group coverage
and the latter as individual coverage.  Complementing these two types
of private health insurance are public programs, including Medicaid
for the poor and Medicare for the elderly and disabled.\5 Fundamental
differences distinguish employer-sponsored group coverage from the
individual insurance market and public insurance programs. 

Employer-Based.  Eligibility for group health coverage through an
employer typically depends on holding or having held a full-time job
or working a sufficient number of hours to meet a minimum eligibility
requirement.  Increasingly, however, firms are imposing age and
length of service eligibility requirements for retiree health
benefits.  Premiums in the group market are often considerably lower
than those in the individual market because they are based on the
experience of the entire group, and the larger the group, the smaller
the impact of high-cost individuals on the overall premium.  Also,
individuals with employer-based coverage do not face the task of
accessing the insurance market or identifying and comparing a
multitude of products on their own.  Rather, the employer arranges
access and greatly simplifies the task of identifying and comparing
products.\6

Employers who offer health coverage generally provide a comprehensive
benefit package 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.  Finally, selecting
cost-sharing options and paying for the products is often eased by
employer contributions and payroll deductions.\7

Individual Market.  Instances when Americans may turn to the
individual market for health insurance include employment in
part-time or temporary jobs, periods of unemployment between jobs,
and retirement prior to Medicare eligibility.  Unlike employer-based
health benefits, however, eligibility and premiums in the individual
markets of many states are determined on the basis of the risk
associated with each applicant's demographic characteristics and
health status.  As a result, coverage in the individual market for
those aged 55 to 64 and for individuals whose health is declining may
be unavailable or considerably more expensive.  Since consumers must
absorb the entire cost of coverage themselves, carriers have
recognized the importance of offering affordable options to people
with different economic resources and health needs, and offer a wide
range of health plans with a variety of covered benefits and
cost-sharing options.  The cost-sharing arrangement selected is a key
determinant of the price of an individual insurance product--the
higher the potential out-of-pocket expenses, the lower the premium,
and the greater the financial risk to the consumer.  Finally, because
carriers in many states can exclude preexisting health conditions
from coverage, the benefits purchased may not be comprehensive. 
Recent federal legislation, discussed below, prevents preexisting
condition exclusions for eligible individuals leaving group coverage. 

Public Insurance Programs.  Significant differences also exist in
eligibility for and coverage available through public programs such
as Medicaid and Medicare.  Medicaid, financed jointly by the federal
government and the states, is the dominant public program for
financing health coverage for low-income Americans--families,
primarily women and children, and the aged, blind, and disabled. 
Medicare is a national insurance program established in 1965 for
elderly Americans aged 65 or older.  For Americans under age 65, only
those with end-stage renal disease or those who have been determined
disabled under the Social Security Act qualify for Medicare.\8
Disabled individuals must fulfill a 2-year waiting period before they
are eligible for Medicare; however, in most states, the low-income
disabled who receive Supplemental Security Income automatically
qualify for Medicaid. 

Medicare benefits contain more gaps than those offered through
Medicaid or a large employer.  For example, standard
(fee-for-service) Medicare has separate benefits for hospitalization
(part A) and physician/outpatient (part B) services.  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.\9 Part B has a separate deductible, requires 20
percent coinsurance for physicians' bills, and does not cover
prescription drugs.  Unlike most employer-based insurance, neither
part A nor part B has a limit on out-of-pocket costs.  To cover some
of the gaps in Medicare coverage, beneficiaries often purchase
Medigap insurance; alternatively, if available, they may enroll in a
Medicare managed care plan, which generally offers a richer benefit
package than fee-for-service Medicare, often with no premium.\10
Finally, some beneficiaries have access to employer-based retiree
health benefits, which supplement their Medicare coverage.  Medicaid,
like most employer-sponsored coverage, offers a comprehensive benefit
package, but the depth of coverage varies substantially among states. 
Federal guidelines require coverage of a broad range of services,
including inpatient and outpatient hospital care, physician services,
laboratory services, and nursing home and home health care.  Most of
those enrolled in the program incur no out-of-pocket expenses.\11


--------------------
\5 Private health insurance, including coverage through an
employer-sponsored group plan or the individual market, represents
about one-third of all U.S.  health expenditures--or nearly 5 cents
of every dollar spent in the United States--and provides health
coverage for 7 of every 10 Americans.  Public health insurance,
including Medicaid and Medicare, represents about another third of
total U.S.  health spending.  The remaining 36 percent of health
spending is not financed through health insurance but represents
out-of-pocket spending by consumers for copayments, deductibles, and
medical services not covered by insurance.  For more information on
major trends in the private health insurance market during the 1980s
and 1990s, see Private Health Insurance:  Continued Erosion of
Coverage Linked to Cost Pressures (GAO/HEHS-97-122, July 24, 1997). 

\6 KPMG Peat Marwick reported that among employers of all sizes,
those with at least 5,000 employees are more likely to offer multiple
health plans to their employees.  Furthermore, while 74 percent of
the largest employers offered three or more health plans, only 25
percent of midsize employers (200 to 999 workers) and 51 percent of
large employers (1,000 to 4,999) did so.  In fact, the report noted
that almost 50 percent of midsize employers offer just one health
plan to their employees.  See KPMG Peat Marwick, Health Benefits in
1997 (New York, N.Y.:  KPMG Peat Marwick, June 1997). 

\7 Health benefits are a means for employers to attract and retain
workers with the necessary skills.  They represent a business
cost--part of the firm's compensation package for workers. 
Economists tend to view employer contributions toward the cost of
health insurance as forgone wages that otherwise could have been paid
to workers.  However, the employer contribution is frequently
referred to as a subsidy and may be viewed as such by some employees. 

\8 Under the Social Security Act, individuals are determined to be
disabled when they are unable to engage in any substantial gainful
activity because of a medically determinable physical or mental
impairment that can be expected to result in death or that has lasted
or can be expected to last 12 months or longer. 

\9 Coverage for care in hospitals is measured in benefit periods.  A
benefit period begins the day an individual is admitted to a hospital
and ends when he or she has been out of the hospital for 60
consecutive days, including the day of discharge.  In 1998, the
deductible for each benefit period is $764.  The copayment is $191
per day for more than 60 but fewer than 91 days of hospitalization;
it rises to $382 per day from the 91st through the 150th day.  Beyond
150 days, Medicare pays nothing, leaving the beneficiary responsible
for all costs. 

\10 For certain low-income Medicare beneficiaries, Medicaid may pay
the part B premiums, deductibles, and coinsurance. 

\11 States may impose nominal deductibles, coinsurance, or copayments
on some recipients for certain services.  However, pregnant women,
children under age 18, hospital or nursing home patients who are
expected to contribute most of their income to institutional care,
and categorically needy health maintenance organization (HMO)
enrollees are excluded from this cost sharing. 


   FEDERAL ROLE IN ENSURING ACCESS
   TO PRIVATE HEALTH INSURANCE
---------------------------------------------------------- Chapter 1:2

Although the decision to offer health benefits to workers or retirees
is essentially voluntary, several federal laws have influenced their
provision by employers.  For example, since 1954, the tax code has
encouraged employment-based health coverage by making employer health
benefit payments tax deductible and by excluding employer-provided
benefits from employees' taxable income.  Also, ERISA, which was
enacted in 1974, allows employers to offer uniform national health
benefits by preempting states from directly regulating employer
benefit plans.  ERISA, however, does impose some federal requirements
on employer-based plans, including requirements to provide employees
with a plan description within 90 days of enrollment and implement a
process for appealing claim denials.  Because of the federal
preemption of state regulation, the rights of active and retired
employees under ERISA are largely determined in the courts.  Appendix
I contains a description of the role of ERISA in safeguarding access
to coverage provided voluntarily by an employer. 

In addition, federal law guarantees that individuals leaving
employer-sponsored group health plans have access to continued
coverage, and ultimately to a product in the individual market. 
First, the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA), which amended ERISA, requires group health plans covering 20
or more workers to offer 18 to 36 months of continued health coverage
to former employees and their dependents in certain circumstances,
such as when an employee is terminated or laid off, or quits or
retires.  Although COBRA is not specifically targeted at the near
elderly, it clearly provides this age cohort with the opportunity to
continue health coverage as they transition from the active workforce
to retirement.  The mandate to offer continuation coverage, however,
does not oblige employers to share in the premium. 

The Health Insurance Portability and Accountability Act of 1996
(HIPAA) further guarantees access to individual market coverage to
individuals leaving group health plans.  Group-to-individual
portability is available to eligible individuals who, among other
criteria, have exhausted their available COBRA or other conversion
coverage,\12 regardless of their health status and without the
imposition of coverage exclusions for preexisting conditions.  HIPAA,
however, does not provide similar guarantees of coverage for others
in the individual market. 


--------------------
\12 Some state laws extend continuation requirements similar to COBRA
to groups with fewer than 20 employees, and several states require
carriers to offer individuals a product comparable to their group
coverage on a guaranteed-issue basis. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

The Chairman, Senate Committee on Labor and Human Resources, asked us
to assess the ability of Americans aged 55 to 64 to obtain health
benefits through the employer-sponsored or individual insurance
markets.  He specifically asked for information on the near elderly's
(1) health, employment, income, and health insurance status; (2)
ability to obtain employer-based coverage if they retire before
becoming eligible for Medicare; and (3) use of and costs associated
with purchasing coverage through the individual market or COBRA
continuation insurance. 

To determine the demographic and health insurance status of the near
elderly, we analyzed the March 1997 Current Population Survey (CPS). 
Appendix II discusses some of the strengths and limitations of the
CPS and other surveys that we considered.  As part of our analysis of
the CPS, we separately examined two subgroups of the near
elderly--those aged 55 to 61, who are more likely to be in the labor
force, and those aged 62 to 64, who have a greater chance of being
retired.  Since the March CPS asks respondents about their
employment, retirement, health, income, marital, and social security
status, we were able to make observations about the relationship of
these variables to the health insurance status of the near elderly. 
To supplement CPS data on the health status of this age cohort, we
also obtained more objective data on their health conditions, health
care use, and health care expenditures from the Agency for Health
Care Policy and Research and the National Center for Health
Statistics. 

To determine trends in employer-based health insurance coverage for
those who retire before reaching Medicare eligibility, we conducted a
literature review on employer-based health benefits for early
retirees.  The focus of that review included information on (1)
factors contributing to the decline in employer-based benefits, (2)
terminations of retiree coverage, (3) changes in the terms and
conditions under which coverage is made available to both current and
future retirees, and (4) retirement and the influence of health
benefits.  We culled data on more recent trends in retiree coverage
from periodic surveys sponsored by private benefit consultants and by
the federal government.  In general, we only reported trend data from
nationally representative surveys. 

Information on continuation coverage is not available from the March
1997 CPS.  Consequently, in order to examine the extent of the near
elderly's utilization of COBRA coverage, we relied on analyses of two
special CPS supplements sponsored by the Pension and Welfare Benefits
Administration of the Department of Labor--one conducted in 1988 and
a second in 1994.  We supplemented these analyses with data drawn
from (1) the administrative records maintained by a COBRA third-party
administrator and (2) an annual survey that attempts to measure
adverse risk selection as a result of COBRA. 

To determine the access of the near elderly to the individual
insurance market, we updated information collected in our 1996
report\13 on the cost and coverage trade-offs faced by Americans who
rely on this market for coverage.  In particular, we contacted
officials from a number of state insurance departments and insurance
carriers to obtain information about carrier underwriting practices,
current premium prices for the most popular products, and recent
state and federal legislation that affect individuals' access to this
market.  Because certain aspects of individual insurance markets can
vary significantly among states, our 1996 study relied on case
studies of such markets in a number of states.\14 Although the
findings from these states, including the premium prices of
individual products, cannot be generalized to the nation as a whole,
we believe they are reasonably representative of the range of
individual insurance market dynamics across the country.  Also
updated were 1995 data for each state concerning individual market
insurance reforms, high-risk pools, and insurers of last resort. 

The following chapters of this report focus on how the near elderly
obtain health insurance and the obstacles they face in doing so. 
Understanding a few key distinctions among the various types of
surveys used will facilitate the understanding of the data presented
in this report.  First, surveys can have different units of analysis. 
Certain surveys are based on interviews with a sample of individuals,
some of whom are near elderly; others are the product of information
collected from a sample of employers or establishments.\15 Because of
these different units of analysis, it is often difficult to make
comparisons across the two types of surveys.  Second, although
various surveys collect information relevant to understanding the
insurance status of the near elderly, 55- to 64-year-olds are not
usually their primary focus.  As a result, a particular sample may
not be sufficiently large to precisely answer questions about a
certain subset of the near elderly.  Conversely, the survey (or an
analysis by others) may have defined the near-elderly group
differently, making it difficult to report on an issue with respect
to 55- to 64-year-olds. 

Changes in survey methodology over time often preclude or complicate
the identification of insurance trends among the near elderly.  This
is particularly true about employer survey data from the 1980s but
also affects some surveys conducted in the 1990s.  Though the changes
may have improved the reliability and relevance of the data, they are
often not comparable with earlier results from the same survey. 
Finally, some of the data sets are proprietary, and not all of the
information collected is publicly available.  The sample sizes, and
thus the precision of the estimates derived, vary.  Throughout this
report, we alert the reader to the source of the survey data being
reported, any limitations in that data, and any caveats that must
accompany the survey findings because of the size of the sample. 

A number of experts on retiree health benefits and insurance markets
commented on a draft of this report.  They generally agreed with our
presentation of the evidence on the near elderly's access to health
insurance.  We incorporated their comments as appropriate.  Our
review was conducted between August 1997 and January 1998 in
accordance with generally accepted government auditing standards. 


--------------------
\13 Private Health Insurance:  Millions Relying on Individual Market
Face Cost and Coverage Trade-Offs (GAO/HEHS-97-8, Nov.  25, 1996). 
See also Alpha Center, Understanding Individual Health Insurance
Markets:  Structure, Practices, and Products in Ten States, Report to
the Kaiser Family Foundation (Washington, D.C.:  Alpha Center, Mar. 
1998). 

\14 We selected these states judgmentally on the basis of variations
in their populations, urban/rural compositions, and the extent of
individual insurance market reforms implemented.  In each state, we
interviewed and obtained data from representatives of the state
insurance department and at least one of the largest individual
market carriers.  From insurance department representatives, we
obtained information concerning the regulation and, where applicable,
reform of the individual insurance market and the number and market
share of individual market carriers in the state.  From carriers, we
obtained information concerning products offered, including their
benefit structure, cost-sharing alternatives, eligibility, and
prices. 

\15 An establishment is not necessarily a unique business.  Thus,
different branches of the same firm might be included in a sample of
establishments. 


DEMOGRAPHIC AND INSURANCE
CHARACTERISTICS OF THE NEAR
ELDERLY
============================================================ Chapter 2

Because near-elderly Americans between the ages of 55 and 64 are
different from younger age groups in terms of health, work, and
income status, their access to and sources of health insurance also
differ.  This chapter uses the March 1997 CPS to depict the
demographic and insurance characteristics of the near elderly and two
subgroups--those aged 55 to 61 and 62 to 64.\16

Compared with younger age groups, the near elderly exhibit declining
workforce attachment, health, and income.  As the near elderly retire
or cut back on their hours of work, they run the risk of severing
their link to employer-based health insurance.  Nonetheless, the
percentage of uninsured in this age group is relatively low because
of their increased reliance on health insurance through the
individual market, Medicaid, and Medicare.  Health, income, and
employment status appear to influence how the near elderly obtain
coverage.  In general, those with individual insurance appear to have
more in common with recipients of employer-based coverage than with
the near elderly who had other sources of health benefits such as
Medicaid or Medicare.  Specifically, a smaller percentage of those
with employer and individual coverage had low incomes, were
minorities, were not working, or were in poor health.  Key
differences between those with individual and employer-based
coverage, however, are that a larger percentage of the former were
women, unmarried, unemployed, and with low incomes.  There is also a
similarity between the 55- to 64-year-olds who had public insurance
and those who were uninsured.  As compared with those with other
sources of coverage, a higher percentage of both groups had low
incomes, were minorities, were not working, or were in poor health. 
Again, however, there were important differences between these two
groups.  Specifically, compared with those with public insurance, the
uninsured were more likely to work, be married, have better health,
and have higher incomes. 


--------------------
\16 App.  II contains more details on the methodology we used in our
CPS analyses. 


   NEAR ELDERLY:  PORTRAIT OF A
   COHORT IN TRANSITION
---------------------------------------------------------- Chapter 2:1

Differences in health, labor force attachment, and family income
distinguish the near elderly from younger Americans, underscoring the
importance of access to affordable health insurance for this age
group.  The near elderly comprise about 21 million Americans.  One of
the fastest growing age cohorts, this group is projected to increase
to 35 million over the next 12 years and to nearly double between
today and the year 2020--jumping from 8 to 13 percent of the U.S. 
population.  The near elderly might best be characterized as a group
in transition.  Neither young nor old, 55- to 64-year-olds have
reached a turning point in their lives.  Many are beginning to focus
on withdrawal from the labor force and eventual retirement.  For
some, this disengagement is motivated by chronic conditions or slowly
worsening health, conditions that may be work-related.  Those near
elderly with children see them growing up and leaving home.  Finally,
family incomes are beginning to decrease as more individuals adjust
to living on a pension. 


      NEAR ELDERLY REPORT
      DECLINING HEALTH AS THEY AGE
-------------------------------------------------------- Chapter 2:1.1

Self-reported health status suggests a pattern of declining health as
individuals grow older.  Such subjective findings are corroborated by
more objective data from the National Center for Health Statistics
(NCHS) and Agency for Health Care Policy and Research (AHCPR). 
Compared with younger age groups, individuals aged 55 to 64 (1) have
the highest prevalence of many serious health conditions, (2) are the
most frequent users of health care services, and (3) incur higher
health care expenditures. 

In response to a health question on the CPS, the near elderly gave
the lowest personal assessments of any group (see fig.  2.1).\17 For
example, while almost three-quarters of 25- to 34-year-olds rated
their health status as excellent, less than one-half of the near
elderly reported their health this positively.  Conversely, about one
quarter of 55- to 64-year-olds assessed their health as poor compared
with only 6 percent of those under age 35. 

   Figure 2.1:  Self-Reported
   Health Status, by Age Group,
   1996

   (See figure in printed
   edition.)

Even among the near elderly, self-reported health status worsens with
age.  As shown in figure 2.2, nearly one-half of 55- to 61-year-olds
rated their health status as excellent compared with 41 percent of
62- to 64-year-olds.  Conversely, more individuals over age 61
reported that their health was poor. 

   Figure 2.2:  Self-Reported
   Health Status of 55- to 61- and
   62- to 64-Year-Olds, 1996

   (See figure in printed
   edition.)

These self-reported health assessments from the CPS are corroborated
by more objective data on the health status of the near elderly. 
Tables 2.1, 2.2, and 2.3 present NCHS and AHCPR data comparing the
health status and expenditures of 55- to 64-year-olds with the
experience of younger Americans.  As demonstrated by table 2.1, the
incidence of conditions such as diabetes, glaucoma, heart disease,
and hypertension is more prevalent among the near elderly than among
younger age cohorts.  In addition, the near elderly are the most
frequent users of many health care services.  Their hospital
discharge rates and days of hospital care were 51 percent and 66
percent higher, respectively, than those of 45- to 54-year-olds (see
table 2.2).  Similarly, the near elderly visited physicians at a rate
that was nearly 20 percent higher than that of any younger age group. 
Finally, the near elderly have the highest annual health care
expenditures of any group under age 65--estimated to be about $5,000
per person in 1998--45 percent higher than for individuals 45 to 54
years of age, and more than 120 percent higher than for those aged 35
to 44 (see table 2.3).\18



                         Table 2.1
          
           Number of Health Conditions per 1,000
                People Among Four Age Groups

                                  Age group
                    --------------------------------------
Condition             25 -34    35 -44    45 -54    55 -64
------------------  --------  --------  --------  --------
Arthritis              41.19     79.85    174.48    294.75
Cataract                3.42      3.21      5.85     33.73
Cerebrovascular         1.98      3.30     11.62     27.73
 disease
Diabetes                9.35     20.17     46.74     86.09
Gallbladder             6.34      3.04      5.49     11.17
 disease
Glaucoma                1.95      5.30      7.63     17.70
Ischemic heart          2.71      7.90     29.23     72.30
 disease
Heart rhythm           21.75     30.43     38.82     53.25
 disorders
Other heart             3.62      7.88     19.35     36.47
 disease
Hernia                  7.40     17.06     25.27     39.80
Hypertension           40.42     82.45    176.21    285.88
Ulcer                  19.45     22.79     17.26     36.01
Varicose veins         19.82     31.00     42.07     62.57
----------------------------------------------------------
Source:  Data derived from the NCHS 1994 National Health Interview
Survey. 



                         Table 2.2
          
            Use of Health Care Services, by Age
                           Group

                                  Age group
                    --------------------------------------
                      25 -34    35 -44    45 -54    55 -64
------------------  --------  --------  --------  --------
Hospital discharges\a
----------------------------------------------------------
Rate per 1,000         107.2      82.8     102.6     154.6
 people per year

Days of care\a
----------------------------------------------------------
Rate per 1,000         412.8     425.8     571.6     948.7
 people per year
Average length of        3.8       5.1       5.6       6.1
 stay (days)

Physician visits\b
----------------------------------------------------------
Rate per 1,000         2,140     2,274     2,973     3,545
 people per year

Outpatient department visits\c
----------------------------------------------------------
Rate per 1,000           227       218       264       305
 people per year

Emergency department visits\c
----------------------------------------------------------
Rate per 1,000           378       297       255       263
 people per year
----------------------------------------------------------
\a Data reproduced from "National Hospital Discharge Survey:  Annual
Summary, 1994," Vital and Health Statistics, Series 13, No.  128
(Hyattsville, Md.:  NCHS, May 1997). 

\b Data derived from "1996 National Ambulatory Medical Care Survey,"
Advance Data (Hyattsville, Md.:  NCHS, Dec.  17, 1997). 

\c Data derived from "1996 National Hospital Ambulatory Medical Care
Survey," Advance Data (Hyattsville, Md.:  NCHS, Dec.  17, 1997). 



                         Table 2.3
          
          Average Health Care Expenditures by Age
                           Group

                                  Age group
                    --------------------------------------
Expenditures          25 -34    35 -44    45 -54    55 -64
------------------  --------  --------  --------  --------
Emergency room        $78.60    $55.81    $48.46    $80.17
Hospital room and     732.34    644.61  1,151.05  2,187.09
 board
Inpatient             196.02    208.81    386.32    463.17
 physician
 services
Outpatient             68.51     67.62    124.28     73.13
 hospital services
Physician office      555.23    573.60    881.42  1,074.00
 services
Prescription drugs    109.46    181.72    340.54    513.62
==========================================================
All medical         $2,110.5  $2,233.9  $3,454.9  $5,023.5
 services                  5         1         3         8
----------------------------------------------------------
Note:  Expenditures are based on the 1987 National Medical
Expenditure Survey and were aged by AHCPR to represent 1998 dollars. 


--------------------
\17 The CPS question asked respondents to rate their health status as
excellent, very good, good, fair, or poor.  To simplify our
presentation of these data, we have collapsed these responses into
three categories.  Specifically, our excellent category includes both
the excellent and very good responses, and our poor category includes
both the fair and poor responses. 

\18 The Agency for Health Care Policy and Research "aged" 1987 data
to represent 1998 dollars. 


      NEAR ELDERLY ARE IN
      TRANSITION FROM THE ACTIVE
      WORKFORCE TO RETIREMENT
-------------------------------------------------------- Chapter 2:1.2

Although a majority of the near elderly reported that they worked for
some period of time in 1996, this age cohort is moving from full-time
employment into retirement, a change that may result in the loss of
employer-based health coverage.  The transition is apparent in data
on the work status of the near elderly and is even starker when
comparing the experience of 55- to 61-year-olds with those 62 and
older. 

About two-thirds of the near elderly were employed for some period of
time in 1996 compared with about 85 percent of those between the ages
of 25 and 54.  Almost 43 percent were employed full time for the
entire year.  The remainder either worked full time for part of the
year (9 percent) or part time (13 percent).  And the majority of
part-timers worked fewer than 20 hours per week.  Of those who were
employed in 1996, about 18 percent were self-employed, with the
remainder working in either the private sector or government. 

The remaining one-third of the near elderly were out of the labor
force entirely.  As shown in figure 2.3, almost 80 percent of
nonworkers reported retirement, illness, or disability as the main
reasons for not working.  Another one-fifth did not work in order to
care for their homes and families.  Few of the nonworking near
elderly were displaced from a job or looking for work.  Only about
117,000 (1.5 percent) reported "inability to find a job" as the main
reason for not working.  This estimate is corroborated by a related
question to which about 155,000 (2 percent) nonworkers said that they
had been laid off or were looking for work during that time
period.\19 The near elderly did not differ from other age groups in
the extent to which they were displaced from work. 

   Figure 2.3:  Percentage of Near
   Elderly Who Did Not Work, by
   Primary Reason Reported, 1996

   (See figure in printed
   edition.)

While the fact that fewer than one-half of the near elderly worked
full time for the whole year suggests a transition to retirement, the
progression is even more evident when comparing the employment status
of the 55- to 61-year-old members of this group with those 62 and
older.  Figure 2.4 demonstrates that by age 62 an even smaller
percentage worked full time and over one-half were not employed at
all. 

   Figure 2.4:  Employment Status
   of 55- to 61- and 62- to
   64-Year-Olds--Percentage
   Working Full Time, Working Part
   Time, and Not Employed, 1996

   (See figure in printed
   edition.)

Another indicator of detachment from the workforce for 62- to
64-year-olds is the proportion who elect Social Security benefits
before they reach the normal retirement age of 65.  In 1996, about
one-half of this age group who were eligible elected to receive
Social Security benefits early with a reduced annuity and only about
one-third of those individuals worked at all in 1996. 

As shown in figure 2.5, the relationship between age and retirement
is also reflected in the reasons individuals reported for not
working.  Almost two-thirds of those 62 and older were retired
compared with about one-third of the younger near elderly.\20
However, fewer of the former indicated they did not work because of
illness or disability or because they were taking care of home and
family. 

   Figure 2.5:  Percentage of 55-
   to 61- and 62- to 64-Year-Olds
   Who Reported Not Working, by
   Reason, 1996

   (See figure in printed
   edition.)

The transition into retirement as the near elderly grow progressively
older could, in part, be influenced by their worsening health status. 
As noted earlier, health status declines with age and self-reported
health status is slightly worse for the older members of this age
group.  When the overall group's employment status is examined in the
context of its health status, we find that a much smaller percentage
of those in poor health worked during 1996 compared with those who
reported having better health (see fig.  2.6). 

   Figure 2.6:  Health and
   Employment Status of the Near
   Elderly, 1996

   (See figure in printed
   edition.)


--------------------
\19 Because of the small number of cases, the actual size of this
group could vary by as much as 30 percent.  Because of the
imprecision of these estimates, we report no additional information
on the characteristics of these individuals. 

\20 The trend toward earlier retirement is also demonstrated by
examining labor force participation rates over time.  For example,
while about 84.6 percent of males aged 55 to 64 participated in the
labor force in 1965, only about 65.5 percent worked in 1995. 


      INCOME BEGINS TO DECLINE
      AFTER AGE 55 AS LIKELIHOOD
      OF BEING RETIRED INCREASES
-------------------------------------------------------- Chapter 2:1.3

In 1996, the median family income for people between the ages of 55
and 64 was about $40,000.\21 A comparison of their income with that
of other age groups, however, suggests that income peaks before age
55 and then declines.  As shown in table 2.4, the median family
income rose from a low of about $36,000 for people aged 25 to 34 to a
high of $52,000 for 45- to 54-year-olds.  In contrast, the median
family income dropped for the near elderly. 



                         Table 2.4
          
             Median Family Income for the Near
            Elderly and Younger Age Groups, 1996

                                       Total family income
Age group                                         (median)
------------------------------  --------------------------
25 -34                                             $35,922
35 -44                                             $45,810
45 -54                                             $52,000
55 -64                                             $40,444
----------------------------------------------------------
Although the median family income of 55- to 64-year-olds was about
$40,000, almost 20 percent of this age group lived close to or below
the poverty level.\22 About 18 percent of these individuals had
incomes less than 150 percent of the poverty level in 1996, and about
10 percent had a total family income below the poverty level. 

Figure 2.7 shows the distribution of family income for the near
elderly.  About one-quarter had a family income of less than $20,000
and almost 40 percent earned less than $30,000.  However, over 20
percent of the near elderly had a total family income of $75,000 or
more. 

   Figure 2.7:  Distribution of
   Total Family Income for 55- to
   64-Year-Olds, 1996

   (See figure in printed
   edition.)


--------------------
\21 For the CPS, total family income represents pre-tax earnings. 
Although the inclusion of assets such as homes, investments, and
savings would provide a more comprehensive measure of financial
resources, such data are not available through the CPS. 

\22 Poverty level refers to the federal poverty guidelines, which are
used to establish eligibility for certain federal assistance
programs.  The guidelines are updated annually to reflect changes in
the cost of living, and vary according to family size.  In 1996, the
poverty level for a near-elderly married couple was about $10,500. 


   PROBABILITY OF BEING INSURED
   RISES WITH AGE, BUT SOURCES OF
   INSURANCE DIFFER
---------------------------------------------------------- Chapter 2:2

In addition to changes in health, work, and income status, the
interval between ages 55 and 64 is also a transitional period in
terms of health insurance.  Eligibility for Medicare is up to 10
years away, and employer-based coverage may well end with retirement. 
Consequently, access to individually purchased coverage and to public
programs for the poor and disabled becomes increasingly important
with age.  For some near elderly, however, the lack of an affordable
alternative results in their being uninsured. 

Given that aging is associated with a higher utilization of health
care services, it is not surprising that the near elderly are among
the most likely age group to have insurance and the least likely to
be uninsured.  According to our analysis of the March 1997 CPS, about
18.5 million near-elderly Americans had health insurance at some time
during 1996 and the remaining 3 million were uninsured.\23 As shown
in table 2.5, the near elderly and those aged 45 to 54 were the most
likely groups to be insured.\24



                         Table 2.5
          
          Percentage Insured and Uninsured, by Age
                        Group, 1996

                          Age group
                ------------------------------
                                                     Total
                                                population
                                                 under age
                 25-34   35-44   45-54   55-64          65
--------------  ------  ------  ------  ======  ----------
Insured           77.7    83.7    86.3    86.2        82.4
Uninsured         22.3    16.3    13.7    13.8        17.6
==========================================================
Total (number      100     100     100     100   100 (235)
 in millions)   (40.3)  (44.0)  (33.0)  (21.5)
----------------------------------------------------------
While as likely to have insurance as those aged 45 to 54, the near
elderly access their coverage differently (see fig.  2.8).  Through
age 54, each successive age group was more likely to have
employer-based coverage and less likely to be uninsured.\25 This
pattern was broken by the near elderly, however, as employer-based
coverage was lower than for most other age groups.  In part, this
reflects their disengagement from the labor force and the lower
probability of firms offering retiree coverage.  On the other hand,
the likelihood of the near elderly being uninsured was no different
than that of 45- to 54-year-olds.  Individual insurance\26 and public
programs such as Medicare compensated for the drop in employer-based
coverage for the near elderly.\27

   Figure 2.8:  Percentage of
   Insured and Uninsured
   Individuals, by Source of
   Insurance and Age Group, 1996

   (See figure in printed
   edition.)

Note:  The March CPS asked whether individuals were covered by the
Department of Defense (DOD) through its direct care system or the
Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS), or the Department of Veterans Affairs.  However, responses
to this question do not distinguish among the three.  The military
health care system is composed of hospitals and clinics of the Army,
Navy, and Air Force, called the direct care system; and CHAMPUS. 
Active duty military members receive all medical services through the
direct care system.  For active duty family members and retirees and
their family members under age 65, CHAMPUS, an insurance-like program
administered by the DOD, pays for a portion of the care they receive
from private sector health care providers when military facility care
is not available or too distant.  DOD administers the CHAMPUS benefit
under the new TRICARE program, which offers eligible beneficiaries
HMO, preferred provider organization, and fee-for-service options. 
The Department of Veterans Affairs provides medical services to all
veterans, subject to the availability of resources.  Priority is
given to veterans with service-connected disabilities, low incomes,
or special health care needs. 

The decreased reliance on employer-based health insurance for the
near elderly is most pronounced among the oldest members of the
group.  As shown in table 2.6, the percentage of 62- to 64-year-olds
with such coverage was almost 8 points lower than for the younger
members of the near elderly.  The further decline in employer-based
coverage should be accompanied by changes in the number of uninsured
and those obtaining coverage through the individual market and
Medicare.  All three categories did in fact show an increase among
62- to 64-year-olds; these differences, however, were only
statistically significant for Medicare.\28



                         Table 2.6
          
          Percentage of Insured and Uninsured Near
          Elderly, Aged 55 to 61 and 62 to 64, by
                 Source of Insurance, 1996

Source of insurance              Aged 55 -61   Aged 62 -64
------------------------------  ------------  ------------
Employer                                67.4          59.6
Individual                               8.0          10.1
Medicare                                 4.9           8.5
Medicaid                                 4.6           4.0
Military/veterans                        1.9           2.1
Uninsured                               13.2          15.5
==========================================================
Total                                  100.0         100.0
----------------------------------------------------------
Note:  Percentages may not add to 100 because of rounding. 


--------------------
\23 Since 1993, the percentage of uninsured near elderly has remained
fairly stable, at 13.4 percent in 1993, 13.9 percent in 1994, and
13.3 percent in 1995.  A recent report based on a household survey
called the Community Tracking Study suggests that the number of
uninsured near elderly in 1996-97 was lower than our estimate.  The
response rate for the survey was 65 percent and included 33,000
families.  See Peter J.  Cunningham, "Next Steps in Incremental
Health Insurance Expansions:  Who Is Most Deserving?" Issue Brief,
No.  12 (Washington, D.C.:  Center for Studying Health System Change,
Apr.  1998). 

\24 Ninety-nine percent of those aged 65 or older were insured in
1996.  For most of these individuals, Medicare was the primary source
of coverage, but two-thirds also purchased individual insurance,
commonly known as Medigap, and about one-third had supplementary
insurance though a former employer. 

\25 The CPS asks respondents if they had health insurance through an
employer or union but does not distinguish coverage from these two
sources.  In our presentation of this information, we refer to
insurance through either of these sources as employer-based.  The CPS
also does not identify whether an individual has only temporary
employer-based coverage under COBRA. 

\26 The CPS question does not distinguish between comprehensive and
more limited policies that are available in the individual market. 
In addition, some policies may exclude a preexisting condition from
coverage.  Limited-benefit products include hospital indemnity,
medical-expense, and specified-disease plans.  Hospital and
medical-expense plans offer a limited, usually flat reimbursement for
hospital and medical/surgical expenses, respectively. 
Specified-disease plans provide coverage only for a particular
disease.  An individual with a family history of cancer might
purchase a cancer-only policy.  Limited-benefit products may
represent a significant share of the individual market in some
states.  For additional information, see Private Health Insurance: 
Millions Relying on Individual Market Face Cost and Coverage
Trade-Offs (GAO/HEHS-97-8, Nov.  25, 1996). 

\27 Although the normal Medicare eligibility age is 65, individuals
under age 65 who are receiving Social Security cash benefits on the
basis of disability are eligible after a 24- month waiting period. 
Also, most individuals who need a kidney transplant or dialysis may
also be covered, regardless of age. 

\28 For purposes of our analysis, we considered a difference to be
statistically significant when the odds were no greater than 5 in 100
that the difference could have occurred by chance. 


   CHANGING DEMOGRAPHIC
   CHARACTERISTICS AFFECT
   LIKELIHOOD OF BEING INSURED AND
   THE SOURCE OF INSURANCE
---------------------------------------------------------- Chapter 2:3

As noted earlier, the health, employment, and income of individuals
change as they grow older.  Our analysis of the March 1997 CPS
indicates that these changes affect the insurance status of the near
elderly.  Overwhelmingly, those who have better health, are employed,
or have higher incomes are more likely to be insured and to have
coverage through an employer.  Conversely, those in poor health, who
are not working, and who have low incomes have a greater probability
of being uninsured or relying on Medicare or Medicaid.  Although the
data also suggest that certain characteristics are linked to the
likelihood of having individual insurance--having better health,
working part time, and having low income--the results were not
statistically significant. 


      HEALTH AND INSURANCE STATUS
-------------------------------------------------------- Chapter 2:3.1

Among the near elderly, a better self-reported health status
translated into a greater likelihood of being insured and of
obtaining this coverage through an employer.  In contrast, those who
rated their health as poor were more likely to be uninsured or to
obtain coverage through a public program. 

As shown in table 2.7, only 43 percent of those with poor health had
employer-based coverage, while about 76 percent of those with
excellent health and 66 percent of those with good health were
covered through an employer.  And individuals in poorer health were
at least 10 times more likely to be covered through Medicare or
Medicaid, compared with those in the best of health.  Poor health
status, however, does not guarantee access to insurance, as reflected
in the fact that about 18 percent of the nearly elderly who reported
their health status as poor were uninsured. 



                         Table 2.7
          
          Health and Insurance Status of the Near
                       Elderly, 1996

                    (Numbers in percent)

                               Health status
                  ----------------------------------------
Type of
insurance            Excellent          Good          Poor
----------------  ------------  ------------  ------------
Employer                  75.7          66.1          42.8
Individual                 9.1           9.9           5.8
Medicare                   1.2           4.0          17.9
Medicaid                   1.3           2.5          13.4
Military/                  1.8           2.0           2.1
 veterans
Uninsured                 10.8          15.5          17.9
==========================================================
Total                    100.0         100.0         100.0
----------------------------------------------------------
Note:  Percentages may not add to 100 because of rounding. 


      EMPLOYMENT AND INSURANCE
      STATUS
-------------------------------------------------------- Chapter 2:3.2

Among the near elderly, there is a link between insurance status and
three work-related variables:  (1) number of hours worked, (2) nature
of the employment, and (3) type of industry.  First, the near elderly
typically had insurance, but those who worked full time were more
likely to be insured.  More than 90 percent of the near elderly who
worked full time had some kind of health insurance, compared with 82
percent of those who did not work at all.  Moreover, the number of
hours worked affected the source of coverage--that is, whether the
insurance was obtained through an employer, the individual market, or
public sources (see fig.  2.9).  For example, 81 percent of the near
elderly who worked full time in 1996 had employer-based coverage,
compared with only 65 percent who worked part time and only 46
percent of those who did not work.  These differences are even more
dramatic when we distinguish employer-based coverage through the
individual's employer from that obtained through a spouse. 
Specifically, about 73 percent of full-time workers had coverage
through their employer, compared with 46 percent of part-time workers
and 25 percent of those who did not work.  In addition, those aged 55
to 64 who worked part time were more likely to purchase individual
insurance than were those who worked full time.  This pattern may be
explained by the possibility that those who worked full time were
more likely to have employer-based health insurance at retirement. 
As was the case with health status, there is a relationship between
not working and reliance on public sources of coverage.  Thus, those
who were not employed in 1996 were at least 10 times more likely to
have Medicare or Medicaid than the near elderly who were employed
full time. 

   Figure 2.9:  Insurance Status
   of the Near Elderly, by
   Employment Status, 1996

   (See figure in printed
   edition.)

Second, the insurance status of 55- to 64-year-olds varied by the
nature of their employment, that is, whom they worked for.  Thus,
individuals who worked for an employer as opposed to being
self-employed were more likely to have employer-based health
insurance through that employer, while the latter were more likely to
have individually purchased insurance.  Eighty-three percent of those
who worked for a public employer in 1996 had coverage through their
employer as did 67 percent of those who worked for a private
employer.  In contrast, 42 percent of the incorporated self-employed
and 27 percent of the unincorporated self-employed had this source of
coverage.\29

However, only 4 percent of individuals who worked for a public
employer and 6 percent who worked for a private employer had
individually purchased insurance compared with more than 20 percent
of the self-employed. 

Finally, health insurance was more common in certain industries.  As
shown in figure 2.10, the near elderly employed in public
administration, manufacturing, mining, transportation, and
professional services were the most likely to have health insurance
through their employer, while those who performed personal services
or worked in agriculture, fishing, and forestry were the least likely
to have coverage through this source.  As noted in chapter 3, an
increasing share of the labor force is working in the service sector,
while a decreasing share is working in manufacturing and
transportation; hence, the number of retirees without insurance
through an employer could be higher in the future. 

   Figure 2.10:  Percentage With
   Insurance Through Their
   Employer, by Industry Sector,
   1996

   (See figure in printed
   edition.)


--------------------
\29 Someone who is self-employed may purchase group health insurance
for him- or herself and any employees of the firm. 


      REASONS THE NEAR ELDERLY DID
      NOT WORK AND INSURANCE
      STATUS
-------------------------------------------------------- Chapter 2:3.3

As reported earlier, almost 97 percent of the near elderly who did
not work in 1996 reported retirement, illness or disability, or
caring for their home or family as their main reason for being out of
the labor force (see fig.  2.3).  Additionally, a small number (about
117,000 individuals) in this age group indicated that they were
unemployed in 1996 because they were unable to find work.\30 Just as
the insurance status of the near elderly varied according to their
relative attachment to the workforce or to the type of work
performed, whether or not a person had insurance as well as the type
of insurance they held also varied by the reasons given for not
working (see table 2.8). 



                         Table 2.8
          
            Type of Insurance, by Reason for Not
                       Working, 1996

                    (Numbers in percent)

                                Caring
                                   for               Could
                                 home/      Ill/  not find
Type of insurance    Retired    family  disabled      work
------------------  --------  --------  --------  --------
Employer                58.1      51.8      25.3      29.5
Individual              11.2       7.9       2.5       9.3
Medicare                 9.6       3.0      32.8       0.0
Medicaid                 2.2       6.6      25.1       7.8
Military/veterans        2.2       2.7       2.1       0.0
Uninsured               16.7      27.9      12.2      53.4
==========================================================
Total                  100.0     100.0     100.0     100.0
----------------------------------------------------------
Note:  Percentages may not add to 100 because of rounding. 

First, whether or not an individual had insurance differed depending
on the reason given for not working.  For example, about 83 percent
of the retired and 88 percent of the ill or disabled had some kind of
health insurance, compared with 72 percent of those who were caring
for a home or family and only 47 percent of those who could not find
work. 

Second, the source of coverage held by the near elderly differed
depending on the reason they did not work.  While both the retired
and the ill or disabled were the most likely to have health
insurance, the former were more than twice as likely to have
employer-based insurance as the latter.  Conversely, the ill or
disabled were more than three times as likely to be covered by
Medicare and 10 times more likely to be covered by Medicaid than
those who were retired.  As shown in table 2.8, those who were caring
for a home or family essentially mirrored the retired group with
respect to source of insurance.  Most of the former individuals,
however, obtained coverage through a spouse.  Among these four
groups, the percentage of uninsured was highest for those reporting
an inability to find work, but because of their small representation
in the overall sample, we could not make further observations. 


--------------------
\30 As mentioned previously, the actual size of this group could vary
by as much as 30 percent. 


      INCOME AND INSURANCE STATUS
-------------------------------------------------------- Chapter 2:3.4

As mentioned earlier, income is lower for individuals 55 to 64 years
of age than for younger groups.  Whether or not the near elderly had
insurance, as well as their source of insurance, however, differed by
income level.  Compared with the near elderly with high incomes,
those with low incomes were more likely to be uninsured or to rely on
Medicaid or Medicare.  As shown in table 2.9, the percentage of 55-
to 64-year-olds without insurance fell from a high of about 33
percent for those with incomes less than $10,000 to about 6 percent
for those with incomes of $75,000 or more.  Similarly, the proportion
covered by Medicaid and Medicare dropped significantly when incomes
exceeded $20,000. 

The near elderly with low incomes were also the least likely to have
employer-based coverage.  As shown in table 2.9, those with incomes
less than $10,000 had the lowest level of employer-based coverage,
while such coverage increased significantly up to the $30,000 income
level and then gradually rose as income exceeded this amount. 

Despite their limited resources, the near elderly with low incomes
purchased individual insurance at about the same rate as did those
with higher incomes.\31 Although table 2.9 suggests that the
low-income near elderly were more likely to purchase individual
insurance than those with higher incomes, these differences were not
statistically significant. 



                                        Table 2.9
                         
                             Source of Insurance for the Near
                                 Elderly, by Income, 1996

                                   (Numbers in percent)

                     Less  $10,00  $20,00  $30,00  $40,00  $50,00  $60,00  $70,00
                     than    0 to    0 to    0 to    0 to    0 to    0 to    0 to  $75,00
Total family       $10,00  $19,99  $29,99  $39,99  $49,99  $59,99  $69,99  $74,99   0 and
income                  0       9       9       9       9       9       9       9   above
-----------------  ------  ------  ------  ------  ------  ------  ------  ------  ------
Employer             15.6    41.2    62.7    71.5    74.5    78.7    78.7    84.6    85.7
Individual           10.3    11.1    11.8     7.5    10.3     6.9     6.5     4.3     5.9
Medicare             16.5    14.3     5.1     4.6     1.9     3.2     3.2     2.1     1.0
Medicaid             22.2     8.7     3.6     1.3     0.7     1.4     0.4     0.5     0.3
Military/             2.7     2.0     3.0     2.2     2.0     1.1     2.0     1.0     1.2
 veterans
Uninsured            32.6    22.8    13.8    12.9    10.6     8.7     9.1     7.5     5.9
=========================================================================================
Total               100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0
-----------------------------------------------------------------------------------------
Note:  Percentages may not add to 100 because of rounding. 


--------------------
\31 The cost of comprehensive coverage in the individual market
suggests that those at lower incomes may be purchasing less
expensive, limited-benefit products. 


   KEY CHARACTERISTICS OF THE NEAR
   ELDERLY, BY SOURCE OF COVERAGE
---------------------------------------------------------- Chapter 2:4

Focusing discretely on the individual demographic characteristics of
the near elderly as they relate to insurance status provides a
fragmented portrait of those who have a particular type of insurance
or who are uninsured.  Table 2.10 profiles 55- to 64-year-olds by
source of insurance--highlighting the extent to which the most
vulnerable have coverage through employer-based, individual, or
public insurance or go without insurance altogether.  Appendix III
has a more detailed profile of the near elderly by source of coverage
as well as demographic and insurance profiles of those 55 to 61 and
62 to 64 years of age. 

In general, the near elderly with employer-based insurance are
similar to those with individual coverage.  Only a small percentage
had low incomes, were minorities, were not working, or were in poor
health.  Key differences between these groups, however, relate to
their gender, marital status, work status, and income.  Specifically,
as compared with those with employer-based insurance, a larger
percentage of those with individual insurance were women, unmarried,
and unemployed and had low incomes. 

Likewise, there is a similarity between 55- to 64-year-olds who had
public insurance and those who were uninsured.  A relatively higher
percentage of both groups had low incomes, were minorities, were not
working, or were in poor health.  Again, however, there were
important differences between these groups.  Compared with those with
public insurance, the uninsured were more likely to work, have better
health, and have higher incomes, but were less likely to be married. 
Focusing on the most vulnerable, however, obscures the extent to
which 55- to 64-year-olds with higher incomes are uninsured.  Thus,
over 20 percent of the uninsured had incomes of $50,000 or more.\32



                         Table 2.10
          
          Demographic Profile of Vulnerable Near-
          Elderly Americans, by Insurance Status,
                            1996

                     Percentage with each characteristic
                    --------------------------------------
                     Employer-  Individu          Uninsure
Characteristic           based        al  Public         d
------------------  ----------  --------  ------  --------
Family income             10.9      29.8    68.8      46.3
 under $20,000\a
Female                    49.7      58.7    56.8      57.5
Minority                  16.3      13.0    38.8      38.0
Not working               25.0      33.4    87.1      46.5
Poor health               14.8      15.4    68.9      29.2
Unmarried                 21.3      34.2    60.8      38.0
----------------------------------------------------------
\a Median family income in 1996 for the near elderly was $50,700 for
those with employer-based coverage, $30,920 for those with individual
coverage, $12,813 for those with public insurance, and $21,750 for
the uninsured. 


--------------------
\32 We compared the self-reported health status of the uninsured near
elderly who had incomes of $50,000 or more with both insured
individuals within the same income range and with uninsured near
elderly with lower incomes.  Compared with the insured near elderly
with incomes of $50,000 or more, about 7 percent more of the
uninsured near elderly in this income range reported poor health;
however, this difference is not statistically significant.  The
uninsured near elderly in this income range were less likely to have
poor health than were uninsured individuals with incomes below
$30,000. 


FUTURE GAPS IN EMPLOYER-BASED
RETIREE HEALTH COVERAGE
============================================================ Chapter 3

Employers have been the main source of health insurance for Americans
since World War II.  During the 1950s, large employers began to
incorporate health coverage for retirees into their benefit packages. 
The trend toward more widely available and more generous retiree
health benefits began to change in the 1980s.  Today, many
policymakers are concerned about the future viability of
employer-based retiree health coverage and the implications for older
Americans who are not yet eligible for Medicare.  Evidence from
several different sources paints a picture of eroding retiree health
benefits.  Because each of these sources alone gives an incomplete
picture, this chapter uses both employer and retiree surveys to
describe the current situation and future outlook for employer-based
retiree health benefits. 

The number of medium and large employers offering health insurance to
retirees appears to have dropped precipitously from levels reported
in the 1980s.\33 Moreover, during the 1990s, it has continued to
drift slowly downward.  Coincidentally, the decline in employers
offering retiree coverage has been exacerbated by a shift in
employment away from firms more likely to offer coverage toward those
less likely to do so, that is, from manufacturing to service
industries.\34 When retiree health benefits are offered by a large
employer, retiree participation has also declined--a development
attributed to the trend toward greater cost sharing.  However, this
decline has been offset, in part, by an increase in labor force
participation among women.  Thus, retirees who decline coverage from
a former employer may have access to less expensive insurance through
a working or retired spouse.  Although the decision by larger
employers not to offer retiree health benefits has affected some
current retirees, it will have a greater effect on those who will
retire in the future.  This finding appears to be supported by the
fact 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. 

Though employer surveys demonstrate that fewer firms are offering
retiree health coverage, they provide limited evidence as to how
changes in the terms under which such benefits are proffered affect
their affordability for both current and future retirees.  The
sketchy evidence available does suggest that retirees are being asked
to contribute a larger share of the premium than active employees. 
If past trends are a reliable indicator, increased cost sharing may
suppress the demand for retiree health benefits even though some
firms continue to make them available.  The erosion in retiree health
coverage has persisted, despite a turnaround in two trends that had
contributed to the decline--the abatement in health care inflation
and the reemergence of a strong, internationally competitive economy. 
This persistent erosion raises a fundamental question about the
future protection available to retired individuals through
employer-based health insurance. 


--------------------
\33 There is no uniform convention for characterizing firm size.  The
two surveys we generally report on collect data from firms with 200
or more and 500 or more employees. 

\34 There has been a debate about whether employment has also shifted
away from larger to smaller firms.  In 1996, EBRI reported 1987 and
1992 Census data showing that compared to the proportion of workers
in smaller firms, the proportion in firms with 500 or more employees
declined by 1.8 percentage points.  See "The Changing World of Work
and Employee Benefits," Issue Brief, No.  172 (EBRI, Apr.  1996). 


   ORIGIN AND EVOLUTION OF RETIREE
   HEALTH BENEFITS
---------------------------------------------------------- Chapter 3:1

Employer-based health benefits for active employees had became a
standard benefit by the early 1950s.  According to Rappaport and
Malone, however, retiree health coverage evolved more as an
afterthought to pension benefits--a way to ease the transition from
employment to retirement.\35 Health insurance was generally
considered a goodwill gesture and an inexpensive addition to the
total retirement package.  Eligibility was usually based on pension
plan eligibility, regardless of the retiree's age or years of
service.  And many employers paid the full premium for retiree health
coverage because of its reasonable cost at the time and the
difficulty of collecting premiums from retirees. 

Medicare, created in 1965, spurred the general expansion of retiree
health coverage by making it much less expensive for employers to
offer to help meet retiree health care needs.\36 Most employers that
provided retiree health coverage did so on a lifetime basis.  The
trend, especially for firms with labor unions, was to continuously
improve retiree health benefits.  With relatively few retirees,
comparatively small health benefit costs, and a philosophy that
American manufacturing would continue to dominate world markets,
employers rarely even measured or voiced concern about the cost of
retiree medical benefits.\37

This situation began to change during the 1980s.  A coincidence of
factors and trends gave rise to attempts by some employers to modify
or even eliminate retiree health benefits, including (1) sharply
rising medical costs, (2) heightened foreign competition, (3)
corporate takeovers, (4) the declining bargaining power of labor, and
(5) a change in accounting standards.  This last factor is often
cited as a major contributor to the decline in employer-based retiree
health coverage.\38 In 1993, after over a decade of discussion, large
employers were required to report annually on the liability
represented by the promise to provide retiree health benefits to
current and future retirees.\39 The new accounting standard, commonly
referred to as FAS 106, does not require that employers set aside
funds to pay for these future costs and thus it does not affect their
cash flow.\40 There was concern, however, that these liabilities
would affect companies' stock prices.  Since employers typically
cover retiree health costs as they are incurred, this liability is
largely unfunded.  The estimated liability in 1988 of between $221
billion and $332 billion was staggering and is widely viewed as
having served as a wake-up call to employers about the magnitude of
their future obligations.  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
reassessing the nature of their commitment to retiree health
benefits.\41


--------------------
\35 Anna M.  Rappaport and Carol H.  Malone, "Adequacy of
Employer-Sponsored Retiree Health Benefit Programs," in Providing
Health Care Benefits in Retirement, eds.  Mazo, Rappaport, and
Schieber (Philadelphia, Pa.:  Pension Research Council, the Wharton
School of the University of Pennsylvania, 1994). 

\36 Judy Mazo, "Introduction to Retiree Health Benefits," in
Providing Health Care Benefits in Retirement. 

\37 G.  Lawrence Atkins, "The Employer Role in Financing Health Care
for Retirees," in Providing Health Care Benefits in Retirement. 

\38 A study that examined why firms reduced retiree health benefits
found strong support for viewing the new accounting standard,
referred to as FAS 106, as an important, but not sole, contributor. 
Firms who cut retiree health benefits were financially weaker than
firms who did not cut benefits, and they had higher retiree health
care costs at the time benefits were reduced.  See H.  Fred
Mittelstaedt and others, "SFAS No.  106 and Benefit Reductions in
Employer-Sponsored Retiree Health Care Plans," The Accounting Review,
Vol.  70, No.  4 (Oct.  1995). 

\39 Initially, the new requirements only affected publicly traded
corporations with 500 or more employees.  Beginning in 1995, FAS 106
requirements became applicable to smaller firms.  The requirement
does not apply to firms whose employees receive health benefits
through a Taft-Hartley plan.  Such plans are union-organized and
provide health coverage under collectively bargained agreements.  A
similar requirement known as GASB-26 became effective for state and
local governments in June 1996. 

\40 ERISA not only requires employers to fund their pension plans but
gives employees vested rights upon meeting certain service
requirements--such as being employed a minimum of 5 years.  Health
benefits, on the other hand, were excluded from such funding and
vesting requirements.  Retiree health benefits are funded on a
pay-as-you-go basis and are not portable.  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). 

\41 Many financial experts are concerned because these long-term
liabilities erode equity positions and will become current
obligations in future years.



   LIMITED DATA FROM 1980S SUGGEST
   SIGNIFICANT EROSION IN COVERAGE
---------------------------------------------------------- Chapter 3:2

The picture of the extent to which large employers offered retiree
health benefits during the 1980s is murky at best.  Much of the
available evidence is from surveys conducted by major benefit
consultants using current or potential clients as their sample. 
Since these clients (larger employers) are more likely to offer
retiree health coverage, the estimates derived from such a nonrandom
sample are likely to reflect an upward bias.  Table 3.1 compares
estimates from five such surveys conducted between 1983 and 1988.\42
The results from two surveys--the Washington Business Group on Health
(WBGH) and Hewitt--appear to be outliers.  The WBGH estimates are
based on a very small sample size (131 firms).  The Hewitt results
are higher than other 1980s estimates and similar to results Hewitt
reported in 1997.  Thus, Hewitt's finding that 92 percent of large
firms offered early retiree coverage in 1996 suggests that little
change has occurred among large employers since 1985.\43



                         Table 3.1
          
           Estimates of the Percentage of Medium
          and Large Firms Offering Retiree Health
                          Benefits

Estimated
percentage            Date  Sample          Source
--------------  ----------  --------------  --------------
67\a               1983-85  Medium and      J. Dopkeen\b
                            large firms

74\a                  1985  886 large       Mercer-
                            employers       Meidinger,
                                            Inc.

98\c                  1985  131 large       WBGH
                            private
                            employers

91\c                  1985  762 medium and  Hewitt
                            large
                            employers

62\c                  1988  Over 1,600      Foster Higgins
                            firms of all
                            sizes
----------------------------------------------------------
\a These estimates include both early retirees and those who are over
age 65. 

\b J.  Dopkeen, "Pew Memorial Trust Fund Synthesis:  Post Retirement
Health Benefits," Health Services Research, 21:6 (Feb.  1987). 
Dopkeen bases his estimates on surveys conducted by 12 major benefit
consulting firms from 1983 to 1985. 

\c These estimates are for early retirees only.  Comparable
percentages for older retirees are as follows:  WBGH--95 percent,
Hewitt--86 percent, and Foster Higgins--55 percent. 

A 1984 Department of Labor survey also sheds some light on the
prevalence of employer-based retiree health benefits.  At firms with
100 or more employees, 60 percent of workers had their coverage
continued when they retired early.  These results are in line with
the range of estimates shown in table 3.1. 


--------------------
\42 A number of these surveys were cited in Wm.  M. 
Mercer-Meidinger-Hansen, Inc., for the American Association of
Retired Persons, Financing Postretirement Medical Benefits:  Assuring
Economic Security for Retirees, Select Committee on Aging, U.S. 
House of Representatives, Committee Publication No.  100-617
(Washington, D.C.:  May 1987), p.  30. 

\43 Hewitt Associates, Retiree Health Trends and Implications of
Possible Medicare Reforms (Washington, D.C.:  The Henry J.  Kaiser
Family Foundation, Sept.  1997).  Hewitt prefers to characterize its
conclusions as based on a database rather than a survey.  This
proprietary database of large employers consists primarily of Hewitt
clients.  The report points out that there was little change among a
constant sample from this database between 1991 and 1996.  For its
constant sample, the percentage of employers offering retiree health
benefits was higher than for the overall database, which includes
newer companies not offering retiree coverage. 


   MORE RECENT SURVEYS PAINT
   CONSISTENT PICTURE OF CONTINUED
   EROSION
---------------------------------------------------------- Chapter 3:3

While the limited data available suggest that upward of 60 to 70
percent of large employers offered retiree health insurance in the
1980s, far fewer than half do so today, and that number is continuing
to decline despite the recent period of strong economic growth.  That
evidence, from more rigorous employer surveys conducted in the past
several years, is corroborated by surveys sponsored by the Labor
Department. 


      FEWER EMPLOYERS OFFER
      COVERAGE
-------------------------------------------------------- Chapter 3:3.1

Results from periodic surveys conducted by two benefit consulting
firms, Mercer/Foster Higgins\44 and KPMG Peat Marwick, are consistent
and indicate a further decline in the availability of retiree
coverage from medium and large employers between 1991 and 1997.\45
Both surveys are based on a random sample whose results can be
generalized to a larger population of employers rather than on a
database of clients such as that used by Hewitt and others.\46 See
appendix II for more information on the characteristics of the Foster
Higgins and Peat Marwick surveys.  As shown in figure 3.1, Foster
Higgins indicated an overall decline of 8 percentage points in
coverage offered to early retirees, while Peat Marwick reported a
drop of 9 percentage points for all retirees during roughly the same
period.  Unlike Foster Higgins, Peat Marwick did not report
separately on early and Medicare-eligible retirees. 

   Figure 3.1:  Percentage of
   Medium and Large Employers
   Offering Retiree Health
   Coverage, 1991-97

   (See figure in printed
   edition.)

Note:  The Foster Higgins survey was not based on a random sample
prior to 1993, and consequently the results are not comparable with
data collected in subsequent years.  Peat Marwick's 1994 and 1996
reports did not include data on retiree coverage.  Although Foster
Higgins only reported on the extent to which employers with 500 or
more workers provide retiree coverage, its sample included firms with
as few as 10 employees.  In 1996, only 8 percent of all firms with 10
or more workers offered health insurance to early retirees.  As
shown, the 1996 offer rate was 40 percent for firms with 500 or more
workers. 

The trends outlined in figure 3.1 raise a question about assessments
by some experts that retiree health offerings have stabilized or that
the decline has been limited.  Although the erosion is slow, its
cumulative impact is significant. 


--------------------
\44 In 1997, Foster Higgins and William Mercer, another large benefit
consulting firm, merged.  Because this report uses surveys from years
before and after the merger, we refer to "Foster Higgins" surveys. 

\45 The Foster Higgins survey includes employers with 10 or more
workers but generally limits its analysis of retiree health coverage
to firms with 500 or more employees.  Peat Marwick collects and
reports data on firms with 200 or more employees. 

\46 While the surveys were based on relatively large samples of
employers, the extent to which they are generalizable is uncertain. 
First, the response rates varied from year to year:  for example, 78
percent in 1993 to only 50 percent in 1997 for Foster Higgins.  Peat
Marwick had similar response rates for these 2 years.  Second,
neither survey reported information on the precision of its
estimates.  As a result, we do not know how closely each sample
reproduced the results that would have been obtained had the entire
population been surveyed. 


      DATA FROM CPS SUPPLEMENTS
      CORROBORATES DECLINE
-------------------------------------------------------- Chapter 3:3.2

In addition to employer surveys, interviews with retirees provide
another, albeit indirect, source of data on employer-based health
coverage for the near elderly.  A 1995 report by the Pension and
Welfare Benefits Administration of the Department of Labor shows the
extent to which retirees were covered by employer-based health
insurance at various points in time--before retirement, just after
retirement, and at some subsequent date.\47

The report compares data collected on retiree health coverage from
special supplements to the August 1988 and September 1994 CPSs.  The
resulting data provide only a limited picture of employer trends
because they (1) are based on interviews with retired workers and (2)
do not always clearly distinguish between the availability of
coverage and a worker's decision not to participate in employer-based
retiree coverage.  If a worker did not "continue" such coverage, the
individual was asked the reasons for discontinuation.  Since
questions about reasons for discontinuing coverage were expanded in
the 1994 survey, it is difficult to make a precise comparison across
the periods. 

The Labor Department's analysis of the CPS data revealed a
significant erosion between 1988 and 1994 in the number of
individuals who retained employer-based health coverage upon
retirement.  As shown in table 3.2, 42 percent of retirees aged 55
and older continued such coverage into retirement in 1994, a decline
of 8 percentage points since 1988.  Among the numerous reasons cited
in the 1994 survey for discontinuing coverage were (1) "eligibility
period expired," (2) "retirees not covered," and (3) "became
ineligible after employer amended plan." Combining these three
factors, about 34 percent of early retirees in 1994 were not eligible
to enroll in an employer's plan after retirement.\48

Although it is not possible to provide a precise estimate of how much
of the decline is due to lower offer rates by employers, it seems
reasonable to attribute at least some portion of the decline to this
factor.\49



                         Table 3.2
          
           Percentage of Retirees With Employer-
                       Based Coverage

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

The data also showed that the percentage of individuals with
employer-based coverage continued to decrease throughout retirement. 
Only 34 percent still retained coverage several years after
retirement.  The decline in participation during retirement has
several explanations.  First, some individuals elect COBRA at
retirement because no retiree coverage is offered.  Such coverage,
however, is only temporary--generally 18 months for a worker leaving
a job.  Second, as figure 3.1 shows, firms are less likely to offer
coverage to individuals who are Medicare-eligible than to early
retirees.  Thus, some retirees may have lost employer-based coverage
when they reached age 65.  Third, some individuals qualify for
Medicare before age 65 because of a disability.  Fourth, some
retirees have access to health insurance through a spouse's employer. 
Fifth, some employers may have unexpectedly stopped offering coverage
to retirees after an individual retired.  Finally, evidence
suggesting reduced participation by retirees as a result of
employer-required cost sharing will be discussed later in this
chapter. 

Based on our analysis of CPS data, the percentage of early retirees
with private health insurance (both employer-based and individually
purchased) fell 7 percentage points from 76 percent to 69 percent
between 1989 and 1995.\50 The decrease in the proportion of early
retirees with private health insurance does not appear to correspond
to the magnitude of the decline in the availability of retiree
coverage documented in employer surveys and in the 1988 and 1994 CPS
supplements.  Among the possible reasons for the mismatch between
availability and coverage trends are that (1) the decision to retire
is often predicated on the availability of health benefits; (2)
coverage may be available through other sources, such as a working or
retired spouse; (3) employers' decisions not to offer retiree health
benefits are frequently directed at future rather than current
retirees; and (4) individuals may have postponed their retirement
plans to avoid becoming uninsured or because of the high costs of
purchasing individual insurance or COBRA continuation coverage. 
Appendix IV discusses the available research on the relationship
between the availability of health insurance and the decision to
retire early. 


--------------------
\47 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. 

\48 However, 11 percent of respondents said that the reason they
discontinued coverage was "other," that is, not specified in the
options available in the questionnaire. 

\49 A recent Urban Institute report imputes 1988 and 1994 offer rates
by tabulating specific reasons given for discontinuing coverage that
imply access to employer-based retiree health benefits.  The study
concludes that the number of workers aged 55 to 64 who were offered
retiree coverage fell from 67 percent in 1988 to 53 percent in 1994. 
See Pamela Loprest, Retiree Health Benefits:  Availability From
Employers and Participation by Employees (Washington, D.C.:  Urban
Institute, Oct.  1997). 

\50 See GAO/HEHS-97-122. 


      TERMINATION OF COVERAGE NOT
      LIMITED TO FUTURE RETIREES
-------------------------------------------------------- Chapter 3:3.3

The cancellation of benefits for current retirees, often emotionally
charged, has captured the attention of the executive branch, the
Congress, and the press.\51 The information available on these
terminations, primarily in the form of newspaper articles and
information on lawsuits brought by affected retirees, is often
anecdotal rather than systematic.\52 The perception that more than
just a few employers are terminating coverage for current retirees
may be fueled by frequent articles discussing cuts to and changes in
retiree coverage.  For example, a lengthy lawsuit, tracked by the
press since 1989, involves a challenge to General Motors' cut in
health benefits for salaried retirees--that is, an attempt to
introduce cost-sharing requirements for what had heretofore been a
benefit provided at little or no cost.  GM, however, was not
attempting to terminate coverage for these retirees--a subtlety that
is sometimes lost in the concern over the general erosion of retiree
health coverage.  In fact, employer surveys indicate that firms are
more likely to terminate benefits for future as opposed to current
retirees.  Fear of litigation as well as ethical and public relations
concerns are cited as explanations for why employers have chosen to
concentrate their cost-cutting efforts on future retirees. 

Despite the future focus of many employers' actions, survey data
suggest that current retirees are also being affected by the decline
in offer rates.  The Foster Higgins data in figure 3.1 reflect the
decline in offer rates among employers who make coverage available to
"most retirees," excluding firms who have only terminated health
benefits for future retirees or hires, or both.  Thus, the
8-percentage-point decline in the number of employers offering early
retiree coverage suggests that some portion of the erosion has
affected current retirees as well.\53 According to the 1994 CPS
supplement, 2 percent of retirees--about 40,000 individuals--became
ineligible for continued retiree coverage after their employers
amended their plans.\54


--------------------
\51 In 1996, the Secretary of Labor expressed concern over the
hardships imposed on individuals by the unexpected termination of
employer-based retiree health benefits and instructed Labor's
solicitor's office to file amicus curiae briefs in support of retiree
litigation.  Similarly, Representative Kleczka introduced legislation
in 1997 after employers in Wisconsin unexpectedly terminated retiree
health insurance for some of his constituents.  The legislation would
have made such retirees eligible to purchase COBRA coverage through
their former employers until age 65. 

\52 Using lawsuits to identify terminations is complicated by the
fact that such litigation may take years to resolve and that
unfavorable decisions can be appealed and overturned.  The Labor
Department's solicitor's office files amicus curiae briefs in some
cases brought by retirees but does not track the frequency of such
lawsuits. 

\53 According to an official at Foster Higgins, one would expect that
as the number of employers offering coverage to most retirees
declines, the percentage indicating that they have terminated
coverage for future retirees would rise.  The fact that it has
remained steady at 3 to 5 percent each year suggests that survey
respondents are not always differentiating clearly between the status
of current and future retirees. 

\54 Retirement Benefits of American Workers:  New Findings From the
September 1994 Current Population Survey, p.  108.  This reason for
discontinuing coverage was not used in the 1988 CPS supplement. 
There have been no additional CPS supplements since 1994 focusing on
retiree health issues.  Also, note that this estimated number could
vary by as much as about 45 percent. 


      CHARACTERISTICS OF FIRMS
      OFFERING RETIREE COVERAGE
-------------------------------------------------------- Chapter 3:3.4

Aggregate data on the erosion in retiree health coverage obscure
significant differences among firms of varying sizes and types of
industry.  As noted earlier, the larger the firm, the more likely it
is to offer health benefits to both active and retired workers. 
However, the decline in offer rates to retirees, as reflected in
figure 3.1, is not restricted to firms at the lower end of the size
spectrum reported on.  Foster Higgins reports that employers with
5,000, 10,000, and even 20,000 or more employees have also shown a
decline.  Surprisingly, the decline for the largest of firms has been
uninterrupted; employers with 500 or 1,000 workers, on the other
hand, have shown more variability, and, according to Foster Higgins,
an increase in the offer rate. 

According to Foster Higgins, jumbo firms employing at least 20,000
workers are more than twice as likely as smaller firms to offer early
retiree health insurance.  Thus, 69 percent of jumbo firms offered
early retiree coverage in 1997 compared with 31 percent of firms with
between 500 and 999 employees.  However, just 4 years earlier, 84
percent of jumbo firms reported that they offered retiree health
benefits.  With one exception, Foster Higgins reported that early
retiree coverage has declined between 9 and 20 percentage points
among firms of all sizes since 1993.  For firms with between 1,000
and 4,999 workers, however, the offer rate for early retiree health
insurance increased by as much as 10 percentage points, but by 1997
was only 1 percentage point higher than in 1993.  As with the overall
trend data shown in figure 3.1, Peat Marwick reported more
variability by firm size, especially in the 1992 to 1995 time frame,
with most firm sizes showing an increased offer rate in 1995.  One
benefit consultant we met with was very skeptical about the Foster
Higgins trend data for firms with 1,000 to 4,999 workers, suggesting
that the increase represented health benefits related to early
retirement incentive programs. 

Foster Higgins data indicate that the offer rate for early retiree
coverage declined among most industry categories between 1993 and
1997.  Government, the only category showing an increase, was among
the most likely to offer such benefits in the first place.  An
increasing share of the labor force works for firms from the service
sector and a decreasing share works for firms in the manufacturing
and transportation sectors.  The former are less likely to provide
their workers with retiree health benefits. 



                         Table 3.3
          
             Percentage of Firms Offering Early
            Retiree Health Coverage, by Type of
                  Industry, 1993 and 1997

Industry                                1993          1997
------------------------------  ------------  ------------
Government                                59            78
Transportation, communication,            55            47
 and utilities
Financial services                        68            57
Manufacturing                             44            39
Services                                  42            35
Wholesale and retail                      27            14
Health care                               28            23
----------------------------------------------------------
Source:  Foster Higgins. 


      COST OF COVERAGE FOR EARLY
      RETIREES
-------------------------------------------------------- Chapter 3:3.5

As noted in chapter 2, a person's utilization of health care services
tends to increase with age.  Consequently, providing health benefits
to retirees is much more expensive than covering younger workers. 
However, because Medicare is the primary payer for beneficiaries 65
and older, employer costs for retirees drop dramatically once they
become Medicare-eligible.  Thus, early retirees are about three times
as expensive for an employer as retirees enrolled in Medicare. 
Because of the significant cost differences between early and
Medicare-eligible retirees, the proportion of early retirees in the
mix of retirees can dramatically affect an employer's average
per-retiree cost.  Overall, about 75 percent of retirees in 1994 were
over age 65, and thus any employer-based coverage supplemented
Medicare benefits; the remaining 25 percent were early retirees not
yet eligible for Medicare. 

Since 1993, both Foster Higgins and Peat Marwick have reported on the
average employer cost for early retiree health coverage.  For firms
that could distinguish between the cost of retirees and active
workers, Foster Higgins indicated that the average annual early
retiree premium in 1996 was $5,210, having shown almost no change
since 1993.  Costs fell slightly to $4,985 in 1997, a drop attributed
to increased HMO enrollment among early retirees.  Foster Higgins
does not report on cost variation for early retiree coverage by firm
size, region, or industry.  Peat Marwick reported that average annual
costs for early retirees declined between 1993 and 1995, falling from
$5,748 to $5,460.  It attributed the decrease to the overall slowdown
in inflation in the private sector and to the growth in managed care
enrollment among early retirees.  As shown in table 3.5, however,
costs varied considerably by firm size, industry, and region.  Thus,
the average early retiree premium in 1995 ranged from a low of $4,500
in the health care industry to a high of $6,180 among finance firms. 
Peat Marwick's 1997 report did not include comparable data. 



                         Table 3.4
          
           Average Annual Costs for Early Retiree
                          Coverage

        Foster Higgins            Peat Marwick (family)
------------------------------  --------------------------
1993                      1997          1993          1995
----------------  ------------  ------------  ------------
$5,216                  $4,985        $5,748        $5,460
----------------------------------------------------------
Source:  Foster Higgins and KPMG Peat Marwick. 



                         Table 3.5
          
           Variation in Average Annual Costs for
                    Early Retirees, 1995

                                Annual cost for family
Category                        coverage
------------------------------  --------------------------
Firm size (200-999 workers to   $5,340 to $5,916
5,000 or more workers)

Industry                        $4,500 (health care) to
                                $6,180 (finance)

Region                          $5,160 (northeast) to
                                $5,760 (west)

Overall                         $5,460
----------------------------------------------------------
Source:  KPMG Peat Marwick, unpublished data. 


   DECLINE IN OFFER OF RETIREE
   HEALTH BENEFITS ACCOMPANIED BY
   EFFORTS TO CONTROL COSTS
---------------------------------------------------------- Chapter 3:4

The cost escalation of the 1980s and early 1990s stimulated employers
to become more aggressive in controlling the growth in their health
care expenditures.\55 Coincidentally, as was discussed earlier in
this chapter, new accounting rules also made employers more conscious
of the costs associated with offering retiree health benefits. 
Though the reaction of some employers was to discontinue or to not
offer retiree coverage, those that still provide such benefits have
often changed the terms under which they are offered.  The objective,
as with a similar restructuring of active workers' benefits, was to
help control costs.  Three commonly cited changes involve increasing
cost sharing, changing eligibility requirements, and reshaping plan
choice.  While employers have been increasing cost sharing and
reshaping plan choice for both active workers and retirees, changes
in eligibility requirements generally have been confined to retirees. 
Those eligibility changes, however, may also have cost-sharing
implications. 

Active management of health benefit costs for retirees focused
initially on the costs associated with future retirees--an outgrowth
of litigation in the 1980s that made firms more cautious about
changing health benefits for individuals who are already retired.  In
order to avoid court challenges over benefit changes, employers began
to explicitly reserve the right in plan documents to modify those
benefits--for both future and current retirees.  Today, virtually all
employers have done so.  Often, older groups of retirees were
grandfathered into existing, more generous, health plans and changes
were only applicable to new hires or individuals who retired after a
certain date.  In 1992, one researcher estimated that the benefits of
about two-thirds of retirees with employer-based coverage seemed
secure because they became effective before employers added escape
clauses reserving the right to make subsequent changes.  However, the
1998 decision in the case brought by General Motors salaried retirees
may call into question any commitment by employers to provide
previously promised retiree health benefits. 

According to benefit consultants and employers, many of the
modifications made to retiree health plans date from the late 1980s
and early 1990s.  Employer surveys, as well as our interviews with a
judgmental sample of large companies, suggest that firms are
continuing to make changes to reduce their overall liability for
retiree health care costs--changes that they attribute to their
competitive or financial situations.  Despite the poor quality of the
data available to assess the impact of coverage changes, the bottom
line is that future retirees will (1) pay more for coverage and (2)
find it harder to become eligible for benefits.  And retiree surveys
suggest that higher costs for individuals could lead to lower
participation rates in employer-based retiree health benefits when
such coverage is available. 


--------------------
\55 See Private Health Insurance:  Continued Erosion of Coverage
Linked to Cost Pressures (GAO/HEHS-97-122, July 24, 1997) and Health
Insurance:  Management Strategies Used by Large Employers to Control
Costs (GAO/HEHS-97-71, May 6, 1997). 


      COST-CONTROL CHANGES MADE TO
      RETIREE HEALTH BENEFITS
-------------------------------------------------------- Chapter 3:4.1

Each year, Foster Higgins tracks the changes made in the past 2 years
by large firms that offer retiree coverage.  Table 3.6, which
summarizes selected changes reported since 1993, suggests that
popular cost-control methods are (1) increased retiree cost
sharing--both the percentage of premium paid by retirees and the
amount of copayments and deductibles, (2) tightened eligibility rules
for participating in the employer-based health plan, and (3)
provision of a fixed (defined) employer contribution toward the cost
of retiree health insurance in lieu of covering whatever medical
services are used during the year (often referred to as a defined
benefit).  More recently, employers have attempted to control costs
by moving retirees into managed care plans.  Additional cost-control
measures noted in other employer surveys include lower limits on the
total amount of health care costs that will be covered during the
lifetime of the retiree and capping employer contributions--a step
that may be the prelude to introducing a defined contribution. 



                         Table 3.6
          
            Cost-Control Changes Made to Retiree
               Benefits in Preceding 2 Years

                      1993    1994    1995    1996    1997
------------------  ------  ------  ------  ------  ------
Raised retiree          23      30      16      16      12
 contribution
Increased               15      16      12      11       6
 copayments and
 deductibles
Tightened                7      13       7       8       4
 eligibility rules
Changed to defined       2       3       3      \a      \a
 contribution
Moved retirees          \a      \a      \a       7       8
 into managed care
----------------------------------------------------------
\a Data were not reported for this year. 

Source:  Foster Higgins. 

A 1992 survey conducted by William Mercer suggests that though
cost-control changes are being implemented for both current and
future retirees, they are often directed at the latter.  Further
evidence for the tendency of employers to target future retirees is
found in data reported by Peat Marwick.  Between 1992 and 1993, the
percentage of firms that grandfathered current retirees into plans
different from those available to future retirees increased from 20
percent to 47 percent.\56 As noted earlier, employers may find it
difficult, despite reservations in plan documents that alert retirees
to the possibility of changes, to modify benefits for current
retirees because of ethical or public relations concerns. 


--------------------
\56 KPMG Peat Marwick, 1994 Retiree Health Benefits:  The Uncertainty
Continues (Washington, D.C.:  KPMG Peat Marwick, 1994). 


      EVIDENCE ON INCREASED COST
      SHARING IS SKETCHY
-------------------------------------------------------- Chapter 3:4.2

Only limited data are available on the nature of the financial
responsibility being shifted to future retirees.  Reporting
differences make it difficult to judge the consistency of the data
across various surveys, and the data's aggregate nature sometimes
obscures the variability of changes among firms.  More importantly,
the limited results often lack a context for judging their impact on
the affordability of increased cost sharing.  Income and asset data
for the affected retirees would be required for such a study. 
However, a comparison of reported cost sharing for retirees with
trends for active workers does suggest that retirees are being asked
to shoulder a higher portion of the health benefits premium when they
leave the workforce.  Finally, the Labor Department's analysis of CPS
supplements suggests that retiree participation rates have already
been affected by increased cost-sharing requirements. 


         EVIDENCE OF CHANGES IN
         EMPLOYER-RETIREE
         RESPONSIBILITY FOR COSTS
------------------------------------------------------ Chapter 3:4.2.1

Typically, surveys report on the extent to which retirees or firms
are responsible for the cost of health benefits, that is, whether the
cost is shared or whether the firm or employee is responsible for all
of the cost.  Given the reported shift in costs from employers to
retirees, one would expect the data to show that fewer employers are
paying the entire cost of coverage and more retirees are paying the
whole premium themselves.  A comparison of data on employer-retiree
cost sharing from three different surveys, however, demonstrates that
the proportion of retirees responsible for the entire premium has
been relatively steady or may have actually decreased.  On the other
hand, two of these surveys show that fewer employers pay the entire
premium, suggesting that costs are not being shifted entirely to the
retiree but are being shared. 


         COMPARED WITH ACTIVE
         WORKERS, EARLY RETIREES
         PAY MORE FOR COVERAGE
------------------------------------------------------ Chapter 3:4.2.2

Compared with active workers, retirees with employer-based coverage
do appear to be shouldering responsibility for a higher portion of
the overall premium.  Peat Marwick reported that active employee
contributions for family coverage increased from 26.6 percent in 1993
to 32.4 percent in 1995.  In contrast, early retiree contributions
for family coverage rose from 39 percent to 45 percent over the same
time period.\57 Thus, on average, early retirees in 1995 were
contributing about $2,340 annually toward the cost of family
coverage--about $655 more than active workers.  Appendix V uses
income data from the March 1997 CPS to estimate the percentage of
total family income that a 55- to 64-year-old would have to commit to
cost sharing under employer-based coverage using 1995 Peat Marwick
estimates of the lowest, highest, and average retiree contribution. 
The average retiree contribution is 4.7 percent of the 1996 median
family income of 55- to 64-year-old married couples.  On average,
Americans under age 65 spent about 4 percent of household income in
1994 on health care--an amount that includes not only insurance
premiums or employer-required cost sharing but also out-of-pocket
expenses for copayments, deductibles, and services not covered by
health insurance.  As shown in table 3.7, costs varied considerably
by firm size, type of industry, and region.\58



                         Table 3.7
          
          Variation in Early Retiree Contribution
             for Family Coverage, by Firm Size,
                 Industry, and Region, 1995

                        Percentage        Annual
                        contribution      contribution
----------------------  ----------------  ----------------
Firm size (200-999      41 percent to 53  $2,040 to $3,048
workers to 5,000+       percent
workers)

Industry                27 percent        $1,680 to $2,556
                        (transportation/
                        communications)
                        to 55 percent
                        (services)

Region                  19 percent        $972 to $3,012
                        (northeast) to
                        56 percent (west
                        and midwest)

Average                 45 percent        $2,340
----------------------------------------------------------
Source:  Peat Marwick. 


--------------------
\57 In 1993, Foster Higgins reported that active employees at large
firms paid 33 percent toward the cost of family coverage in an
indemnity plan or an HMO, compared with 38 percent for early retirees
regardless of the plan chosen.  In 1997, Foster Higgins noted that,
in general, employers ask their retirees to pay more of the cost of
coverage than their active employees. 

\58 More recent Peat Marwick employer surveys do not contain
comparable statistics. 


         INCREASED COST SHARING
         MAY BE REDUCING
         PARTICIPATION RATES
------------------------------------------------------ Chapter 3:4.2.3

Department of Labor analyses of CPS supplements indicate that factors
other than the actual availability of coverage account 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, an estimated 27 percent cited the expense as a
factor--an increase from 21 percent who cited this reason 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.  Thus, some retirees who find
coverage from their own employer too expensive may be switching to
plans with lower cost sharing available through a working or retired
spouse. 


      SHIFT TO A DEFINED
      CONTRIBUTION
-------------------------------------------------------- Chapter 3:4.3

Traditionally, employer-based health benefits have been an open-ended
commitment by employers to pay for covered medical services.  The
liability represented by such a commitment as well as the escalating
costs of medical services over time has stimulated employers to look
for ways to limit their financial obligation, or at least to make it
more predictable.  The shift toward capitated health plans represents
one approach.\59 Another technique is for an employer to translate
the benefit offered into a cash value either by instituting an
aggregate cap on expenditures or by offering retirees a fixed cash
benefit.\60

Such an approach is often referred to as a defined contribution. 
Though several surveys--notably Hewitt (1997) and Mercer (1992)--have
addressed the issue of employer caps, others such as Foster Higgins
and Peat Marwick have limited data on this phenomenon.\61

The following Hewitt data must be considered with the recognition
that it is largely based on information from clients and as a result
may overstate the prevalence of employer dollar caps. 

According to Hewitt, employers began to introduce dollar caps on
their future retiree health obligations in the early 1990s, largely
in response to new accounting rules that require them to report the
accrued obligation for retiree health benefits.  Few large employers
had such caps in 1991, but by 1996, 36 percent had some form of
dollar cap on their subsidy for early retirees, and 39 percent had
caps for post-age-65 retiree coverage.\62

Hewitt reports that the caps can take many forms, including

  -- caps on total costs:  the company will not spend more in total
     for retiree health coverage than twice what was spent as of a
     certain date;

  -- per capita caps:  the subsidy per person will not exceed a fixed
     amount; and

  -- caps with service component:  the employer share is fixed at a
     specified dollar amount that is then multiplied by years of
     service. 

Hewitt suggests that many employer caps on retiree health
expenditures are fixed dollar caps without a built-in adjustment for
inflation.  Since a fixed-dollar cap dramatically reduces a firm's
liability for retiree coverage by shifting the responsibility for
future cost increases to retirees, Hewitt believes that there will be
significant pressure to revisit these expenditure limits in the
future.  However, if the caps are not adjusted, retirees will
shoulder any future cost increases.  Hewitt emphasized that the
dollar caps introduced since 1991 are largely intended to control
"accounting costs" for purposes of FAS 106. 

A variation on an expenditure cap is a maximum lifetime benefit.  In
1994, Peat Marwick reported that some employers had more restrictive
maximum lifetime benefits for their retiree population.  Thus,
compared with 57 percent of active workers, only 47 percent of
retirees have no maximum lifetime benefit or one that is equivalent
to $1 million or more.  On the other hand, Peat Marwick also reported
that retiree lifetime limits were increased for 38 percent of
retirees in 1993, with only 2 percent of retirees receiving a
decrease. 


--------------------
\59 Rather than paying for each medical service, an employer pays a
fixed amount per enrollee.  Though capitated plans such as HMOs are
generally less costly than other alternatives, their rate of premium
growth over time is similar. 

\60 Atkins noted that there are drawbacks to a cash benefit under the
current pay-as-you-go system for financing health benefits.  Retirees
will be at a disadvantage if the cash value is not equivalent to the
health benefit value, which is dynamic and grows in both real and
nominal terms.  On the other hand, if the cash benefit could be
accrued over the working life--that is, prefunded, vested, and made
portable--then retirees' security might actually be enhanced, even if
the cash value was not equivalent to the health benefit value.  See
"The Employer Role in Financing Health Care for Retirees."

\61 A 1992 William M.  Mercer employer survey with about 800
respondents reported that 23 percent had capped the firms
contribution for existing or future retirees or for both.  Between
1993 and 1995, Foster Higgins reported that 2 to 3 percent of
employers had instituted a defined contribution in the past 2 years. 
In 1996, Foster Higgins dropped this question from its survey. 
Though Peat Marwick does not discuss employer caps in its published
reports on retiree health issues, an unpublished 1995 study stated
that "many employers have capped their contribution for retiree
coverage."

\62 Twenty-eight percent of employers in the Hewitt sample have
instituted a defined dollar approach that is limiting current costs,
while 8 percent have set the cap to begin at some future date. 


      ELIGIBILITY REQUIREMENTS
      HAVE BEEN TIGHTENED
-------------------------------------------------------- Chapter 3:4.4

Employers have used changes in participation rules to reduce their
liability for retiree health coverage and to differentiate their
treatment of workers with varying lengths of service.  While the cost
implications of these new eligibility rules are clear for employers,
their impact on the affordability of coverage is less so.\63
Moreover, changes in labor force mobility could result in fewer
active workers ever qualifying for a benefit that is, at the same
time, becoming less widely available. 

In the past, retiree health coverage was treated as a benefit that
accrued at retirement.  Under those eligibility rules, workers with
only a few years of service and those with many years were often
treated equally.  Because retirement was the only test, the
responsibility and cost of a retiree's health care were borne fully
by the last employer.\64

More recently, employers have modified their eligibility requirements
by tying them to years of service.  The three most common methods
employers use to determine eligibility for retiree health benefits
are (1) length of service, (2) age, or (3) some combination of the
two.  Peat Marwick has reported that the proportion of retirees
enrolled in plans with both a minimum service and age requirement
increased from 56 to 79 percent between 1992 and 1997.  In 1996,
Foster Higgins reported that the most common service and age
requirements were 10 years and 55 years old, respectively.  When the
requirement is the sum of age and service, Foster Higgins indicated
that firms commonly require 75 "points." For example, an individual
at age 55 with 20 years of service would receive 75 points. 

More stringent eligibility requirements have potentially serious
implications for future retirees.  First, if workers change jobs
frequently, especially as they become older, they may not qualify for
retiree health benefits at all.  In 1994, 2 percent of workers (over
100,000 individuals) who did not continue employer-based coverage
into retirement reported that they failed to meet either the age or
the service requirement or some other prerequisite.  Second, full
health benefits may not accrue at retirement.  Thus, some employers
tie cost sharing to years of service.  For example, an official we
interviewed at one company said the company requires 35 years of
service to qualify for the maximum employer contribution--75 percent. 
Retirees with only 19 years of service qualify for a substantially
lower employer contribution--30 percent. 


--------------------
\63 For example, one firm told us that it lowered its liability by
tens of millions of dollars simply by instituting a minimum
eligibility age for retiree health benefits of 45. 

\64 G.  Lawrence Atkins, "The Employer Role in Financing Health Care
for Retirees," in Providing Health Care Benefits in Retirement, p. 
111. 


      RECENT JUMP IN EARLY RETIREE
      ENROLLMENT IN MANAGED CARE
-------------------------------------------------------- Chapter 3:4.5

Many large employers adopted a managed care strategy in the late
1980s to help combat double-digit health care inflation.\65 Thus,
between 1987 and 1996 managed care enrollment in employer-sponsored
health plans nearly tripled, from 27 percent to 75 percent, and has
continued to grow.  Until more recently, elderly Americans have
lagged behind younger age groups in the extent to which they are
enrolled in managed care, but this situation appears to be changing
rapidly, especially in the case of early retirees.  It is not clear
what is accelerating the move of early retirees into managed care. 
Cost sharing and lack of choice may both be contributing, but we do
not know how much. 

In 1996, Foster Higgins reported that the movement of retirees into
managed care is helping to slow down the overall growth in employers'
health insurance costs.\66 By 1996, over half of covered early
retirees were enrolled in a managed care plan--either a preferred
provider organization (PPO), a point-of-service (POS) plan, or an
HMO.  Only 1 year later, managed care enrollment had grown to 70
percent, largely because of the increase in the number of early
retirees joining HMOs.  Foster Higgins attributed decreased costs for
early retirees of 4.3 percent in 1997 to the jump in HMO enrollment. 
Table 3.8 compares early retiree health plan enrollment for 1996 and
1997 with that of active workers.  According to Foster Higgins, the
transition of early retirees into managed care plans has been even
more rapid than the earlier shift by active workers. 



                         Table 3.8
          
            Comparison of Percentage of Covered
             Early Retirees and Active Workers
               Enrolled in Managed Care Plans

                   Fee-for-service     PPO     POS     HMO
--------------  ------------------  ------  ------  ------
Early retirees
----------------------------------------------------------
1996                            48      21      16      15
1997                            30      25      19      26

Active employees
----------------------------------------------------------
1997                            15      35      20      30
----------------------------------------------------------
Source:  Foster Higgins. 

It is not obvious what is motivating early retirees to move so
quickly into managed care plans such as HMOs.  Clearly, the fact that
employers have reserved the right to make changes to early retiree
health benefits has increased employers' flexibility, allowing them
to manage the cost of those benefits much as they do for active
workers.  Moreover, some large employers no longer view early
retirees as an extension of their active employee population but
recognize that the per capita costs of early retirees make them the
most expensive component of their overall health benefit costs. 

In the case of active workers, employers recognized that financial
incentives could be an important tool in encouraging managed care
enrollment.  Thus, in a 1997 report, we noted that some large
employers now vary their subsidy according to the cost of the
coverage option, making it cheaper for a worker to enroll in a
managed care plan.\67 Interviews with a sample of large employers
suggest that some firms are applying this same technique to early
retirees.  Thus, in one industry, early retirees are now in a
separate risk pool, with premiums 30 to 40 percent higher than for
active workers.  These higher costs are passed on through the
cost-sharing formula to early retirees who choose a non-HMO product. 
However, for an early retiree who selects a community-rated HMO, the
cost is the same as that for an active employee. 


--------------------
\65 That inflation has decelerated substantially.  By 1996, premium
changes had reached record lows.  While the precise impact of managed
care continues to be debated, some studies contend that it has been a
contributing factor to the slowdown because HMO plans generally cost
less than other health plans, and many managed care organizations
control health care utilization.  Managed care includes one or more
of the following common cost-control features:  (1) physician and
hospital networks with explicit criteria for inclusion, (2)
alternative payment methods and rates that often shift some financial
risk to providers, and (3) utilization controls over hospital and
specialist physician services.  In general, HMOs tend to use more
stringent controls than preferred provider organization or
point-of-service plans.  However, there is variation among the three
different types of managed care plans, and as a result, some HMOs
have weaker controls than preferred provider organization or
point-of-service plans. 

\66 Before 1996, Foster Higgins did not report on managed care plan
enrollment by retirees. 

\67 GAO/HEHS-97-71, May 6, 1997, p.  61. 


INDIVIDUAL INSURANCE: 
UNAFFORDABLE OR UNAVAILABLE
ALTERNATIVE FOR MANY NEAR ELDERLY
============================================================ Chapter 4

As a growing number of employers reduce or eliminate their support
for retiree health benefits by scaling back premium contributions or
increasing cost sharing, many affected retirees look to the
individual market for coverage until they become eligible for
Medicare.  Also, access to affordable coverage in the individual
insurance market is a concern for those 55- to 64-year-olds who have
primarily relied on this market for coverage, including some of those
who are self-employed and those who were guaranteed access to an
individual product under HIPAA.  As demonstrated by our March 1997
CPS analysis, the near elderly already rely on the individual market
to a greater extent than younger Americans.  However, many of the
near elderly may encounter difficulty in obtaining a comprehensive
plan at a reasonable price or in obtaining any plan at all. 

Significant differences exist between the individual and
employer-sponsored health insurance markets, and these differences
may have significant implications for some consumers.  In the
individual market, the near elderly must choose from among a number
of complex products and pay for the entire cost of coverage.  For
employer-based coverage, the burden of selecting and paying for the
products is significantly eased by employer contributions and payroll
deductions.  Although states and the federal government have
undertaken a wide range of initiatives to increase access to the
individual market, the ability of carriers in many states to continue
to charge higher premiums to applicants who are older or who have
certain health conditions may have particularly adverse effects on
those aged 55 to 64.  These individuals may be denied coverage, may
have certain conditions or body parts excluded from coverage, or may
pay premiums that are higher than the standard rate, depending on
demographic characteristics or health status. 


   SOME NEAR ELDERLY FACE A BROAD
   RANGE OF CHOICES
---------------------------------------------------------- Chapter 4:1

Purchasing insurance through the individual market can be a complex
process for even the most informed consumer.  However, it may pose a
considerable challenge for 55- to 64-year-olds who have previously
depended on their employer for coverage.  In addition to the multiple
ways the near elderly may access the market, such as through agents
or associations, they are confronted with products offered by dozens
or even a hundred or more different carriers.  Once they choose a
carrier and a product, consumers must then select among a wide range
of deductibles and other cost-sharing options. 


      MULTIPLE CARRIERS OFFER
      INDIVIDUAL PRODUCTS
-------------------------------------------------------- Chapter 4:1.1

In our November 1996 report, we found that in the seven states we
visited, consumers, including the near elderly, could choose from
plans offered by no fewer than 7 to well over 100 carriers.\68 While
the number of carriers operating in states may vary significantly, it
is important to recognize that fewer carriers do not necessarily
equate to fewer choices for consumers.  For example, over 140
carriers in Illinois may offer individual products, but these
products are not available to all consumers because of medical
underwriting.  In contrast, New Jersey has 27 carriers offering one
or more comprehensive products to which every individual market
consumer in the state is guaranteed access. 


--------------------
\68 Private Health Insurance:  Millions Relying on Individual Market
Face Cost and Coverage Trade-Offs (GAO/HEHS-97-8, Nov.  25, 1996). 


      CONSUMERS MAY LOWER PREMIUMS
      BY INCREASING THEIR
      FINANCIAL RISK
-------------------------------------------------------- Chapter 4:1.2

In contrast to employer-based group insurance, individuals may choose
from multiple cost-sharing arrangements and are generally subject to
relatively high out-of-pocket costs.  Under employer coverage, the
range of available deductibles is narrower, and total out-of-pocket
costs are capped at a lower level than under most individual market
products.  For example, for non-HMO plans offered by medium and large
employers, annual deductibles are most commonly between $100 and
$300, and a significant percentage have no deductible.\69 In
contrast, annual deductibles in the individual market are commonly
between $250 and $2,500. 

The cost-sharing arrangement selected by the consumer is a key
determinant of the price of an individual insurance product, and the
higher the potential for out-of-pocket expenses, the lower the
premium.  In November 1996, we reported that carrier and insurance
department representatives thought that the level of consumer cost
sharing had been increasing in recent years, reflecting consumers'
efforts to keep premiums affordable.\70 A representative of one
national carrier said that among its new enrollees in 1995, 40
percent chose $500 deductibles, 50 percent chose $1,000 deductibles,
and the remaining 10 percent chose deductibles ranging from $2,500 to
$10,000.  Also, individual market reforms enacted in New Jersey
originally limited carriers to offering only standard plans with
deductibles of $150, $250, $500, or $1,000 and with prescribed ranges
of cost-sharing options.  An insurance department official said that
because consumers showed little interest in the lower-deductible
plans, New Jersey no longer offers the $150 and $250 deductible
options for new individual insurance applicants.  Instead, beginning
on September 1, 1997, the state offers deductibles of $1,500, $2,250,
$2,500, $3,000 and $4,500\71 in addition to the original $500 and
$1,000 deductible options.  In fact, the official said that consumers
requested a deductible option of $5,000.  If the $2,500 option proves
to be popular, the official said the state would consider introducing
plans with larger deductibles in the future. 


--------------------
\69 Department of Labor, Bureau of Labor Statistics, Employee
Benefits in Medium and Large Private Establishments, 1995
(Washington, D.C.:  Department of Labor, 1997), http://stats.bls.gov/
special.requests/ocwc/ebs/ebsml95.htm (cited Feb.  13, 1998).  In
contrast to non-HMO policies, HMOs do not commonly include
deductibles. 

\70 GAO/HEHS-97-8. 

\71 The official said that the $1,500 and $2,250 deductible options
were added to comply with the HIPAA provision that allowed for
high-deductible plans (defined as those plans with deductibles
between $1,500 and $2,250 for individuals) to be used in conjunction
with the purchase of a medical savings account (MSA).  An MSA is an
account, which may be tax deductible, into which an individual
deposits funds for later payment of unreimbursed medical
expenditures.  The $3,000 and $4,500 deductible options were added
for the same reason for husband and wife, family, and adult and child
policies.  Carriers, however, are not required to offer these
deductible options, and in February 1998, only 3 of the 27 carriers
operating in the individual market chose to do so. 


   AMOUNT OF PREMIUMS AND HEALTH
   STATUS MAY AFFECT ACCESS OF
   NEAR ELDERLY
---------------------------------------------------------- Chapter 4:2

Certain aspects of the individual insurance market, such as
restrictions on who may qualify for coverage and the premiums
charged, can have direct implications for consumers seeking to
purchase coverage, especially those who are retired but not yet
eligible for Medicare.  These aspects of the individual market are
often exacerbated by the fact that individuals must absorb the entire
cost of their health coverage, whereas employers usually pay for the
majority of their employees' coverage.  A consumer may not find
affordable coverage, or may find coverage only if it is conditioned
upon the permanent exclusion of an existing health condition. 


      PREMIUM VARIATION DUE
      LARGELY TO DEMOGRAPHIC
      DIFFERENCES
-------------------------------------------------------- Chapter 4:2.1

Unlike the employer-sponsored market, where the price for group
coverage is based on the risk characteristics of the entire group,
premium prices in the individual markets of most states are based on
the characteristics of each applicant.  To determine rates in both
markets, carriers commonly consider age, gender, geographic area,
tobacco use, and family size.  For example, on the basis of past
experience, carriers anticipate that the likelihood of requiring
medical care increases with age.  Consequently, a 57-year-old in the
individual markets of most states pays more than a 30-year-old for
the same coverage.  In the group market, however, this older
individual would usually pay the same amount as the other members of
the group, regardless of the individual's age. 

Table 4.1 demonstrates for selected carriers the range in premiums
charged in the individual markets of four states to applicants based
solely on differences in their ages.  The low end of the range
represents the carrier's premium for a 24-year-old nonsmoking, male
applicant, while the upper end of the range indicates the premium
price charged for the same coverage to a nonsmoking male applicant
aged 60.  Depending on the carrier and the plan chosen, a 60-year-old
could pay over four times more than the younger applicant for the
same coverage. 



                         Table 4.1
          
          Examples of Variation in an Individual's
              Standard Monthly Premium Due to
                     Differences in Age

                    Deductible (plan      Range in monthly
                    type)                        premium\a
------------------  ------------------  ------------------
Carrier A           $500 (PPO)                    $81-$373
Carrier B           $250 (PPO)                    $66-$253
Carrier C           $250 (Indemnity)              $80-$236
Carrier D           $0 (HMO)                     $101-$302
----------------------------------------------------------
\a Although the range in prices listed represents differences
attributable to age only, each of these carriers varies its rates for
other demographic characteristics as well.  In addition to
adjustments for differences in age, carrier A also varies rates for
gender, geographic area, tobacco use, and family size; carrier B for
gender, geographic area, and family size; carrier C for geographic
area and family size; and carrier D for family size. 


      MEDICAL UNDERWRITING AFFECTS
      PREMIUMS AND MAY BAR ACCESS
      TO THE INDIVIDUAL MARKET
-------------------------------------------------------- Chapter 4:2.2

Where no state or federal restrictions apply, a carrier may also
evaluate the health status of each applicant to determine whether it
will increase the standard premium rate, exclude a body part or an
existing health condition from coverage, or deny coverage to the
applicant altogether.  This process is called medical underwriting. 

A carrier may deny coverage to applicants determined to be in poorer
health and more likely to incur high medical costs.  Individuals with
serious health conditions such as heart disease are virtually always
denied coverage.  Similarly, those with such non-life-threatening
conditions as chronic back pain and varicose veins may be denied
coverage.  The most recent declination rates for carriers with whom
we spoke ranged from zero in states where guaranteed issue is
required to about 23 percent.  Carriers in those states that do not
prohibit medical underwriting typically deny coverage to about 15
percent of all applicants. 



                         Table 4.2
          
              Most Recent Declination Rates of
           Selected Individual Market Carriers in
                        Seven States

                                             Percentage of
                                         applicants denied
State                                           coverage\a
--------------------------------------  ------------------
Arizona
----------------------------------------------------------
Carrier A                                               15

Colorado
----------------------------------------------------------
Carrier A                                               15
Carrier B                                                5

Illinois
----------------------------------------------------------
Carrier A                                             17.5

New Jersey
----------------------------------------------------------
All carriers                                           0\b

New York
----------------------------------------------------------
All carriers                                           0\b

North Dakota
----------------------------------------------------------
Carrier A                                             22.5

Vermont
----------------------------------------------------------
All carriers                                           0\b
----------------------------------------------------------
Note:  For a discussion about how we selected the states and
insurance carriers, see the objectives, scope, and methodology
section of chapter 1. 

\a Carrier representatives provided these approximations of the
percentage of applicants who are denied coverage. 

\b The declination rate is zero since state laws require carriers to
offer all products they sell to all individuals who apply for
coverage.  This requirement is referred to as guaranteed issue. 

These declination rates could be understated for two reasons.  First,
the rates do not take into account carriers who attach riders to
policies to exclude certain health conditions or carriers that charge
unhealthy applicants a higher, nonstandard rate for the same
coverage.  Thus, although a carrier may have a low declination rate,
it may attach such riders and charge higher, nonstandard premiums to
a substantial number of applicants.  For example, while one carrier
with whom we spoke declines only about 15 percent of all individual
applicants, it attaches exclusionary waivers to the policies of 38
percent of the non-HMO applicants it accepts.  Thus, persons with
chronic back pain, glaucoma, or diabetes may have all costs
associated with the treatment of those conditions excluded from
coverage.  Insurance agents are also generally aware of which
carriers medically underwrite and have a sense as to whether
applicants will be accepted or denied coverage.  Consequently, they
will often deter individuals with certain health conditions from
applying for coverage from certain carriers.  When this occurs, the
declination rate is not an accurate indicator of the proportion of
potential applicants who are ineligible for coverage. 



                         Table 4.3
          
          Examples of Health Conditions for Which
           Carriers May Decline Coverage or That
               May Be Excluded From Coverage

Condition for which coverage    Condition that may be
may be declined                 excluded from coverage
------------------------------  --------------------------
Alzheimer's disease             Asthma

Diabetes                        Glaucoma

Hernia                          Impotence

Hypertension                    Parkinson's disease

Migraine headaches              Substance abuse

Rheumatoid arthritis            Ulcers

Stroke                          Varicose veins
----------------------------------------------------------
The ability of carriers in some states to underwrite applicants may
have the most adverse effects on those aged 55 to 64.  Because of the
existence of certain health conditions, many of these individuals
have retired or work only part time, and consequently, may have fewer
resources with which to purchase insurance.  For these individuals,
carriers' underwriting practices may often result in premiums priced
prohibitively high, or even worse, denial of coverage altogether. 


      ACCESS TO INDIVIDUAL MARKET
      VARIES AMONG STATES,
      AFFECTING NEAR ELDERLY
      DIFFERENTLY
-------------------------------------------------------- Chapter 4:2.3

As discussed, without state restrictions that prohibit the practice,
carriers generally base premium rates on the demographic
characteristics and health status of each applicant.  Table 4.4
demonstrates premium price variation stemming from age differences
and includes examples of what the near elderly with varying health
conditions might experience in terms of availability and
affordability of coverage in the individual insurance markets of
these states.  The baseline is the monthly premium charged to a
healthy 25-year-old male. 



                                        Table 4.4
                         
                         Selected Carriers' Monthly Premium Price
                            Variations Attributable to Age and
                             Specified Health Characteristics

                                                          Preexisting condition or
                            Gender, age                        characteristic
                  -------------------------------  --------------------------------------
                  Baseli
                  ne                                                   Cancer
                  health  Health  Health                               within 3  High-
                  y       y       y       Healthy  Chronic   Preexist  years of  risk
Plan type/        male,   male,   female  male,    back      ing       applicat  pool,
deductible        25      55      , 60    64       pain      diabetes  ion       male, 60
----------------  ------  ------  ------  -------  --------  --------  --------  --------
Arizona
-----------------------------------------------------------------------------------------
PPO/$250          $66     +$153   +$177   +$187    Exclude   Exclude   Deny      Not
                                                   conditio  conditio  coverage  availabl
                                                   n or      n or                e
                                                   deny      deny
                                                   coverage  coverage


Colorado
-----------------------------------------------------------------------------------------
HMO               $105    +$147   +$197   +$197    Deny      Deny      Deny      +$445\b
                                                   coverage  coverage  coverage
                                                             \a

PPO/$500          $51     +$95    +$94    +$110    Not       Exclude   Deny      +$499\b
                                                   availabl  conditio  coverage
                                                   e         n


Illinois
-----------------------------------------------------------------------------------------
PPO/$500          $87     +$212   +$206   +$286    Charge    Charge    Deny      +$638
                                                   higher    higher    coverage
                                                   premium   premium


New Jersey
-----------------------------------------------------------------------------------------
FFS/$1,000        $214-   0       0       0        0         0         0         Not
                  $602\                                                          applicab
                  (low                                                           le
                  end-
                  high
                  end)\c


New York
-----------------------------------------------------------------------------------------
HMO               $160-   0       0       0        0         0         0         Not
                  $309                                                           applicab
                  (rural                                                         le
                  /
                  urban)
                  \d


North Dakota
-----------------------------------------------------------------------------------------
FFS/$250          $80     +$112   +$156   +$156    Deny      Deny      Deny      +$316\e
                                                   coverage  coverage  coverage


Vermont
-----------------------------------------------------------------------------------------
FFS/$1,000        $192    0       0       0        0         0         0         Not
                                                                                 applicab
                                                                                 le
-----------------------------------------------------------------------------------------
\a Coverage is denied if the applicant is insulin-dependent and
acquired his/her diabetes after the age of 55. 

\b This is for an applicant who selects the $300 deductible option
and lives in Denver.  For the Colorado HMO plan, the premium price
differential may be understated, since, unlike the high-risk-pool
plan, it has no deductible. 

\c The range represents the lowest and highest premium prices for the
most popular plan in the state's individual insurance market.  The
premium prices charged by all carriers who sell this product fall
within this range. 

\d The premiums listed represent the range in prices for the standard
HMO product in different geographic areas in New York.  The lower end
of the range represents one carrier's price for this product in a
rural county in the state, while the upper end represents one
carrier's price for this product in the New York City metropolitan
area. 

\e This difference may be understated because the high-risk-pool plan
has a $500 deductible, whereas the plan with which we compared it has
a $250 deductible. 

Because carriers anticipate that the likelihood of needing medical
care increases with age, all carriers in the states listed except
those that were prohibited by law from doing so charged higher
premiums to older applicants.  For example, an Arizona PPO plan costs
a 25-year-old male $66 a month and a 64-year-old male $253 for the
same coverage, a difference of $187.  Similarly, a 64-year-old male
would have paid $286 more than the 25-year-old male for a PPO product
from one Illinois carrier.  As the table indicates, all applicants in
New Jersey, New York, and Vermont, regardless of age, would pay
exactly the same amount for the same insurance coverage from the same
carrier.  The individual insurance reform legislation enacted in
these states requires community rating, a system in which the cost of
insuring an entire community is spread equally among all members of
the community, regardless of their demographic characteristics or
health status.  Given the median income of the near elderly, rates in
the individual market may pose an affordability problem to some.  For
example, the premiums for popular health insurance products in the
individual markets of Colorado and Vermont are at least 10 percent
and 8.4 percent, respectively, of the 1996 median family income of
married near-elderly couples.  Typically, Americans under age 65
spent about 4 percent of household income in 1994 on health care--an
amount that includes not only insurance premiums or employer-required
cost sharing but also out-of-pocket expenses for copayments,
deductibles, and services not covered by health insurance.  (See app. 
V for a comparison of the affordability premiums in the individual
market with cost sharing under employer-based coverage.)

Without state restrictions, carriers will also evaluate the health
status of each applicant to determine whether to charge an increase
over the standard premium rate, to exclude a body part or existing
health condition from coverage, or to deny the applicant coverage
altogether.  For example, while four of the carriers automatically
deny coverage to an applicant with preexisting diabetes or exclude
from coverage all costs associated with treating this condition, one
carrier will accept the applicant but will charge him or her a
significantly higher premium to cover the higher expected costs. 
Also, an applicant who had cancer within the past 3 years would
almost always be denied coverage from all carriers we interviewed
except those in the guaranteed-issue states of New Jersey, New York,
and Vermont. 

In non-guaranteed-issue states, applicants who have a history of
cancer or other chronic health conditions are likely to have a
difficult time obtaining coverage.  Since the near elderly are more
likely to use medical services and develop such conditions as they
grow older, they may have an even more difficult time accessing
coverage in the individual markets of certain states.  However,
high-risk insurance pools have been created in a number of states and
act as a safety net to ensure that otherwise uninsurable individuals
can obtain coverage, although at a cost that is generally 125 to 200
percent of the average or standard rate charged in the individual
insurance market for a comparable plan.\72

Although the near elderly in Colorado, Illinois, and North Dakota who
are denied coverage from one or more carriers may obtain coverage
through the high-risk pool, they may be required to pay $316 to $638
more each month for this coverage.  Arizona is the only state that we
examined that did not have either guaranteed issue or a high-risk
pool.\73 The near elderly in this state, especially if they are
unhealthy, are not guaranteed access to any insurance product and
consequently may become uninsured. 


--------------------
\72 The premium in a high-risk pool, however, may still fall short of
covering the expected cost of high-risk enrollees.  A subsidy
mechanism is commonly in place to cover these shortfalls. 

\73 However, under HIPAA, carriers in Arizona are required to
guarantee-issue certain individual market products to eligible
individuals. 


   STATE AND FEDERAL INITIATIVES
   ATTEMPT TO EXPAND ACCESSIBILITY
   TO THIS MARKET
---------------------------------------------------------- Chapter 4:3

Most states and the federal government have undertaken a wide range
of initiatives to increase access to the various segments of the
health insurance market.  While almost all states have enacted
reforms designed to improve access to small employer health
insurance, they have been slower to introduce similar reforms to the
individual market.  In our 1996 report, we noted that some states (1)
had passed reforms designed to, among other things, improve
portability, limit waiting periods for coverage of preexisting
conditions, and restrict rating practices in the individual market;
and (2) operated high-risk insurance pools to provide a safety net
for otherwise uninsurable individuals.  In addition, certain states
had provided all individuals a product on an open enrollment basis
through their Blue Cross and Blue Shield plan.  Nevertheless, as many
as six states may have no insurance rating restrictions, an
operational high-risk pool for which all in the state are eligible,
an insurer of last resort, or any method through which all
individuals are guaranteed access to an individual insurance product. 

Also, a number of state and federal laws guarantee individuals
leaving employer-sponsored group health plans access to continued
coverage and, ultimately, to a product in the individual market. 
First, similar to COBRA, some states extend continuation requirements
to groups of fewer than 20, and several states require carriers to
offer individuals a product comparable to their group coverage on a
guaranteed-issue basis.  HIPAA further guarantees access to
individual market coverage for eligible individuals leaving group
health plans.  This group-to-individual portability is only available
to eligible individuals who have exhausted their available COBRA or
other conversion coverage and who meet several other eligibility
criteria.  HIPAA, however, does not explicitly restrict the premiums
carriers may charge, nor does its guarantee of coverage extend to
those who have always relied on the individual market for coverage. 


      ABOUT HALF OF THE STATES
      HAVE PASSED INDIVIDUAL
      INSURANCE REFORMS, BUT
      PROVISIONS VARY
-------------------------------------------------------- Chapter 4:3.1

In our 1996 report, we identified 25 states that at the end of 1995
had passed one or more reforms in an effort to improve individuals'
access to this market.  Since that time, additional states have
enacted reforms.  These reforms sought to restrict carriers' efforts
to limit eligibility and charge higher premiums because of an
individual's health history or demographic characteristics.  We found
substantial variation in the ways states approached reform in this
market, although reforms commonly passed included guaranteed issue,
guaranteed renewal, limitations on preexisting condition exclusions,
portability, and premium rate restrictions.  Among all reforms,
guaranteed issue and restrictions on premium rates are provisions
that most directly affect individuals' access to this market and the
affordability of the products offered to them.  Guaranteed issue
requires all carriers that participate in the individual market to
offer at least one plan to all individuals and accept all applicants,
regardless of their demographic characteristics or health status. 
See appendix VII for an updated summary of state initiatives to
increase access to the individual market. 

In our 1996 report, we found that 11 states required all carriers
participating in this market to guarantee-issue one or more health
plans to all applicants.  Since that time, we have identified an
additional two states that require carriers to guarantee-issue
selected products.\74 Such a provision, however, does not necessarily
guarantee coverage to all individuals on demand.  To limit adverse
selection, carriers in most states do not have to accept individuals
who are eligible for employer or government-sponsored insurance, and
in some states carriers are only required to accept applicants during
a specified, and usually limited, open enrollment period. 

Twenty of the states that have passed some reform in the individual
market included a provision in their legislation that attempts in
some way to limit the amount carriers can vary premium rates or the
characteristics they may use to vary these rates.  This number
represents an increase of 2 states (Massachusetts and South Dakota)
from the 18 we previously had identified.  Most of these states allow
carriers to vary, or modify, premium rates charged to individuals
within a specified range according to differences in certain
demographic characteristics such as age, gender, industry (type of
employment), geographic area, and use of tobacco.  For example, while
New Hampshire only allowed carriers to modify rates on the basis of
age, South Carolina allowed carriers to use differences in age,
gender, geographic area, industry, use of tobacco, occupational or
avocational factors, and any additional characteristics not
explicitly specified, to set premium rates.  Most of the 20 states,
however, limit the range over which carriers may vary rates among
individual consumers.  In fact, at least three of these states
require carriers to community-rate their individual products, with
limited or no exceptions.  Under community rating, carriers establish
premiums at the same level for all plan participants, regardless of
their age, gender, health status, or any other demographic
characteristic.  See appendix VIII for a description of the rating
restrictions in the states that have passed such reforms. 


--------------------
\74 For a summary of these reforms by state, see ch.  5 of
GAO/HEHS-97-8, Nov.  25, 1996.  To update our 1996 summary of
individual insurance reforms passed by states, we relied on a survey
conducted by the Blue Cross and Blue Shield Association published in
January 1998, State Legislative Health Care and Insurance Issues: 
1997 Survey of Plans.  We did not independently verify whether
additional states passed similar reforms. 


      HIGH-RISK POOLS MAY BE AN
      OPTION FOR THOSE DENIED
      COVERAGE
-------------------------------------------------------- Chapter 4:3.2

In addition, at least 27\75 states have created high-risk insurance
programs that act as a safety net to ensure that individuals who need
coverage, including the near elderly, can obtain it.  However, the
cost is generally 125 to 200 percent of the average or standard rate
charged in the individual insurance market for a comparable plan.  To
qualify for the high-risk pool, applicants usually have to
demonstrate they have been rejected by at least one carrier for
health reasons or have one of a number of specified health
conditions.\76

These high-risk pools, however, have historically enrolled a small
number of individuals.  In all but one of the states with such pools,
less than 5 percent of those under age 65 with individual insurance
obtain coverage through the pool.  Only in Minnesota does enrollment
in the pool approach 10 percent of the individually insured
population.  The relatively low enrollment in these pools may be due
in part to limited funding, their expense, and a lack of public
awareness.  For example, California has an annual, capped
appropriation to subsidize the cost of enrollees' medical care and
curtails enrollment in the program to ensure that it remains within
its budget.  Also, although these programs provide insurance to
individuals who are otherwise uninsurable, they remain relatively
expensive, and many people are simply unable to afford this coverage. 


--------------------
\75 Tennessee high-risk-pool participants have been merged into the
TennCare Medicaid program.  By June 30, 1995, coverage in the
high-risk pool, which had been in operation since 1987, had been
phased out and most of these "medically uninsurable" individuals were
enrolled in TennCare.  TennCare, which also provides coverage to the
state's Medicaid population and the uninsured, does not separately
track the number of high-risk individuals in the program. 

\76 To fulfill HIPAA requirements, approximately 22 states have
chosen to use their high-risk pool to provide guaranteed access to
coverage for eligible individuals who lose group coverage. 


      SEVERAL "BLUES PLANS" ACT AS
      INSURERS OF LAST RESORT
-------------------------------------------------------- Chapter 4:3.3

In addition to the states that require all carriers to
guarantee-issue at least one health plan to all individuals, the Blue
Cross and Blue Shield plans in eight states and the District of
Columbia offer at least one product to individuals during an annual
open enrollment period, which usually lasts 30 days.  Although these
plans accept all applicants during the open enrollment period, they
are not limited in the premium they can charge an individual
applicant.  For individuals not eligible for guaranteed access to
individual market coverage under HIPAA, these plans may provide their
only source of coverage. 


      SIX STATES HAVE PASSED NO
      INITIATIVES THAT GUARANTEE
      UNHEALTHY INDIVIDUALS ACCESS
      TO THE MARKET
-------------------------------------------------------- Chapter 4:3.4

Our analysis also showed that at the end of 1997, six states had
passed no reforms that attempted to increase the access of all
persons to the individual insurance market (for example, guaranteed
issue and premium rate restrictions), had no operational high-risk
pool for which all individuals in the state were eligible for
coverage, and had no Blues plan that acted as insurer of last resort. 
In these states, individuals who are unhealthy and not eligible for
coverage under HIPAA, and thus most likely to need insurance
coverage, may be unable to obtain it.  These states are Alabama,\77
Arizona, Delaware, Georgia, Hawaii,\78 and Nevada. 


--------------------
\77 Alabama recently created a high-risk pool, but enrollment in the
pool is limited to HIPAA eligibles.  Thus, those not previously
covered by an employer group plan are not eligible for coverage in
the pool. 

\78 Hawaii is the only state with mandated employer-sponsored health
insurance.  Therefore, almost all employed individuals have access to
health insurance through their employer, and a relatively small
percentage of the population must rely on the individual insurance
market as their sole source of coverage. 


      FEDERAL LEGISLATION
      INCREASES SOME INDIVIDUALS'
      ACCESS TO COVERAGE IN THE
      INDIVIDUAL MARKET
-------------------------------------------------------- Chapter 4:3.5

Through HIPAA, signed into law on August 21, 1996, the Congress
sought to provide a set of minimum protections that would apply to
all states and to coverage sold in all insurance markets.  ERISA
exempts self-insured employer group plans, which cover about 40
percent of all insured workers, from the insurance reforms passed by
most states; since HIPAA established federal standards, they apply to
such self-funded firm plans. 

HIPAA guarantees those leaving group coverage access to coverage in
the individual market--"group-to-individual portability"--under
certain specified circumstances.  This guarantee applies to those who
had at least 18 months of aggregate creditable coverage, most
recently under a group plan, and without a break of more than 63
days, and who have exhausted any COBRA or conversion coverage
available.  Individuals who meet these criteria are eligible for
guaranteed access to coverage, regardless of their health status and
without the imposition of coverage exclusions for preexisting
conditions.  However, only about 11 percent of those who elect COBRA
coverage remain enrolled for the maximum period.  Furthermore, HIPAA
offers no guaranteed access to the individual market for retirees
whose benefits were terminated before its July 1, 1997,
implementation or to those who have traditionally relied on the
individual market for coverage. 

To meet HIPAA's group-to-individual portability requirement, states
could choose between two approaches, the "federal fallback" and
"alternative mechanism" approaches.  Under the federal fallback
approach, which HIPAA specifies and which 13 states are using,
carriers must offer eligible individuals (1) all their individual
market plans, (2) their two most popular plans, or (3) two
representative plans--a lower-level and a higher-level coverage
option.  The remaining 36 states\79 and the District of Columbia
chose an alternative mechanism under which the law allows a wide
range of approaches as long as certain requirements are met. 
Twenty-two states decided to use their high-risk pool as their
alternative mechanism. 

Under the federal fallback approach, HIPAA does not explicitly limit
the premium price carriers may charge eligible individuals for
coverage.  In fact, we recently reported that in several of the 13
states using the federal fallback approach, the premium prices
charged to HIPAA-eligibles ranged from 140 to 400 percent or more of
the standard premium.\80

Similar to the experience of non-HIPAA-eligibles who rely on the
individual market for coverage, carriers in the federal fallback
states typically evaluate the health status of applicants and offer
healthier HIPAA-eligibles access to standard products.  Although
these products may include a preexisting condition exclusion period,
they may cost considerably less than the HIPAA product and will
likely attract the healthier individuals.  Unhealthy HIPAA-eligibles
in these states may have access to only the guaranteed access
product, and some may be charged an even higher premium on the basis
of their health status.  However, a similarly situated individual who
was not eligible for a HIPAA product may still be denied coverage or
have certain conditions excluded from coverage.  So, while an early
retiree whose employer eliminated coverage would typically be
eligible for one of these guaranteed access products, no similar
guarantees of access to coverage exist for those who historically
have relied on the individual market as their sole source of
coverage.  These individuals may still encounter significant
obstacles in their efforts to obtain an individual insurance
product.\81

In comparison, individuals in the 22 states that will use a high-risk
pool as their alternative mechanism to comply with HIPAA may face
less steep premium prices than those in the federal fallback states,
regardless of their particular health status.  Coverage through a
high-risk pool typically costs more than standard coverage, but state
laws limit the premiums carriers may charge, generally at a cost that
is 125 to 200 percent of the average or standard rate charged. 


--------------------
\79 Kentucky has until July 1, 1998, to implement group-to-individual
guaranteed access, since its legislature was not in session during
1997.  Thus, Kentucky is not included in the total. 

\80 We reported on a number of concerns that were raised during the
first year of HIPAA implementation.  For a thorough discussion of
these concerns, see Health Insurance Standards:  New Federal Law
Creates Challenges for Consumers, Insurers, Regulators
(GAO/HEHS-98-67, Feb.  25, 1998) and Health Insurance Portability and
Accountability Act of 1996:  Early Implementation Concerns
(GAO/HEHS-97-200R, Sept.  2, 1997). 

\81 HIPAA also includes a guaranteed renewal provision, which
requires carriers to renew all individual coverage.  The law
supersedes the guaranteed renewal requirement in states with less
far-reaching renewal provisions and requires health plans to renew a
product, provided it meets specified criteria.  HIPAA does allow
health plans to terminate coverage in the case of fraud, nonpayment
of premiums, noncompliance with contribution requirements, market
exit, and service area limitations. 


COBRA PROVIDES TEMPORARY ACCESS
FOR SOME NEAR ELDERLY
============================================================ Chapter 5

Although a company's decision to offer health coverage to workers is
essentially voluntary, legislation enacted in 1986 mandates the
temporary continuation of employer-based benefits under certain
circumstances.  Such continuation coverage is known by the acronym
COBRA.\82 The mandate applies only to firms with 20 or more workers
that choose to offer coverage, and the mandate ceases to apply if an
employer terminates health benefits.\83 Though available to the near
elderly, COBRA was targeted at a broader group.  Thus, continuation
coverage extends participation in employer-based group coverage for
individuals of all ages who experience a transition resulting in the
loss of health benefits, such as unemployment, retirement, death of a
spouse, or divorce.  The legislation was enacted in response to
increasing concern about the large number of Americans who lack
health insurance.  Those who elect COBRA are responsible for the
entire premium plus a 2-percent surcharge to cover associated
administrative expenses.  Although the mandate does not oblige firms
to share in the cost of continuation coverage--a major difference
from most employer-based health benefits, which are commonly heavily
subsidized--employers contend that there is an implicit subsidy
because sicker, more costly individuals are likely to elect COBRA.\84

Categories of the near elderly who might potentially benefit from
continuation coverage include those who (1) are laid off, (2)
experience a cutback in hours that makes them ineligible for health
benefits, (3) retire, or (4) are younger spouses of individuals who
become eligible for Medicare and thus relinquish employer-based
health insurance for their entire family.\85 An attractive feature of
COBRA for the near elderly is its ability to temporarily fill the gap
in coverage that exists when an employer provides health benefits to
active workers but not to retirees.  Moreover, COBRA may be used as a
bridge to Medicare by individuals who coordinate their retirement age
with the eligibility period. 

Because the employer is not required to pay any portion of the
premium, COBRA may be an expensive alternative for the near
elderly--especially since the loss in employer-based coverage is
probably accompanied by a decrease in earnings.  The limited
information available on eligibility for and use of COBRA by
Americans in general and the near elderly in particular is based on
past experience and may not reflect incentives to elect and exhaust
continuation coverage created by the implementation of HIPAA. 
Moreover, the information leaves many important questions unanswered. 
In general, the near elderly appear to be more likely to elect COBRA
than younger age groups.  Analysis of two studies that examined data
from special CPS supplements suggests that COBRA use by the near
elderly in 1988 and 1994 was relatively small compared with the size
of this age group.  On the one hand, these estimates represent the
lower boundary of COBRA use by the near elderly since neither
includes both retired and nonretired 55- to 64-year-olds.  On the
other hand, both may overestimate the use of continuation insurance,
since employers have told us that some individuals only elect COBRA
to receive dental or vision coverage--benefits that are not always
offered to those with access to employer-based retiree health
insurance.  A proprietary database whose results cannot be
generalized to the whole population suggests that, on average, 61- to
64-year-olds only keep continuation coverage for a year.  Finally,
although there is a strong rationale for those near elderly who lack
an alternative source of coverage and who can afford the premium to
elect COBRA, there is no systematically collected evidence on the
extent to which such elections affect employer costs. 


--------------------
\82 This provision was added to ERISA by the Consolidated Omnibus
Budget Reconciliation Act of 1985 (COBRA), 29 U.S.C.  1161-1169.  For
this reason, continuation coverage is commonly referred to as COBRA. 

\83 COBRA applies to state and local governments that receive funds
under the Public Health Service Act.  Taft-Hartley trusts, which are
union-organized plans that provide health coverage under collectively
bargained agreements, are also subject to COBRA.  Continuation
requirements similar to COBRA are applicable to federal employees
enrolled in plans under the Federal Employees' Health Benefits
Program.  The District of Columbia government, territories and
possessions of the United States, and church plans are exempt. 
Before the enactment of federal legislation, 23 states had
continuation coverage legislation for laid-off workers, but the laws
varied as to who was covered and for how long.  Moreover,
self-insured firms were exempt from state laws as a result of ERISA. 
State continuation laws, however, may apply to small firms with fewer
than 20 employees. 

\84 Though companies may charge COBRA enrollees the full premium,
group insurance rates for a comprehensive medical plan with
reasonable deductibles and copayments are generally advantageous to
older individuals or to those with health problems.  If comparable
coverage is available in the individual market, the premium may be
adjusted for both age and health status.  Moreover, certain medical
conditions may result in the denial of coverage or may be excluded
from any policy issued. 

\85 COBRA coverage is not available to individuals whose employers
terminate their health insurance after retirement. 


   TERMS AND CONDITIONS OF COBRA
   COVERAGE
---------------------------------------------------------- Chapter 5:1

The terms and conditions of COBRA eligibility are complex, in part
because of (1) its broad scope, (2) the fact that it addresses
coverage for individuals and families whose connection to an employer
has been broken, and (3) the protections for enrollees built into the
election process. 

There are two broad categories of qualifying events under COBRA, with
the coverage period linked to the type of event: 

  -- Work-related.  Voluntary separation, including retirement;
     involuntary separation other than for gross misconduct; or a
     decrease in the number of hours worked that results in loss of
     heath insurance. 

  -- Family.\86 Divorce or legal separation from or the death of an
     insured worker, Medicare entitlement for a covered employee
     resulting in the loss of employer-provided coverage to a
     dependent, or loss of dependent child status.\87

Generally, a work-related event provides benefits for 18 months. 
However, in the case of separation or reduction in hours as a result
of a disability, coverage can be extended for an additional 11 months
if the disability is determined under the Social Security Act and
existed during the first 60 days of COBRA coverage.\88 The cost for
those additional 11 months rises from 102 percent to 150 percent of
the applicable premium.  Dependents are also eligible for the full 29
months of coverage.  For those who qualify on the basis of family
events, coverage is available for up to 36 months.  Finally, in the
case of multiple qualifying events, coverage is limited to 36 months. 

Three factors make COBRA administration complex for firms:  the lack
of personnel departments at smaller firms, the detachment of
enrollees from the active workforce, and the election time frames and
notification requirements.  COBRA eligibility rules must be
implemented not only by large firms with established personnel and
benefit staffs but also by small businesses where benefit management
may be an ancillary duty.  Further complicating administration of
COBRA is the fact that firms must create systems and procedures for
individuals who are no longer on their payroll and who may be more
difficult to contact than an employee who reports for work.  For
example, payroll deductions, the typical means of collecting an
employee's share of the health insurance premium, are not an option
for a former worker.  Finally, the terms under which an employer must
proffer continuation coverage add to the administrative burden.  The
employer has 14 days to notify individuals that they qualify for
COBRA.  After notification of eligibility, an individual has 60 days
to elect coverage and 45 days to make a retroactive payment for
covered health services--benefits that may actually have already been
accessed by the enrollee 4 months earlier.  As discussed in the
following section, some employers are concerned that these election
time frames contribute to adverse selection.\89


--------------------
\86 A Bureau of Labor Statistics survey of medium and large employers
conducted in 1985, before the enactment of COBRA, suggests that a
majority of firms continued health benefits for families of deceased
workers, but the length of this coverage varied considerably.  Some
large employers told us that their own continuation benefits are, in
some instances, more generous than those mandated under COBRA.  In
effect, COBRA establishes a minimum floor for all employers with more
than 20 workers. 

\87 Women's organizations were strong advocates of COBRA enactment. 
The Congressional Research Service points out that in 1977, the last
year for which relevant data are available, only 50 percent of all
widows and 33 percent of all divorcees aged 35 to 64 who were
unemployed had private insurance.  Our analysis of the March 1997 CPS
indicates that regardless of work status, about 18 percent of widows
and divorcees were uninsured.  Approximately 60 percent had private
insurance and about 19 percent had public coverage.  See Beth C. 
Fuchs, Health Insurance Continuation Coverage Under COBRA,
Congressional Research Service Issue Brief, updated July 10, 1997. 

\88 Individuals who qualify for disability under the Social Security
Act must wait 5 months to receive benefits and 24 months to become
eligible for Medicare, but COBRA enrollment generally ceases after 18
months.  The additional 11 months of COBRA eligibility ensures that
there is no gap in coverage. 

\89 One employer characterized the 60- and 45-day waiting periods for
COBRA election and payment of the first retroactive premium as akin
to "allowing someone to purchase automobile insurance after the
accident."


   LIMITED EVIDENCE ON USE OF
   COBRA BY THE NEAR ELDERLY
---------------------------------------------------------- Chapter 5:2

More than 10 years after the establishment of continuation coverage
on a nationwide basis, there is a dearth of systematically collected
data on (1) how many individuals are eligible, (2) how many enroll,
(3) the demographic characteristics of those who elect coverage, or
(4) the average health care costs of COBRA enrollees.  Since
eligibility is not conditioned on age, the handful of studies on
COBRA often examine its use in general rather than focusing on the
near elderly.  Information from CobraServe, a third-party COBRA
administrator, provides insights on the election rates of retirees
who become eligible for COBRA compared with younger age groups, but
the data are not nationally representative.\90 The only nationally
representative data on the use of COBRA by the near elderly are
special supplements to the CPS conducted in 1988 and again in
1994.\91

However, because they used different methodologies, the two studies
based on these data only provide a rough estimate of COBRA use by 55-
to 64-year-olds.\92

According to the CobraServe data, the near elderly appear to be more
likely than other age groups to elect COBRA, but the number doing so
is relatively small.  About 10 percent of the over one-half million
workers in the database became eligible for COBRA between October 1,
1990, and September 30, 1991, and approximately 21 percent
enrolled.\93 We presumed enrollees to be near elderly if they elected
coverage at retirement or when a spouse became eligible for Medicare. 
Using these assumptions, approximately 1,600 of the 12,536 enrollees
were near elderly.\94 The election rates of the near elderly were
high--33 percent for retirees and 60 percent for spouses of those who
became eligible for Medicare.  However, the actual number of
near-elderly enrollees was small.  For example, only 196 individuals
elected COBRA because a spouse became eligible for Medicare. 
Overall, the election rate of those aged 61 and older was 38 percent,
while the election rate for those under age 40 was 17 percent.  In
addition, the length of the enrollment period was higher for older
individuals from 1987 to 1991.  The 61- to 64-year-olds used COBRA
for an average of 12 months--4 months longer than those aged 41 to
60.  Only 11 percent of all beneficiaries remained enrolled for the
full 18 to 36 months allowed.  Several hypotheses can be offered for
the higher election rates by older, compared with younger,
individuals.  First, the near elderly may be more willing to
sacrifice current income to pay the insurance premium, given their
greater medical needs.  Second, younger workers may have access to
health insurance through another family member.  Finally, the longer
election rates by older individuals suggest that they are less likely
than younger Americans to obtain other employment. 

Analysis of two studies that examined data from special CPS
supplements suggests that COBRA use by the near elderly in 1988 and
1994 was relatively small compared with the size of this age group. 
On the one hand, these estimates represent a lower boundary of
estimated COBRA use by the near elderly, since neither study includes
both retired and nonretired 55- to 64-year-olds.  On the other hand,
both may overestimate the use of continuation insurance since
employers have told us that some individuals only elect COBRA to
receive dental or vision coverage--benefits that are not always
offered to those with access to employer-based retiree health
insurance.  For those who were not retired in 1988 and whose
continuation coverage lasted for no more than 36 months, an estimated
443,000 were enrolled in COBRA--about 2 percent of the near elderly. 
Among those who were retired in 1994 and whose continuation coverage
was for no more than 18 months, an estimated 65,000 used COBRA--about
1.5 percent of the 4.4 million retirees in 1994.\95


--------------------
\90 Patrice Flynn, "Employment-Based Health Insurance:  Coverage
Under COBRA Continuation Rules," in Health Benefits and the Workforce
(Washington, D.C.:  Dept.  of Labor, 1992). 

\91 The CPS supplements focus on health insurance status at a
particular point in time providing direct information on both worker
and dependent coverage through a former employer.  Though the 1988
and 1994 CPS supplements only sampled adults aged 40 and older, that
is not a limitation for addressing COBRA usage by the near elderly. 
However, since the CPS only captures individuals who elected COBRA,
no information is available on how many Americans were eligible but
declined coverage or their reasons for not enrolling.  COBRA usage is
inferred from the length of coverage (18 to 36 months or less) since
respondents were not asked directly if they had continuation
coverage.  The Survey of Income and Program Participation (SIPP), a
nationally representative survey conducted by the Census Bureau, has
also been used to estimate COBRA usage.  A longitudinal survey, it
captures changes in health insurance coverage over time by following
a large panel of households over a 28-month period.  However, SIPP
provides no direct information on how many workers or their families
have elected COBRA coverage, nor does it distinguish between health
insurance coverage provided by a current or previous employer.  It
only permits an estimate of the number of unemployed and uninsured
who would qualify for COBRA if their previous employers offered
health insurance. 

\92 Patrice Flynn, "Employment-Based Health Insurance:  Coverage
Under COBRA Continuation Rules," and Pamela Loprest, Retiree Health
Benefits:  Availability From Employers and Participation by Employees
(Washington, D.C.:  The Urban Institute, Oct.  1997). 

\93 Almost one-half of employees in the 1990-91 database worked for
firms with more than 5,000 workers, and 21 percent were employed at
firms with between 51 and 500 employees. 

\94 Looking at CobraServe data from 1987 to 1991, Flynn also found
that about 13 percent of elections were for retirees and individuals
whose spouses became eligible for Medicare.  Presumably, those
retirees who elected COBRA were not offered retiree health coverage
and did not have access to insurance through a spouse.  As noted
earlier, there is no data as to why individuals did not elect
continuation coverage--that is, coverage was available through a
spouse or former employer or COBRA was unaffordable.  Gruber and
Madrian use Flynn's analysis to suggest that retirees without an
alternative source of health insurance are quite likely to elect
continuation coverage.  Thus, they estimated that 75 percent of those
most likely to be covered by COBRA actually are.  See Jonathan Gruber
and Brigitte C.  Madrian, "Health Insurance and Early Retirement: 
Evidence From the Availability of COBRA Coverage," Working Paper No. 
4594 (Cambridge, Mass.:  National Bureau of Economic Research, 1993). 

\95 Sixty-three percent of retirees received coverage through a
former employer or a spouse and 15 percent turned to the individual
market.  The remaining 20 percent were either uninsured or were
enrolled in Medicare or Medicaid. 


   PROOF OF ADVERSE SELECTION MORE
   INTUITIVE THAN SYSTEMATIC
---------------------------------------------------------- Chapter 5:3

Employers believe that per capita costs for COBRA enrollees are
higher than those for active workers because of adverse risk
selection--the propensity of sicker individuals with greater health
care costs to elect coverage.  Even though the enrollee typically
pays the full premium plus an administrative surcharge, employers
contend that there is an implicit subsidy in continuation coverage
because enrollee costs typically exceed that premium, raising average
costs per enrollee.\96 Notwithstanding the concern about higher costs
as a result of the COBRA mandate, few employers appear to collect
data to substantiate their concerns.  Some employers told us that
they believe such efforts would be fruitless because COBRA is
unlikely to change--in fact, legislative interest appears to be
focused on COBRA expansions.\97 And employers point out that
demonstrating adverse selection is made all the more difficult by the
enrollment growth in capitated health plans, which often lack the
claims data necessary to compute average costs for those who elect
COBRA. 

Logic suggests that adverse risk selection, a well-recognized factor
in the individual insurance market, may be encouraged by the terms
and conditions established for continuation coverage.  At the same
time, the fact that risk-averse individuals may elect coverage is
also relevant to predicting employer costs.  The election of COBRA
coverage by the near elderly in the absence of other insurance
alternatives may, in some instances, reflect an antipathy to living
without health insurance, given their greater risk of illness.  Since
COBRA election is associated with turnover, the demographics of a
firm or industry will also have a significant impact on COBRA costs. 
Taking all these factors into consideration, some analysts have
suggested that it is not possible to predict whether COBRA will lead
to higher or lower net costs for an employer.  The limited
quantitative data available tend to highlight the random nature of
the high costs often attributed to COBRA. 


--------------------
\96 There might have been more debate about establishing a premium in
excess of 100 percent if COBRA had targeted the elderly.  One
proposal introduced during the debate over COBRA in 1985 did suggest
establishing the premium at 110 percent. 

\97 See app.  VI for a description of past COBRA expansions. 


      COST CALCULUS FOR A COBRA
      ENROLLEE
-------------------------------------------------------- Chapter 5:3.1

COBRA is an adjunct to employer-based group coverage, but its
incentive structure may have more in common with the operation of the
individual insurance market.  Table 5.1 compares the characteristics
of group and individual coverage.  While the purchase of an
individual health insurance policy is purely voluntary, coverage in
the group market is tied to employment.  Group insurance rates are
often considerably lower than rates in the individual market where,
absent state reforms prohibiting the practice, premiums usually
reflect the demographic and health characteristics of the purchaser. 
In contrast to individual rates, employer-based costs typically
reflect the experience of the entire group.  Thus, there is an
inverse relationship between group size and the impact of employees
with high health care costs:  the larger the group, the smaller the
impact (see table 5.2).  From the perspective of individuals
contemplating the purchase of continuation coverage, the absence of
an employer subsidy places COBRA on a par with individual insurance: 
it is similarly expensive but cheaper than individual coverage
because COBRA permits enrollees to maintain the group rate.  In
summary, the high cost and voluntary nature of COBRA suggest that
individuals will go through a personal calculus in deciding whether
to elect coverage:  Individuals whose expected medical expenses
exceed the premium are more likely to elect continuation coverage.\98



                         Table 5.1
          
              Comparison of Characteristics of
           Employer-Based Group Health Insurance
            and Individually Purchased Coverage

Employer-based coverage         Individual coverage
------------------------------  --------------------------
Tied to employment              Voluntary

Group rate                      Rate often based on age
                                and health status

Often subsidized                No subsidy

Relatively inexpensive for      Cost shouldered entirely
worker                          by individual
----------------------------------------------------------


                         Table 5.2
          
          Sicker Employees Have Greater Impact on
            Average Health Care Costs of Smaller
                         Employers

                                              Average cost
                                                 of health
                             Total cost of     benefits if
                                    health          one of
                                  benefits    enrollees is
                             (average cost    costly (130%
                                 = $2,000/      of average
Number of workers                    year)       enrollee)
--------------------------  --------------  --------------
2                                   $4,000          $2,300
10                                  20,000           2,060
20                                  40,000           2,030
50                                 100,000           2,012
75                                 150,000           2,008
100                                200,000           2,006
200                                400,000           2,003
----------------------------------------------------------
Some evidence suggests, however, that factors other than expected
medical expenses play a role in who elects COBRA.  Thus, some
individuals may be risk-averse and willing to pay the high cost of
continuation coverage.  The near elderly might well be expected to
fall into this category.  Anecdotal evidence from employers suggests
that parents whose children lose dependent child status may also be
risk-averse.  The health benefit manager at one large company told us
that the firm's well-educated employees understand the value of
health benefits, the randomness of catastrophic illness, and the
financial consequences of being uninsured.  Many of the firm's COBRA
elections are young adults who lose health benefits under their
parents' company policy when they graduate from college.  The benefit
manager at another firm told us that the COBRA premiums for her son
who had just graduated from college were very high but that the
financial risk of going without coverage was more worrisome to her
than the cost.  The CobraServe database referenced earlier indicates
that election rates for loss of dependent child status are as high as
those for retirees. 

COBRA election is also influenced by affordability considerations. 
Since COBRA does not require employers to subsidize the premium, the
enrollee is generally responsible for paying the full cost of
coverage.  For 1997, Mercer/Foster Higgins reported that, on average,
the total annual premium for employer-based coverage for an active
employee was $3,820.  This average cost would represent an enormous
increase in out-of-pocket costs for a COBRA enrollee, considering
that large employers typically contribute 70 to 80 percent of the
premium for active workers.\99 However, aggregate premium data hide
the considerable variation in health benefit costs across firms and
thus the potential expense to COBRA enrollees.  Firm size, benefit
structure, locale, and aggressiveness in negotiating rates all affect
a company's health care premiums. 

At one large, New England-based firm that does not negotiate with
health plans but rather accepts a community rate for HMO coverage, we
were told that the full premium for family coverage was approximately
$5,000 per year; in contrast, the company's indemnity plan would cost
a COBRA enrollee about $12,000 annually.  According to the firm's
benefit manager, an individual enrolled in the indemnity plan who
became eligible to elect COBRA would not be allowed to select the
less expensive HMO option until the next annual open enrollment
period.  The full premium for family coverage for retiree health
plans offered by the Milwaukee-based Pabst Brewing Company ranged
from about $5,646 to $7,933 per year.  In 1996, Pabst terminated
health benefits for 750 early retirees.  Since Pabst had paid the
total cost of practically all of the health plans it offered to
retired workers, the COBRA cost would have come as a rude awakening
to affected retirees.\100 Assuming an obligation for such high
premiums occurs at a time when individuals eligible for COBRA are
undergoing a transition--a transition that may be associated with a
reduction in family income.  As a result, Marquis and Long
hypothesized that COBRA participation will rise with age because of
higher liquid assets and because of the need to protect those assets
from potentially high health expenditures.\101

Since the cost of COBRA coverage is associated with a particular
firm, the demographic profile of a company will affect both its
average health care expenditures and the costs associated with COBRA. 
Thus, a firm with an older workforce that does not offer retiree
health benefits or a company with a large number of women in their
childbearing years might expect to incur higher expenditures than a
firm consisting of young, healthy males.  And the number of COBRA
enrollees who actually do become pregnant or suffer from an expensive
illness associated with old age will raise an employer's average
health insurance costs. 


--------------------
\98 Some argue that the absence of a subsidy increases the likelihood
that only those with high expected health care costs will enroll. 
Thus, the cost calculus for a healthy individual suggests that the
costs outweigh the benefits. 

\99 Although health benefit payments by employers are tax deductible
and thus paid with pre-tax dollars, employees who elect COBRA pay
with after-tax dollars. 

\100 In fact, the affected Pabst retirees were not eligible for COBRA
since the requirement to provide continuation coverage does not apply
to firms that terminate health benefits to retired workers. 

\101 Stephen H.  Long and M.  Susan Marquis, "COBRA Continuation
Coverage:  Characteristics of Enrollees and Costs in Three Plans," in
Health Benefits and the Workforce (Washington, D.C.:  U.S.  Dept.  of
Labor, 1992). 


      LIMITED QUANTITATIVE DATA
      HIGHLIGHT RANDOMNESS OF
      AVERAGE COBRA COSTS
-------------------------------------------------------- Chapter 5:3.2

There are only limited quantitative data on adverse selection
attributable to COBRA.  Though this evidence suggests that COBRA
enrollees are on average more expensive than active employees, it is
insufficient support for a generalizable conclusion.  Instead, the
evidence tends to underscore the randomness of high-cost cases at a
particular firm and the relationship between the demographics of a
firm and the number of high-cost cases they experience. 

Marquis and Long analyzed the cost of individuals who elected
continuation coverage at three different firms.\102 Their study found
that costs for COBRA enrollees were higher than for active employees
in all three plans by amounts ranging from 32 to 224 percent. 
Adjusting these costs for the demographic characteristics of
participants, however, shows that health risk is not always higher
among COBRA enrollees.  Thus, in one of the firms, the higher cost of
COBRA continuation coverage was entirely attributable to demographic
differences, especially the much higher proportion of women among
enrollees.  Adjusting for those differences, COBRA enrollees actually
had somewhat lower levels of health care spending than active
workers.  At a second firm, demographic differences, including the
older age of COBRA enrollees, did not explain the higher costs,
indicating that those on continuation coverage were indeed poorer
health risks than the company's active employees. 

In addition, Spencer, a Chicago-based benefit consulting firm, has
conducted a survey of COBRA costs and experience among a small sample
of firms since 1989.  Unlike the Marquis and Long analysis, Spencer
does not attempt to distinguish between the impact of health risk and
demographics on firms' costs.  Among its limitations, the survey
sample is not random and only about 5 percent of firms contacted
responded to the questionnaire.  The respondents include a mix of
small, medium, and large companies with no apparent oversampling of
smaller firms, whose size would magnify the impact of adverse
selection on their future premiums.  Of the limited number of
questionnaires returned in 1997 (191), fewer than one-half were able
to supply cost data, and six very large employers represented 71
percent of the total COBRA elections.  The survey has consistently
shown that (1) costs vary radically and unpredictably among
employers; and (2) overall, the costs of COBRA enrollees are higher
than those of active workers.  Since 1991, average COBRA costs have
hovered at about 150 percent of active employee costs.  The official
responsible for the survey told us that he is constantly struck by
the randomness of an individual firm's experience from year to year. 
Thus, a firm could have 10 COBRA elections during a year and no
claims, or one election and $150,000 in associated medical
expenditures.  In 1997, about 25 percent of respondents reported that
COBRA costs were lower than for active workers, while 75 percent
reported that COBRA costs were higher. 


--------------------
\102 "COBRA Continuation Coverage," in Health Benefits and the
Workforce. 


OBSERVATIONS
============================================================ Chapter 6

Forecasting the insurance status of future generations of near
elderly is inherently risky.  Since it is not entirely clear why
employers are continuing to reassess their commitment to retiree
health insurance, it is possible that unforeseen developments will
halt or even reverse the erosion that has occurred over the past
decade.  Among potential scenarios that could affect the incentives
for both employers and near-elderly individuals are (1) a tightening
of labor markets as a result of having a smaller active labor force
or a low unemployment rate, (2) changes in the tax treatment of
retirement income, and (3) a postponement of retirement because of
insufficient postretirement income. 

In addition to events that could affect the erosion in employer-based
retiree coverage, use of the HIPAA guaranteed-access provision by
eligible individuals may improve entry into the individual market for
those with preexisting health conditions who lack an alternative way
to obtain a comprehensive benefits package.  Depending on the manner
in which each state has chosen to implement HIPAA, however, cost may
remain an impediment to such entry.  Since group-to-individual
portability is only available to qualified individuals who exhaust
available COBRA or other conversion coverage, HIPAA may lead to an
increased use of employer-based continuation insurance.  Moreover,
additional state reforms of the individual market may improve access
and affordability for those who have never had group coverage or who
fail to qualify for portability under HIPAA rules. 

Despite the possibility of countervailing trends, however, the
evidence available today suggests that future generations of retirees
are less likely to be offered health benefits when they leave the
active workforce.  With the number of 55- to 64-year-olds estimated
to grow from 8 percent of the population today to 13 percent by 2020,
the impact, in the absence of affordable and accessible alternatives,
could lead to an increase in the number of uninsured near-elderly
Americans.  At the same time, the evidence also suggests that those
with continued access to employer-based retiree health coverage will
shoulder more--in some instances significantly more--of the financial
burden.  Compared with premiums in the individual market, the typical
cost-sharing requirements faced by retirees with employer-based
coverage today do not appear to be greatly out of line with those
faced by active employees.  However, cost-sharing policies being
implemented by some firms could eventually create affordability
problems for those who retain access to employer-based coverage.  If
more firms base their financial contribution to retiree coverage on
years of service, workers who change jobs frequently throughout their
careers may find the employer subsidy small in relation to the
overall premium.  Some experts suggest that the traditional
employer-employee contract has already been fundamentally altered,
with both parties less likely to view the work contract as a lifelong
arrangement. 

A major unknown that could also affect the continued commitment of
employers to retiree coverage is the federal government's response to
the Medicare financing problem--a dilemma created by the imminent
retirement of the baby-boom generation.  Experts are divided about
the impact on employer-based coverage of actions that shift costs to
the private sector, such as increasing the eligibility age for
Medicare.  In responding to Medicare's financial crisis, policymakers
need to be aware of the potential for the unintended consequences of
their actions. 


LIMITED FEDERAL PROTECTION OF
EMPLOYER-BASED RETIREE HEALTH
BENEFITS
=========================================================== Appendix I

The Employee Retirement Income Security Act of 1974 (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 has 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.\103 Moreover,
employer-based health benefits are typically funded on a
pay-as-you-go basis.  In contrast, the sheer magnitude of accumulated
employer-employee contributions to retirement funds demonstrates the
importance of greater 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, are excluded from such funding
and vesting requirements.\104

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.\105 ERISA does, however, impose some federal requirements
on employer-based health plans.  For example, employers must

  -- 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 protects the pension benefits of retired workers at U.S. 
companies, it offers only limited federal safeguards to retirees
participating in a firm's health benefit plan.  ERISA requires
companies to make a Summary Plan Description (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 typically 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."
According to Labor, employers are free to cut or terminate health
care coverage unless they (1) have made a clear promise of specific
health benefits for a definite period of time or for life and (2)
have not reserved the right to change those benefits.  However, the
recent decision in the 1989 case brought by General Motors salaried
retirees may call into question any commitment by employers to
provide previously promised retiree health benefits.\106


--------------------
\103 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. 

\104 Retiree Health Plans:  Health Benefits Not Secure Under
Employer-Based System (GAO/HRD-93-125, July 9, 1993). 

\105 Federal preemption is valued by employers, especially those who
self-fund their health benefit plans, because they can avoid certain
taxes, are exempt from mandated state benefits, can offer a uniform
benefit plan to company employees located in different states, and
are not subject to certain medical malpractice lawsuits.  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). 

\106 Sprague v.  General Motors Corporation, Nos.  94-1896, 94-1897,
94-1898, and 94-1937, U.S.  Sixth Circuit Court of Appeals, Jan.  7,
1998. 


CHARACTERISTICS OF PUBLIC AND
PRIVATE HEALTH INSURANCE SURVEYS
========================================================== Appendix II

We examined a number of public and proprietary surveys that include
information on the near elderly, such as their (1) demographic
characteristics and access to insurance; (2) ability to obtain
retiree health insurance through a former employer; and (3)
likelihood of experiencing certain medical conditions, use of
services, and levels of health care expenditures.  The surveys we
relied on were broad and current, and allowed the most precise
estimates. 


      SURVEYS ON THE
      CHARACTERISTICS OF THE NEAR
      ELDERLY AND THEIR ACCESS TO
      INSURANCE
------------------------------------------------------ Appendix II:0.1

Information on the demographic characteristics of the near elderly
and their access to insurance is available through the following
national surveys either conducted or financed by the federal
government:  (1) the March supplement of the Current Population
Survey (CPS), (2) the Survey of Income and Program Participation
(SIPP), (3) the August 1988 and September 1994 supplements to the
CPS, (4) the National Medical Expenditure Survey (NMES), (5) the
Medical Expenditure Panel Survey (MEPS), and (6) the Health and
Retirement Survey (HRS).  Table II.1 compares selected aspects of
these six surveys. 



                                        Table II.1
                         
                         Selected Characteristics of Six Surveys
                         of the Near Elderly and Their Access to
                                     Health Insurance

                                           CPS-Aug.
                                           1988/
                                           Sept. 1994  NMES--      MEPS--
                   CPS-March               supplement  household   household
Characteristic     supplement  SIPP        s           survey      component   HRS
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Sponsor and        Census      Census      Labor       AHCPR,      AHCPR and   National
date established   Bureau,     Bureau,     Department  1977        NCHS, 1996  Institute
                   1968        1983        ,                                   on Aging
                                           conducted                           and
                                           by the                              Institute
                                           Census                              for Social
                                           Bureau,                             Research,
                                           1988                                Univ. of
                                                                               Michigan,
                                                                               1992

Frequency          Annual.     Continuing  1988 and    1977 and    New panels  Every 2
                               survey      1994.       1987,       establishe  years.
                               with                    succeeded   d
                               respondent              by MEPS.    annually.
                               s
                               interviewe
                               d every 4
                               months.

Latest publicly    1996        1996        1994        1987        1996 for    1994
available data                                                     some data

Sample design      Nationally  Continuous  Nationally  Nationally  Nationally  Nationally
                   representa  series of   representa  representa  representa  representa
                   tive,       nationally  tive,       tive panel  tive        tive panel
                   cross-      representa  cross-      lasting     overlappin  of 51-to
                   sectional.  tive        sectional.  about 16    g panels,   61-year-
                               panels,                 months.     each        olds/
                               each from                           lasting     spouses as
                               2.5 to 4                            about 2.5   of 1992.
                               years. As                           years.      Panel
                               of 1996,                                        ongoing.
                               each panel
                               is 4
                               years.

Sample size        About       Typically   About       About       About       Over about
                   54,000      about       56,000      14,000      10,500      7,600
                   eligible    14,000 to   households  households  households  households
                   households  20,000      in 1988,    /           , or        /12,600
                   /100,000    households  and about   35,000      25,000      people.
                   people for  . For the   57,000      people.     people.     Hispanics,
                   the 1997    1996        households              Blacks      blacks,
                   CPS March   panel,      in 1994.                and         and
                   supplement  about                               Hispanics   Florida
                   .           36,700                              are         residents
                   Hispanics   households                          oversample  are
                   are         /77,000                             d. Overall  oversample
                   oversample  people.                             sample      d.
                   d.                                              increased
                                                                   every 5
                                                                   years.

Response rate      About 90%   About 74%   About 95%   About 72%.  About 78%   About 82%
                   of the      for the     in 1988                 for round   for wave I
                   individual  1993        and about               1.          and 93% of
                   s.          panel.      94% in                              wave I
                                           1994.                               members
                                                                               for wave
                                                                               II.
-----------------------------------------------------------------------------------------
As a result of its breadth, currency, and precision, we relied on the
March 1997 CPS supplement for our analysis of the demographic and
insurance status of the near elderly.  The March supplement is based
on a sample of about 54,000 households with approximately 100,000
individuals.  As shown in table II.1, the CPS is one of the largest
surveys and allows comparisons of the insurance and demographic
characteristics of 55- to 64-year-olds and younger age groups.  It
also allowed us to make observations about two subgroups--those aged
55 to 61 and 62 to 64.  It is among the surveys with the most current
data and addresses health status and income, categories not covered
by some of the other surveys. 

The CPS is based on a sample designed to be nationally representative
of the civilian noninstitutional population of the United States.  As
a result, any estimates about that population are subject to sampling
errors.  To minimize the chances of citing differences that could be
attributable to sampling errors, we highlight only those differences
that are statistically significant at the 0.05 level. 

In addition to sampling errors, another source of variability that
affects the interpretation and quality of survey data is the coverage
and response rates.  The coverage ratio is a measure of the extent to
which persons are represented in the sample according to demographic
characteristics such as age or race.  For the age groups reported in
our study, these ratios ranged from 0.855 to 0.998.  The response
rate for the CPS is an overall measure of the extent to which houses
and persons selected for the sample are actually represented in the
sample of respondents.  For the March 1997 CPS, the response rate was
about 90 percent.  This response rate is reasonable and somewhat
higher than for most of the other surveys. 

A major difference between the CPS March supplement and surveys such
as SIPP and HRS is that the latter are designed to follow a group of
respondents (often referred to as a "panel" of individuals) over a
period of time--2-1/2 to 4 years for the SIPP and 10 to 12 years for
HRS--while the CPS is primarily designed to be cross-sectional,
largely focusing on the 12 months preceding the interview.\107 As a
result, we did not use the CPS to directly measure how the health,
income, and insurance status of individuals or groups change over
time.  To better understand the estimates we reported in chapter 2,
it is important to be aware of how some of the CPS questions are
worded and the responses categorized.  The following explains four
categories of questions. 

Insurance Status.  The CPS questions that we used to determine
insurance status ask whether respondents were covered through various
sources of insurance (for example, employer-based, individual, and
Medicare).  However, they do not ask for the length of coverage or
whether the individual was covered through these sources at the time
of the interview.  Thus, the results of these questions overestimate
the size of the insured population because respondents are considered
insured for the entire year if they were insured at all during the
preceding 12-month period--regardless of their insurance status at
the time of the interview or the length of time they were insured. 
Conversely, the wording of these questions produces an underestimate
of the uninsured population because, regardless of their insurance
status at the time of the interview, a respondent must have been
uninsured for the entire year to be categorized as uninsured. 

Some people may receive coverage from several sources.  To avoid
double counting, we prioritized the source of coverage reported by
the CPS.  For our analysis, employment-based coverage was considered
primary to other sources of coverage, and respondents were classified
as having employment-based coverage even if they also had other types
of coverage.  The other types of health insurance coverage were
prioritized in the following order:  Medicare, Medicaid,
military/veterans, and individual insurance.  Also, with respect to
coverage through the individual insurance market, the CPS
questionnaire does not distinguish between comprehensive and more
limited policies that are available. 

Employment Status.  The CPS questions that we used for employment
status are similar to those on insurance status.  Specifically,
respondents are considered employed if they worked at all in the
year, and not employed only if they did not work at all during the
past 12 months.  As a result, these questions overestimate the
employed population and underestimate the number who did not work. 

Health Status.  The CPS asks respondents to categorize their health
as excellent, very good, good, fair, or poor.  The question is worded
in the present tense and implies an answer relating to the
respondent's health at the time of the interview.  In our analysis,
however, we correlated health status with other characteristics such
as employment and insurance status, which, as noted, had a different
temporal context.  In general, poor health equated to a weakened
workforce attachment and to an increased likelihood of having public
coverage or being uninsured.  To the extent a respondent's health
status at the time of the interview differed from that during the
preceding 12 months, the relationship between the two variables is
weakened.  Consequently, when we report differences in employment or
insurance status relative to health status, we are probably
underestimating the extent to which the latter has affected these
other characteristics. 

Income Status.  The gross income data we report overstates the amount
of disposable income available to nonelderly Americans because it
does not take into account the taxes they must pay.  On the other
hand, income alone is an incomplete measure of wealth and the ability
of individuals to afford individual market premiums or
employer-imposed cost sharing.  Although the inclusion of assets such
as homes, investments, and savings would provide a more comprehensive
measure of affordability, such data are not available through the
CPS.  Moreover, income comparisons between different age groups are
complicated by differences in family size and financial obligations. 
For example, a married couple in their thirties with several children
and a mortgage may earn more than a near-elderly couple whose
children are grown and who own their home, but their financial
obligations are clearly not comparable.  And the younger couple may
have fewer assets, other than current income, on which to draw. 


--------------------
\107 By design, about 50 percent of the sample for the CPS March
supplement is selected for interview the following year.  As a
result, between-year comparisons are possible for a subset of the CPS
respondents. 


      SURVEYS ON THE EXTENT TO
      WHICH EMPLOYERS OFFER
      RETIREE HEALTH INSURANCE
------------------------------------------------------ Appendix II:0.2

Information on the extent to which employers offer health coverage to
retirees as well as the conditions under which coverage is made
available is captured in private surveys conducted by benefit
consultants.  The Foster Higgins and KPMG Peat Marwick employer
surveys are based on random samples with results that can be
generalized to a larger population of employers.  Neither survey
reports information on the precision of its estimates.  Other
employer surveys we examined are based on a sample of clients, which
statistically limits the results to that client base.  In general, we
report data from the Foster Higgins and KPMG Peat Marwick surveys. 
However, these two surveys did not always capture important changes
in the conditions under which retiree health benefits are made
available.  Thus, we occasionally include information from
client-based surveys but note that the latter must be used cautiously
since they are not generalizable. 

In addition to proprietary surveys, some information on
employer-based retiree health benefits is also available from a
biennial survey conducted by the Bureau of Labor Statistics (BLS) and
from special supplements to the CPS.  Although the BLS survey is
based on a sample that can be generalized to a larger population, the
sample focuses on establishments rather than unique firms.  Thus,
different branches or offices of the same firm could be included in
the sample.  Moreover, rather than reporting the number of
establishments that offer retiree coverage, the results are presented
in terms of how many workers have access to retiree health benefits. 
In contrast to the firms and establishments surveyed by benefit
consultants or BLS, the unit of analysis for the CPS supplements is
individuals.  These individuals were asked whether they continued
employer-based coverage at retirement or later during retirement and
to identify the reason they discontinued coverage.  In 1994, "retiree
coverage not offered by employer" was added to the list of reasons,
but it was not used in the 1988 questionnaire.  Table II.2 compares
selected characteristics across three employer surveys. 
Characteristics of the August and September CPS supplements are
included in table II.1. 



                                        Table II.2
                         
                         Characteristics of Employer Surveys Used
                                     in Our Analysis

                                                   Survey
                   ----------------------------------------------------------------------
                                                                   Bureau of Labor
Characteristic     Foster Higgins          KPMG Peat Marwick       Statistics
-----------------  ----------------------  ----------------------  ----------------------
Date established   1986, although results  1991.                   1980.
                   before 1993 are not
                   comparable to later
                   surveys, which were
                   based on random
                   samples.

Frequency          Annual.                 Data on trends in       Annually, with small
                                           retiree health          establishments
                                           coverage were reported  surveyed in 1 year and
                                           for 1991-93, 1995, and  medium and large
                                           1997.                   establishments
                                                                   surveyed in the next
                                                                   year.

Latest data        1997.                   1997.                   1995.
available

Sample design      Stratified random       Stratified random       Two-stage probability
                   sample of public and    sample of public and    sample of
                   private employers with  private employers with  establishments and
                   10 or more workers.     200 or more workers.    occupations.
                                                                   Establishments with
                                                                   100 employees or more
                                                                   are selected for the
                                                                   survey of medium and
                                                                   large private
                                                                   establishements.
                                                                   Establishments with
                                                                   fewer than 100
                                                                   employees and state
                                                                   and local governments
                                                                   are selected for the
                                                                   survey of small
                                                                   establishments.

Sample size        3,676 in 1993; 3,156    About 1,800 in 1993;    3,447 medium/large
                   in 1997.                2,500 in 1997.          establishments in 1993
                                                                   and 3,092 small
                                                                   establiments in 1994.

Response rate      78 percent in 1993; 50  55 percent in 1993; 60  About 67 percent in
                   percent in 1997.        percent in 1997.        1993; about 70 percent
                                                                   in 1994.
-----------------------------------------------------------------------------------------

      SURVEYS ON HEALTH
      CONDITIONS, HEALTH CARE
      EXPENDITURES, AND USE
------------------------------------------------------ Appendix II:0.3

We obtained information on the prevalence of health conditions, and
health care expenditures and use from surveys conducted by the
National Center for Health Statistics (NCHS) and Agency for Health
Care Policy and Research (AHCPR).  Specifically, we used the

  -- 1994 National Health Interview Survey (NHIS) for the prevalence
     of health conditions,

  -- 1994 National Hospital Discharge Survey (NHDS) for the number of
     hospital discharges and days of care,

  -- 1996 National Hospital Ambulatory Medical Care Survey (NHAMCS)
     for the number of visits to emergency rooms and outpatient
     departments,

  -- 1996 National Ambulatory Medical Care Survey (NAMCS) for the
     number of physician office visits, and

  -- 1987 NMES for health care expenditures. 

The NMES data we reported were "aged" by AHCPR to represent 1998
dollars.  Table II.3 compares selected characteristics for the NHIS,
NHDS, NHAMCS, and NAMCS.  Information on the NMES was reported in
table II.1. 



                                        Table II.3
                         
                          Selected Characteristics of Surveys on
                           Health Conditions, Expenditures, and
                                       Utilization

                                                   Survey
                   ----------------------------------------------------------------------
Characteristic     NHIS              NHDS              NHAMCS            NAMCS
-----------------  ----------------  ----------------  ----------------  ----------------
Sample design      A national        A national        A national        A national
                   multistage        multistage        multistage        multistage
                   probability       probability       probability       probability
                   design with       design based on   design based on   sample based on
                   continuous        primary sampling  PSUs, hospitals   PSUs, physician
                   weekly samples    units (PSU) used  within these      practices in
                   so that each is   in the NHIS,      PSUs, emergency   those PSUs, and
                   representative    hospitals within  rooms and         patient visits.
                   of the target     the PSUs, and a   clinics within
                   population and    systematic        outpatient
                   additive over     random sample of  departments, and
                   time.             inpatient         patient visits.
                                     records. Also,
                                     all hospitals
                                     with 1,000 beds
                                     or more or
                                     40,000
                                     discharges or
                                     more annually
                                     are included in
                                     the sample.

Sample size        49,000            512 hospitals.    486 hospitals,    3,000
                   households with                     of which 438 had  physicians, of
                   127,000 people.                     an emergency      which 2,142 were
                   Blacks are                          room or           eligible.
                   oversampled.                        outpatient
                                                       department.

Response rate      94%               93%,              95%,              70%,
                                     representing      representing      representing
                                     277,000           21,092 emergency  29,805 patient
                                     discharge         room records and  record forms.
                                     records from 478  29,806
                                     respondents.      outpatient
                                                       department
                                                       records.
-----------------------------------------------------------------------------------------

DEMOGRAPHIC AND INSURANCE PROFILES
OF THE NEAR ELDERLY AND THOSE AGED
55 TO 61 AND 62 TO 64
========================================================= Appendix III



                        Table III.1
          
           Key Demographic Characteristics of the
             Near Elderly, by Insurance Status

                Insurance status--numbers in millions
                              (percent)
            ----------------------------------------------
Characteri   Employer-
stic             based  Individual      Public   Uninsured
----------  ----------  ----------  ----------  ----------
Income
----------------------------------------------------------
Less than         0.34        0.23        0.85        0.72
 $10,000        (2.4%)     (12.3%)     (38.5%)     (24.0%)
$10,000 -         1.20        0.32        0.67        0.66
 $19,999        (8.5%)     (17.5%)     (30.3%)     (22.3%)
$20,000 -         5.31        0.76        0.46        0.97
 $49,999       (37.8%)     (41.3%)     (21.0%)     (32.5%)
$50,000 -         3.32        0.27        0.17        0.36
 $74,999       (23.6%)     (14.6%)      (7.5%)     (12.2%)
$75,000 or        3.87        0.27        0.06        0.27
 more          (27.6%)     (14.4%)      (2.8%)      (9.0%)

Gender
----------------------------------------------------------
Male              7.06        0.76        0.95        1.26
               (50.3%)     (41.3%)     (43.2%)     (42.5%)
Female            6.97        1.08        1.25        1.71
               (49.7%)     (58.7%)     (56.8%)     (57.5%)
Widowed           0.69        0.18        0.31        0.26
 female         (4.9%)      (9.6%)     (14.3%)      (8.8%)
Divorced          0.91        0.17        0.30        0.30
 female         (6.5%)      (9.0%)     (13.6%)     (10.0%)

Race
----------------------------------------------------------
White            11.75        1.61        1.35        1.84
               (83.7%)     (87.0%)     (61.2%)     (62.0%)
Black             1.17        0.89        0.43        0.40
                (8.3%)      (4.8%)     (19.4%)     (13.6%)
Hispanic          0.69        0.82        0.31        0.51
                (4.9%)      (4.4%)     (14.0%)     (17.3%)
Other             0.42        0.68        0.12        0.21
                (3.0%)      (3.7%)      (5.3%)      (7.1%)

Employment
----------------------------------------------------------
Full-time         7.44        0.68        0.08        0.83
               (53.0%)     (36.8%)      (3.6%)     (27.8%)
Part-time         3.08        0.55        0.21        0.76
               (22.0%)     (29.8%)      (9.3%)     (25.7%)
Did not           3.51        0.62        1.92        1.38
 work          (25.0%)     (33.4%)     (87.1%)     (46.5%)

Health status
----------------------------------------------------------
Excellent         7.59        0.91        0.26        1.08
               (54.1%)     (49.4%)     (11.6%)     (36.4%)
Good              4.36        0.65        0.43        1.02
               (31.1%)     (35.2%)     (19.5%)     (34.4%)
Poor              2.08        0.28        1.52        0.87
               (14.8%)     (15.4%)     (68.9%)     (29.2%)
----------------------------------------------------------
Table III.2 displays the characteristics of three subgroups of the
near elderly:  (1) 55- to 61-year-olds, (2) 62- to 64-year-olds, and
(3) 62- to 64-year-olds who elected Social Security benefits at a
reduced annuity.  The estimated numbers of individuals in these three
subgroups are 15.7 million, 5.8 million, and 3.0 million,
respectively.  As mentioned in chapter 2, just over one-half of those
eligible elected Social Security before age 65. 



                        Table III.2
          
           Selected Characteristics of 55-to 61-
                    Year-Olds and 62-to
                        64-Year-Olds

                   (Numbers in millions)

 Characteristic     Number with characteristic (percent)
----------------  ----------------------------------------
                                                 62-to 64-
                                                 year-olds
                                              with reduced
                                                    Social
                     55-to 61-     62-to 64-      Security
                     year-olds     year-olds       annuity
----------------  ------------  ------------  ------------
Income
----------------------------------------------------------
Less than          1.51 (9.6%)  0.68 (11.8%)  0.33 (11.3%)
 $10,000
$10,000 -         1.95 (12.5%)  0.96 (16.5%)  0.64 (21.7%)
 $19,999
$20,000 -         5.41 (34.6%)  2.28 (39.2%)  1.32 (44.5%)
 $49,999
$50,000 -         3.18 (20.3%)  0.99 (17.1%)  0.43 (14.3%)
 $74,999
$75,000 or more   3.62 (23.1%)  0.89 (15.4%)   0.24 (8.2%)

Gender
----------------------------------------------------------
Male              7.53 (48.1%)  2.73 (47.1%)  1.31 (44.4%)
Female            8.14 (51.9%)  3.07 (52.9%)  1.65 (55.6%)
Widowed female     0.89 (5.7%)  0.59 (10.2%)  0.36 (12.1%)
Divorced female    1.32 (8.4%)   0.37 (6.4%)   0.18 (6.0%)

Race
----------------------------------------------------------
White                    12.34  4.57 (78.8%)  2.43 (82.0%)
                       (78.7%)
Black              1.56 (9.9%)   0.56 (9.6%)   0.28 (9.5%)
Hispanic            1.2 (7.6%)   0.42 (7.2%)   0.18 (6.2%)
Other              0.57 (3.7%)   0.25 (4.3%)   0.07 (2.3%)

Employment
----------------------------------------------------------
Full-time         7.61 (48.6%)  1.53 (26.4%)   0.16 (5.3%)
Part-time         3.43 (21.9%)  1.29 (22.2%)  0.74 (24.9%)
Did not work      4.63 (29.6%)  2.98 (51.4%)  2.07 (69.8%)

Insurance
----------------------------------------------------------
Employer-based           10.57  3.46 (59.6%)  1.54 (52.1%)
                       (67.4%)
Individual         1.26 (8.0%)  0.59 (10.1%)  0.36 (12.0%)
Medicare           0.76 (4.9%)   0.50 (8.5%)  0.43 (14.7%)
Medicaid           0.72 (4.6%)   0.23 (4.0%)   0.11 (3.8%)
Military/          0.29 (1.9%)   0.12 (2.1%)   0.07 (2.4%)
 veterans
Uninsured         2.07 (13.2%)  0.90 (15.5%)  0.44 (15.0%)

Health status
----------------------------------------------------------
Excellent         7.65 (48.8%)  2.37 (40.8%)  1.05 (35.3%)
Good              4.65 (29.6%)  1.95 (33.5%)  0.98 (33.1%)
Poor              3.37 (21.5%)  1.49 (25.6%)  0.94 (31.6%)
----------------------------------------------------------

IMPACT OF HEALTH BENEFITS ON EARLY
RETIREMENT
========================================================== Appendix IV

Analysts have attempted to show that access to health benefits is an
important factor influencing the retirement decision.\108 It is not
difficult to imagine an individual in poor health continuing to work
to maintain access to employer-based benefits that are not available
to retirees.  Similarly, it appears that the near elderly would be
averse to leaving the workforce without health benefits.  But does
the availability of coverage actually encourage retirement earlier
than it might otherwise occur?  Despite the limitations of most
studies, they all agree that there is a positive correlation between
access to health benefits and the retirement decision.  However, they
disagree, often substantially, on the extent of the impact,
suggesting a need for additional empirical research. 

First, a 1993 study by Hurd and McGarry found that the availability
of retiree health insurance at least partly funded by the employer
reduced the probability that an individual would be working full time
after age 62 by between 18 and 24 percent.\109 In addition, a 1994
study by Karoly and Rogowski found that the availability of
postretirement health benefits would increase the probability of men
retiring early by 50 percent.\110 However, their study may
overestimate the effect because the availability of retiree health
insurance was imputed, and the estimated retirement impact of health
benefits may be highly correlated with retirement decisions for
reasons other than health insurance, such as pension plan provisions. 
Third, using a life-cycle model of retirement that incorporates the
value of retiree health benefits and also includes information on
pension accruals, Gustman and Steinmeier found that employer-based
coverage lowers male retirement age by about 1.3 months.\111 The
authors acknowledged that their methodology may tend to underestimate
the effect of health benefits on retirement.  Furthermore, a 1994
study by Madrian reported that individuals with access to health
insurance retired between 5 and 16 months earlier than those lacking
coverage and that the probability of retiring before age 65 was
between 7 and 15 percentage points higher for individuals with
retiree health insurance.\112 Shortcomings of the study included (1)
an inconclusive attempt to control for participation in a pension
plan and (2) the fact that the results were based on the
recollections of individuals who had been retired as long as 15 years
and had to recall their pension and health insurance status at the
time of retirement. 

Finally, a 1993 study by Gruber and Madrian focused on the early
retirement impact of state and federal COBRA coverage.\113 They found
that continuation mandates have an effect on retirement among men
aged 55 to 64.  Specifically, 1 year of coverage raised the
probability of being retired by 1.1 percentage point.  However, they
also reported that this additional year of coverage raises the
probability of being insured by 6 percentage points, suggesting that
many of these individuals would have retired in the absence of such
coverage.  Finally, contrary to basic intuition, the effects are not
necessarily the strongest at older ages but decline with age. 

AFFORDABILITY OF HEALTH INSURANCE FOR THE NEAR ELDERLY

Using data from the March 1997 CPS and 1995 and 1996 information on
insurance premiums, we estimated the percentage of median income that
a 55- to 64-year-old would have to commit to health insurance under a
number of possible scenarios, including

  -- purchasing coverage through the individual market in a
     community-rated state (Vermont) as well as one that had no
     restrictions on the premiums that could be charged (Colorado)
     using 1996 rates for a commonly purchased health insurance
     product and

  -- cost sharing under employer-based coverage using 1995 Peat
     Marwick estimates of the lowest, highest, and average retiree
     contribution. 

While no official affordability standard exists, research suggests
that older Americans commit a much higher percentage of their income
to health insurance than do younger age groups.  Congressional Budget
Office calculations based on data from the BLS Consumer Expenditure
Survey indicate that between 1984 and 1994, spending by elderly
Americans aged 65 and older on health care ranged from 10.2 percent
to 12.9 percent of household income.  In 1994, elderly Americans
spent 11.2 percent of household income, about three times as much as
younger age groups.  These estimates include costs other than
premiums or employer-imposed cost sharing--for example, copayments,
deductibles, and expenditures for medical services not covered by
insurance. 

Table V.1 compares the cost of health insurance purchased in the
individual market and employer-imposed cost sharing for early
retirees with the median income of the near elderly in 1996. 



          Table V.1 Individual Market Premium and
           Early Retiree Share of Employer-Based
          Premium Compared With 1996 Median Income
                    of the Near Elderly

                                 Annual cost
                                 of coverage    Percentage
                                    for near     of median
Source and type of coverage          elderly      income\a
------------------------------  ------------  ------------
Individual market--Colorado
----------------------------------------------------------
Single person aged 55-64            $2,484 -    11.7 -11.8
                                      $2,520
Married couple aged 55-64           $4,968 -    10.0 -10.1
                                      $5,040

Individual market--Vermont\b
----------------------------------------------------------
Single person                         $2,100           9.9
Married couple                        $4,200           8.4

Employer-imposed premium sharing
----------------------------------------------------------
Family--lowest cost                     $972           2.0
Family--average cost                  $2,340           4.7
Family--highest cost                  $3,012           6.1
----------------------------------------------------------
\a In 1996, the median income for a near-elderly single person was
$21,314.  For married individuals, it was $49,774. 

\b One carrier's community-rated premium.  With limited exceptions,
all those who purchase individual insurance pay the same rate. 

As demonstrated by table V.1, the near elderly's share of
employer-subsidized coverage is generally lower than for coverage
purchased through the individual market.  For example, on average,
employer-based family coverage for retirees at $2,340 annually
represents 4.7 percent of median family income.  In contrast, costs
in the individual market can be significantly higher--in part,
because they lack an employer subsidy.  In Colorado, the annual
premium for a commonly purchased individual insurance product in 1996
was about $2,500 for single coverage and $5,000 for a
couple--representing about 12 percent and 10 percent, respectively,
of median income for 55- to 64-year-olds.\114 While less expensive
than the Colorado example, premiums for health insurance through the
individual market in Vermont--a community-rated state--would
represent 9.9 percent of median income for single coverage and 8.4
percent of median income for a couple.\115 For more than one-half of
the near elderly, these individual market costs typically exceed
average health care spending for Americans under age 65--in some
cases significantly.  In April 1998, the Center for Studying Health
System Change reported that older adults who purchased individual
coverage typically

spent a considerably higher proportion of their income on premiums
than other adult age groups--about 9 percent for the 60- to
64-year-old group.\116

EXPANSIONS OF COBRA COVERAGE

Since 1986, COBRA eligibility has been expanded on a number of
occasions: 

  -- COBRA was made available to retirees whose former employer had
     declared bankruptcy (P.L.  99-509). 

  -- Coverage was extended from 18 to 29 months for certain disabled
     COBRA enrollees (P.L.  101-239).  A 1996 change clarified that
     the dependents of a disabled qualified beneficiary are also
     eligible for the additional 11 months of COBRA coverage and
     provided that the qualifying event of disability applies in the
     case of a qualified beneficiary whose disability is determined
     under the Social Security Act to exist during the first 60 days
     of COBRA coverage (P.L.  104-191). 

  -- A 1990 change permitted states to use Medicaid funds to pay for
     COBRA premiums of certain low-wage beneficiaries (who had worked
     for an employer with 75 or more employees) whose income does not
     exceed 100 percent of the federal poverty level and whose
     resources are at or below the Supplemental Security Income
     level.  The state must determine that the anticipated Medicaid
     savings from COBRA would exceed the COBRA premium costs (P.L. 
     101-508). 

  -- COBRA continuation requirements were extended to the Federal
     Deposit Insurance Corporation (P.L.  102-242). 

  -- Reservists and their dependents who would otherwise lose
     employer-based health benefits as a result of taking a leave of
     absence to serve in the armed forces were made eligible for 18
     months of COBRA coverage (P.L.  103-353). 

  -- The Health Insurance Portability and Accountability Act of 1997
     (HIPAA) (P.L.  104-191) requires that any individual who
     exhausts COBRA continuation coverage is guaranteed the right to
     purchase insurance in the individual market without any
     preexisting exclusions or waiting periods. 

STATE INITIATIVES TO INCREASE ACCESS TO THE INDIVIDUAL INSURANCE
MARKET AS OF YEAR-END 1997

                                "Blues
                                 plan"
                               acts as             Premium
                       High-   insurer                rate
                        risk   of last  Guarante  restrict
State                 pool\a    resort  ed issue      ions
------------------  --------  --------  --------  --------
Alabama                  X\b
Alaska                     X
Arizona
Arkansas                   X
California                 X         X
Colorado                   X
Connecticut                X
Delaware
District of                          X
 Columbia
Florida                    X
Georgia
Hawaii
Idaho                                          X         X
Illinois                   X
Indiana                    X
Iowa                       X                   X         X
Kansas                     X
Kentucky                                       X         X
Louisiana                  X                             X
Maine                                          X         X
Maryland                             X
Massachusetts                        X         X         X
Michigan                             X
Minnesota                  X                             X
Mississippi                X
Missouri                   X
Montana                    X
Nebraska                   X
Nevada
New Hampshire                                  X         X
New Jersey                                     X         X
New Mexico                 X                             X
New York                                       X         X
North Carolina                       X
North Dakota               X                             X
Ohio                                           X         X
Oklahoma                   X
Oregon                     X                             X
Pennsylvania                         X
Rhode Island                         X
South Carolina             X                             X
South Dakota                                 X\c         X
Tennessee\d
Texas                      X
Utah                       X                   X         X
Vermont                                        X         X
Virginia                             X
Washington                 X                   X         X
West Virginia                                            X
Wisconsin                  X
Wyoming                    X
----------------------------------------------------------
\a Communicating for Agriculture, Inc., Comprehensive Health
Insurance for High-Risk Individuals:  A State-by-State Analysis,
eleventh edition, 1997. 

\b Alabama's high-risk pool is available to HIPAA-eligible
individuals only. 

\c People who had creditable coverage within the previous 63 days,
including coverage through an employer-sponsored plan or Medicare,
are guaranteed access to two health plans from each carrier operating
in the individual market.  Although broader in scope than HIPAA, this
provision does not guarantee access to coverage to those who are not
now insured or who have not had continuous coverage. 

\d Tennessee merged the participants of its high-risk pool into the
TennCare Medicaid program as of June 30, 1995.  Coverage for the
"medically uninsurable" is available through this state program, as
is coverage for the Medicaid population and the uninsured population
(primarily lower-income workers where insurance is not provided). 


--------------------
\108 See Paul Fronstin, "Health Insurance Portability:  COBRA
Expansions and Job Mobility," Issue Brief (Washington, D.C.: 
Employee Benefit Research Institute, Feb.  1998), p.  15. 

\109 Michael Hurd and Kathleen McGarry, "The Relationship Between Job
Characteristics and Retirement," Working Paper No.  4558 (Cambridge,
Mass.:  National Bureau of Economic Research, 1993). 

\110 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). 

\111 Alan L.  Gustman and Thomas L.  Steinmeier, "Employer-Provided
Health Insurance and Retirement Behavior," Industrial and Labor
Relations Review, 48(1) (Oct.  1994). 

\112 Brigitte C.  Madrian, "Employment-Based Health Insurance and Job
Mobility:  Is There Evidence of Job Lock?" Quarterly Journal of
Economics, Feb.  1994. 

\113 Jonathan Gruber and Brigitte C.  Madrian, "Health Insurance and
Early Retirement:  Evidence From the Availability of Continuation
Coverage," Working Paper No.  4594 (Cambridge, Mass.:  National
Bureau of Economic Research, 1993). 

\114 The Colorado carrier significantly increased rates between 1996
and 1998.  The single and family premiums for 55- to 64-year-olds in
1998 were $3,024 to $3,624 and $6,048 to $7,248, respectively. 

\115 Between 1996 and 1998, this carrier's premium only increased by
$204 a year. 

\116 Peter J.  Cunningham, "Next Steps in Incremental Health
Insurance Expansions:  Who Is Most Deserving?" Issue Brief, No.  12
(Washington, D.C.:  Center for Studying Health System Change, Apr. 
1998), pp.  3-4. 


STATE RESTRICTIONS RELATED TO
INDIVIDUAL MARKET PREMIUMS
======================================================== Appendix VIII

Idaho:  Premium rates may not vary by more than 25 percent of the
applicable index rate for age and gender only.  The Director of
Insurance may approve additional case characteristics. 

Iowa:  Premium rates may not vary by more than 100 percent from the
applicable index rate for demographic characteristics approved by the
Commissioner of Insurance.  The legislation does not specify these
characteristics, but an insurance department official said they may
include age, gender, and geographic location. 

Kentucky:  Premium rates may not vary by more than a 5 to 1 ratio for
all case characteristics.  Allowable case characteristics (and
maximum allowable variation, if specified) are age (300 percent),
gender (50 percent), occupation or industry (15 percent), geography,
family composition, benefit plan design, cost-containment provisions,
whether or not the product is offered through an alliance, and
discounts (up to 10 percent) for healthy lifestyles. 

Louisiana:  Adjusted community rating is required, with variation of
+/-10 percent currently allowed for health status and unlimited
variation allowed for specified demographic characteristics and other
factors approved by the Department of Insurance. 

Maine:  Adjusted community rating is required, with variation allowed
of no more than +/-20 percent of the community rate for age, tobacco
use, occupation, industry, or geographic area. 

Massachusetts:  Adjusted community rating is required for carriers'
guaranteed-issue health plans with maximum allowable variation ratio
of 1.5 to 1 for geographic area and 2 to 1 for age.  Effective
December 1, 1999, the maximum allowable variation ratio for age will
be 1.5 to 1. 

Minnesota:  Premium rates may vary from the index rate +/-25 percent
for health status, claims experience, and occupation, and +/-50
percent for age.  Premium rates may also vary by up to 20 percent for
three geographic areas. 

New Hampshire:  Adjusted community rating is required with a maximum
variation ratio of 3 to 1 allowed for age only. 

New Jersey:  Community rating is required. 

New Mexico:  Until July 1, 1998, premium rates may vary for age,
gender (no more than 20 percent), geographic area of the place of
employment, tobacco use, and family composition (by no more than 250
percent).  Thereafter, every carrier must charge the same premium for
the same coverage to each New Mexico resident, regardless of
demographic characteristics or health status.  The only allowable
rating factor will be age--whether the person is over or under the
age of 19. 

New York:  Pure community rating within specified geographic regions. 

North Dakota:  Premium rates charged to individuals within a class
for the same or similar coverage may not vary by a ratio of more than
5 to 1 for differences in age, industry, geography, family
composition, healthy lifestyles, and benefit variations. 

Ohio:  Premiums charged to individuals may not exceed 2.5 times the
highest rate charged to any other individuals with similar case
characteristics. 

Oregon:  Each carrier must file a geographic average rate for its
individual health benefit plans.  Premium rates may not vary from the
individual geographic average rate, except for benefit design, family
composition, and age.  Legislation does not limit this variation, but
indicates that age adjustments must be applied uniformly. 

South Carolina:  Premium rates charged to individuals with similar
demographic characteristics may not vary by more than 30 percent. 
The legislation specifically states that age, gender, area, industry,
tobacco use, and occupational or avocational factors may be used to
set premium rates, but does not prohibit the use of additional
characteristics.  The only exception is durational rating, which is
explicitly prohibited. 

South Dakota:  Carriers may establish up to three classes of
individual business.  Within a given rating period, the index rate
for any class of business may not exceed the index rate for any other
class of individual business by more than 20 percent.  Within a class
of business, the premium rates charged to individuals with similar
case characteristics for the same or similar coverage may not vary
from the index rate by more than 30 percent.  A carrier may not use
characteristics other than age, gender, lifestyle, family
composition, geographic area, health status, height, and weight
without the prior approval of the Director of Insurance.  The maximum
rating differential based solely on age may not exceed a ratio of 5
to 1.  Adjustments based on these characteristics may result in
premium rates that vary more than the set parameters noted. 

Utah:  A variation of +/-25 percent is allowed for health status or
duration of coverage.  Carriers may also vary premiums because of
differences in age, gender, family composition, and geographic area
by actuarially reasonable rates, as defined in National Association
of Insurance Carriers guidelines.  Premiums may also be rated-up 15
percent for industry.  The index rates carriers use for their
individual business may be lower than or equal to, but not any higher
than, the index rates they use for their small-employer business. 

Vermont:  Adjusted community rating of indemnity plans is required,
with maximum allowable variation of +/-20 percent for limited
demographic characteristics.  HMOs operating in the state must use
pure community rating and thus are not allowed to vary rates. 

Washington:  Adjusted community rating is required, with variation
allowed for geographic area, family size, age, and wellness
activities.  Permitted rates for any age group cannot exceed 400
percent of the lowest rate for all age groups on January 1, 1997, and
375 percent on January 1, 2000, and thereafter.  The discount for
wellness activities cannot exceed 20 percent. 

West Virginia:  Premium rates charged to individuals with similar
demographic characteristics may not vary by more than 30 percent. 
The legislation specifically states that age, gender, geographic
area, industry, tobacco use, and occupational or avocational factors
may be used to set premium rates,but does not prohibit the use of
additional characteristics.  The only exception is durational rating,
which is explicitly prohibited. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX

Jonathan Ratner, Project Director, (202) 512-7107
Walter Ochinko, Senior Health Policy Analyst, (202) 512-7157
Susan T.  Anthony, Senior Evaluator
Mark Vinkenes, Senior Social Science Analyst
Paula Bonin, Senior Evaluator (Computer Specialist)


*** End of document. ***