Retiree Health Insurance: Erosion in Retiree Health Benefits Offered by
Large Employers (Testimony, 03/10/98, GAO/T-HEHS-98-110).

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

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

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

 REPORTNUM:  T-HEHS-98-110
     TITLE:  Retiree Health Insurance: Erosion in Retiree Health 
             Benefits Offered by Large Employers
      DATE:  03/10/98
   SUBJECT:  Health insurance
             Retirement benefits
             Elderly persons
             Employee retirement plans
             Accounting procedures
             Insurance premiums
             Health insurance cost control
             Insurance companies
IDENTIFIER:  Medicare Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives

For Release on Delivery
Expected at 2:00 p.m.
Tuesday, March 10, 1998

RETIREE HEALTH INSURANCE - EROSION
IN RETIREE HEALTH BENEFITS OFFERED
BY LARGE EMPLOYERS

Statement of William J.  Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-110

GAO/HEHS-98-110T


(101728)


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

  COBRA - Consolidated Omnibus Budget Reconciliation Act
  ERISA - Employee Retirement and Income Security Act
  HIPAA - Health Insurance Portability and Accountability Act
  SPD - summary plan description

RETIREE HEALTH INSURANCE:  EROSION
IN RETIREE HEALTH BENEFITS OFFERED
BY LARGE EMPLOYERS
============================================================ Chapter 0

Madam Chairman and Members of the Subcommittee: 

We are pleased to be here today as you discuss issues related to
pension benefits and retirement.  As you know, forces in the U.S. 
labor market have been transforming the cash portion of retirement
benefits, and these forces are impinging on retiree health benefits
as well.  Several factors suggest that retiree access to affordable
health benefits is becoming an important national issue.  These
factors include the downward drift in employers' commitment to
retiree coverage, the consideration of proposals to raise the
Medicare eligibility age to 67, and the dramatic near-term increase
in the number of retirees as millions of baby boomers approach
retirement age. 

You asked us to comment on the erosion in employer-based health
benefits for retirees, especially early retirees who leave the
workforce before age 65, when Americans typically become eligible for
Medicare.  My comments are based on a recent report we prepared at
the request of Representative Jerry Kleczka.\1 His request was
sparked by the Pabst Brewing Company's abrupt cancellation of health
benefits for about 750 retirees of its Milwaukee plant in late 1996. 
My statement today will focus on three issues:  (1) trends in access
to employer-sponsored retiree health benefits, (2) the impact on
retirees of an employer's decision to terminate health benefits, and
(3) federal safeguards that protect the rights of retirees who have
health benefits. 

To address these questions, we reviewed surveys that track the
availability of employer-based health coverage, data from health
insurance carriers on the cost of alternative sources of coverage for
individuals whose employers unexpectedly terminate retiree health
benefits, applicable federal and state laws and legal precedents, and
our earlier work.  (See the list of related GAO products at the end
of this statement.)

In summary, retiree access to and participation in private insurance
through an employer has undergone a slow but persistent decline since
the early 1990s.  There are several explanations for this erosion in
coverage.  First, high and rising health care costs have spurred
employers to look for ways to control their benefit expenditures,
including eliminating retiree coverage and increasing cost-sharing. 
According to the Labor Department, increased cost-sharing by retirees
has contributed to fewer electing coverage when it is offered. 
Second, a new financial accounting standard developed in the late
1980s has changed employers' perceptions of retiree health benefits
and may have acted as a catalyst for reductions in retiree coverage. 
The new rule makes employers much more aware of the future liability
inherent in retiree health benefits by requiring them to account for
its estimated value.  By dropping retiree coverage, a company can
immediately improve its balance sheet, making its stock more
attractive to investors. 

Losing access to employer-based coverage poses major challenges for
retirees.  The 1997 implementation of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) has eliminated one
potential obstacle for retirees who lose group coverage through their
former employer--the possibility that coverage in the individual
market will be denied or restricted by a preexisting medical
condition.  HIPAA provides federal standards to ensure that eligible
individuals leaving employer-based group plans can purchase insurance
on their own if they can afford to do so.  Because state laws
governing the operation of the individual market differ, however, the
premiums faced by early retirees vary substantially.  Moreover,
considering that large companies typically pay 70 to 80 percent of
the premium, costs in the individual market may come as a rude
awakening for early retirees.  For example, had HIPAA been in effect
in 1996, retirees trying to replace the benefits terminated by Pabst
with comprehensive family coverage from a Wisconsin carrier would
have faced an annual premium of almost $8,200--a cost that they would
have had to absorb on their own.  And, using 1996 rates again, family
coverage for a HIPAA-eligible early retiree would have been $6,246 in
Arizona but $11,825 in New Jersey.  While New Jersey restricts
carriers' premium-rating practices and generally requires all
carriers to set the same rate for all plan participants in a
community, eligible retirees in Arizona and Wisconsin can be charged
much more than the standard premium if they have a preexisting health
condition.  Early evidence from the implementation of HIPAA suggests
that rates developed by insurance carriers for HIPAA guaranteed
access products are substantially higher than the prices of standard
products available in the individual market to those who are healthy. 
As a result, these 1996 rates may understate the cost of a HIPAA
product purchased in 1998. 

A key characteristic of America's voluntary, employer-based system of
health insurance is an employer's freedom to modify the conditions of
coverage or to terminate benefits.  When an employer has terminated
retiree health benefits, federal courts have turned to the nature of
the written agreements and other pertinent evidence covering the
provision of retiree benefits to determine the legitimacy of the
action.  In essence, the issues before the court are often a matter
of contract interpretation.  If the employer explicitly reserved the
right in plan documents to modify health benefits, the courts have
generally upheld the termination of coverage.  Individuals who are
already retired when an employer terminates coverage are not eligible
to temporarily continue that firm's health plan at their own
expense.\2 COBRA coverage is only available to active employees who
quit or retire or are fired or laid off.  To address the potential
gap in coverage when a former employer unexpectedly terminates health
insurance, Members of the Congress as well as the President have
proposed allowing affected retirees to purchase continuation coverage
at a cost that reflects their higher utilization of services until
they become eligible for Medicare. 


--------------------
\1 Retiree Health Insurance:  Erosion in Employer-Based Health
Benefits for Early Retirees (GAO/HEHS-97-150, July 11, 1997). 

\2 Continuation coverage was mandated by the Consolidated Omnibus
Budget Reconciliation Act of 1986 (COBRA), 29 U.S.C.  1161 et seq. 
For this reason, continuation coverage is known by the acronym COBRA. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Because of the cost, retiree health benefits are a concern to both
employers and older Americans.  Employers recognize that these
benefits help to retain an experienced workforce but must also
consider the cost of providing coverage.  Older Americans approaching
or at retirement age consume a higher level of medical services, and
as a result, their health care is commensurately more expensive.  For
workers under age 65 and not yet eligible for Medicare, the decision
to retire may turn on the continuation of health benefits by an
employer.  For those 65 or older living on a fixed income,
employer-based benefits may help fill coverage gaps in Medicare, such
as deductibles and copayments or the lack of a prescription drug
benefit. 

Overall, about one-third of retirees 55 and older received health
benefits from a former employer in 1994.  About 75 percent were over
age 65, and any employer-based coverage available to them
supplemented their Medicare benefits; the remaining 25 percent of
retirees were generally ineligible for Medicare because they were
between ages 55 and 65.  For the latter group, employer-based
benefits were the primary source of coverage. 

Bureau of the Census data show that the number of retirees increased
from 18.5 million to 23.4 million between 1988 and 1994.  However,
the first members of the baby boom generation are now aged 52 and
poised to enter retirement, an event that will begin to dramatically
increase the number of retirees. 


   DECLINE IN ACCESS TO AND
   PARTICIPATION IN EMPLOYER-
   BASED RETIREE COVERAGE
---------------------------------------------------------- Chapter 0:2

Data from an annual survey conducted by Foster Higgins, a benefit
consulting firm, suggest a significant decline between 1988 and 1996
in the availability of retiree coverage from large employers with
over 500 workers.  Because of a change in the survey methodology, the
pre-1993 data should not be viewed as authoritative.\3 However, the
data from these two periods appear to be consistent.  The data
distinguish between early retirees and those who are
Medicare-eligible.  Since 1993, coverage for both groups has declined
by 8 to 9 percentage points, a continuation of a trend evident since
1988.  As shown by figure 1, early retirees are more likely than
those who are Medicare-eligible to be offered health benefits by a
former employer.  In 1997, for example, only 31 percent of
Medicare-eligible retirees were offered health benefits compared with
38 percent of early retirees. 

   Figure 1:  Percentage of Large
   Employers Offering Retiree
   Medical Coverage, 1988 and
   1992-97

   (See figure in printed
   edition.)

Note:  1988 and 1992 data are not strictly comparable with data
collected in 1993 and later.  Large firms are those that employ more
than 500 workers. 

The two primary reasons cited for the decline in employer-based
retiree health coverage are (1) new accounting standards, which
highlight the magnitude of this liability over time, and (2) rapidly
rising benefit costs.  Since employers typically cover retiree health
costs as they are incurred, the liability represented by a commitment
to provide benefits to current and future retirees is largely
unfunded.  In 1990, the Financial Accounting Standards Board
announced the introduction of a new rule, referred to as FAS 106,
regarding these unfunded obligations.  Beginning in 1993, employers
were required to include the present value of future costs for
retiree health benefits as a liability on their balance sheets.  Many
financial experts are concerned because these long-term liabilities
erode equity positions and will become current obligations in future
years.\4 The new standard does not require that employers set aside
funds to pay for these future costs, and thus it does not affect
their cash flow.  However, by dropping retiree coverage, a company
can immediately improve its balance sheet, making its stock more
attractive to potential investors.  In responding to benefit
consultant surveys, many companies cited FAS 106 as a reason for
modifying retiree health benefits, including the phasing out of such
coverage. 

The late 1980s was a period of double-digit health care inflation. 
Although the growth in premiums has slowed dramatically in the past
few years, the percentage of large firms offering retiree health
benefits has continued to drop.  Among the reasons cited by Foster
Higgins for the slowdown in the growth of employers' health care
costs are that more workers moved into managed care plans--including
retirees--and the fact that some employers dropped retiree coverage. 

As shown in figure 1, employers are less likely to offer coverage to
Medicare-eligible retirees than to early retirees.  There are several
potential explanations for this disparity.  First, individuals are
not as likely to seek early retirement if they cannot continue
employer-based health benefits.  A RAND study on the effect of access
to postretirement health insurance found that the offer of continued
coverage made it more likely that men aged 55 to 62 would retire.\5
Second, those who retired early through buyouts may have been
guaranteed health benefits as an enticement to do so.  Third,
federally mandated COBRA coverage allows some individuals to retire
at age 63-1/2 and continue with employer-based group coverage until
they become Medicare-eligible at age 65.  Finally, employers know
that coverage is available to retirees aged 65 and older through
Medicare, an option not open to younger retirees. 


--------------------
\3 National Survey of Employer Sponsored Health Plans 1996 (New York: 
Foster Higgins, 1997).  Although the Foster Higgins survey dates from
1986, the survey methodology was changed in 1993 so that the results
could be representative of all U.S.  employers rather than just those
who responded. 

\4 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). 

\5 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.:  RAND, 1995). 


      COVERAGE INFLUENCED BY
      FACTORS OTHER THAN
      AVAILABILITY
-------------------------------------------------------- Chapter 0:2.1

The decline in the number of large employers that offer retiree
coverage is corroborated by an analysis conducted by the Labor
Department's Pension and Welfare Benefits Administration.  The study,
which examined Current Population Survey (CPS) data, revealed a
significant erosion between 1988 and 1994 in the number of
individuals who retained employer-based health coverage upon
retirement.\6 Only 42 percent of retirees aged 55 and older continued
employer-based coverage into retirement in 1994, a decline of 8
percentage points since 1988.  Moreover, the percentage of
individuals with employer-based coverage continued to decrease
throughout retirement.  Thus, only 34 percent still retained coverage
several years after retirement. 

In addition to the availability of coverage, the Labor Department
study suggests that cost is another factor contributing to the
decline in retirees with employer-based insurance.  Thus, the
propensity for retirees to enroll in employer-based plans when they
are offered has also 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 the reasons for their decisions.  Of the
approximately 5.3 million retirees who discontinued employer-based
benefits in 1994, an estimated 27 percent cited the expense as a
factor--an increase from 21 percent in the earlier survey.  Moreover,
there was a 6-percentage-point increase over the same time period in
the number of such retirees who indicated that they still had health
insurance through a plan other than that of their former employer. 
Thus, some retirees who find coverage from their own employer too
expensive may have switched to plans with lower cost-sharing
available through a working or retired spouse. 

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

CPS data also contain insights on the characteristics of retirees
more likely or less likely to have employer-based coverage.  The
characteristics for these two groups of retirees are summarized in
table 1. 



                          Table 1
          
            Characteristics of Retirees More and
             Less Likely to Have Employer-Based
                      Health Benefits

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

Have higher preretirement         Have lower preretirement
earnings                          earnings

Belong to union                   Are nonunion

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

Work for public sector            Work for private sector

Are men                           Are women

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


--------------------
\6 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. 

\7 Our estimate is based on CPS data from the Bureau of the Census. 
See Private Health Insurance:  Continued Erosion of Coverage Linked
to Cost Pressures (GAO/HEHS-97-122, July 24, 1997). 


   EMPLOYERS' DECISIONS TO
   TERMINATE COVERAGE EXPOSE
   RETIREES TO NEW COSTS AND RISKS
---------------------------------------------------------- Chapter 0:3

If available, employer-based group health insurance provides two
important advantages to retirees:  (1) more affordable health
benefits and (2) access to benefits for those retirees whose health
status might otherwise impinge on their ability to obtain coverage in
the individual insurance market.  Such insurance is affordable
because many employers continue to finance all or a significant
amount of their retirees' health insurance premiums, even though over
the last decade retirees have been required to pay an increasing
share of these costs.  In addition, the overall premiums for
employer-based health plans are generally lower than those in the
individual insurance market because the premiums that insurers charge
employers are based on risks spread over an entire group of workers. 
In contrast, premiums in the individual insurance market reflect the
risk characteristics of each applicant.  These characteristics
include not only age but also gender, health status, geographic
differences in health care costs, and family size.\8 Unless there is
a state law prohibiting price differences by age, most carriers
charge higher premiums to older applicants. 

Before the July 1, 1997, implementation of HIPAA, consumers,
including retirees entering the individual insurance market, often
discovered that they were not eligible for insurance or that their
coverage was conditioned upon the permanent exclusion from the policy
of an existing health problem.  Many with specific health problems
found coverage only at prohibitive prices.  For example, health
insurance carriers often declined coverage for acquired
immunodeficiency syndrome (AIDS) and diabetes; offered coverage but
excluded conditions such as asthma, ulcers, and glaucoma; and charged
higher premiums for plans that covered conditions like anemia and
arteriosclerosis.\9 HIPAA guarantees access to the individual market
by eligible individuals with qualifying coverage from a former
employer--regardless of their health status--and also provides for
the renewability of individual coverage.\10 This guaranteed access is
often referred to as "portability." However, HIPAA offers no
protection to Pabst retirees whose health benefits were terminated in
1996 or to any retiree who lost employer-based health benefits before
its July 1, 1997, implementation date.\11

Although HIPAA guarantees access to the individual market, it does
not address the cost of coverage.  Retirees no longer covered by
their former employer's group health plan are likely to pay higher
premiums for similar coverage in the individual insurance market. 
And with the loss of employer-based coverage, affected retirees who
want to purchase health insurance must now absorb its full cost,
which can be significant.  Thus, had HIPAA been in effect in 1996, a
Milwaukee retiree who wanted to replace the benefits terminated by
Pabst would have paid $8,187 for a standard family plan with a $250
deductible.\12 Since Wisconsin does not restrict the underwriting
practices of carriers, a carrier may choose to charge an unhealthy
individual more.  Before its decision to terminate health benefits to
retired employees at its Milwaukee plant, Pabst financed the total
cost of practically all of the health plans it offered to retired
workers.  Given the substantial geographic variability of health
insurance rates in the individual market, HIPAA-eligible retirees
will be affected differently.  For example, in 1996, a major carrier
in New Jersey offered family coverage with a $250 deductible at an
annual price of $11,825.\13 The price of similar family coverage in
Maricopa County, Arizona, was only $6,264 in 1996.  However, as in
Wisconsin, HIPAA-eligible retirees in Arizona with preexisting
conditions can be charged a premium much higher than the standard. 

These 1996 rates may understate the actual cost of a HIPAA guaranteed
access product purchased today.  Thus, in September 1997
correspondence to the Chairman of the Senate Labor and Human
Resources Committee on early HIPAA implementation concerns, we
reported that (1) premiums for some HIPAA products may be
substantially higher than for standard products available to healthy
individuals and (2) the way many carriers will determine future
premium rates for portability products may lead to even higher rates. 
Some carriers permit HIPAA eligibles to apply for both a HIPAA
product and a lower-cost standard product.  Since healthy individuals
are likely to enroll in the less expensive option, only unhealthy
individuals would be enrolled in the HIPAA product--a practice that
could result in an increasing spiral of poorer risks and higher
premiums. 

States were allowed to choose a number of approaches to meet HIPAA's
portability requirements.  Thus, 22 states elected to use their
high-risk pools to provide guaranteed access to the individual market
for qualified individuals leaving group coverage.  Prior to the
enactment of HIPAA, many states had high-risk pools for those who had
been denied coverage or had one of a number of specified health
conditions.  However, this safety net option often has very limited
coverage and lower lifetime limits.  The cost of a high-risk pool can
be 50 percent more than the average or standard rate charged in the
individual insurance market for a comparable plan.  For example, the
annual premium for a single male aged 50 to 55 in Wisconsin's
high-risk pool averaged $5,122 in 1996--over $500 more than the cost
in the individual insurance market.  Wisconsin offers subsidies to
families with incomes of less than $20,000. 


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

\9 See GAO/HEHS-97-8, Nov.  25, 1996, for a discussion of the
evaluation process that health insurance companies have used in
providing access to the individual insurance market. 

\10 HIPAA only guarantees access to the individual market to eligible
individuals leaving group coverage.  Thus, someone living in Arizona
who wanted to purchase individual coverage but did not qualify under
HIPAA could still be denied an individual policy because of a
preexisting health condition. 

\11 Wisconsin law requires insurers to accept individual applicants
who previously had employer-based insurance if such insurance is not
self-funded, but it does not apply to Pabst retirees because the firm
self-funded its health benefits.  Self-funded plans are those in
which employers bear much of the financial risk for health claims. 
Employers that self-fund are not subject to state insurance
regulation. 

\12 Family coverage is for a retiree and spouse.  The rate is for an
individual who does not smoke.  A retiree who smokes would pay about
$11,000 for family coverage. 

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


   LIMITED FEDERAL PROTECTION OF
   EMPLOYER-BASED RETIREE HEALTH
   BENEFITS
---------------------------------------------------------- Chapter 0:4

The Employee Retirement and Income Security Act (ERISA) protects both
the pension and health benefits of workers.  It does not, however,
mandate that employers offer such benefits.  ERISA requires employers
to fund their pension plans and gives employees vested rights upon
meeting certain service requirements; health benefits, on the other
hand, were excluded from such funding and vesting requirements.  In
fact, employer-based health benefits for both active and retired
workers are commonly funded on a pay-as-you-go basis. 

Nothing in federal law prevents an employer from cutting or
eliminating health benefits.  In fact, an employer's freedom to
modify the conditions of coverage or to terminate health coverage is
a defining characteristic of America's voluntary, employer-based
system of health insurance.\14 While ERISA protects the pension
benefits of retired workers, 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 is in effect at the time of retirement is
the controlling document.  The SPD must clearly set out employee
rights, including "information concerning the provisions of the plan
which govern the circumstances under which the plan may be
terminated." Employers must file these documents with the Department
of Labor, the agency responsible for enforcing ERISA.  According to
Labor, unless employers have made a clear promise of specific health
benefits for a definite period of time or for life and have not
reserved the right to change those benefits, they are free to cut or
terminate health care coverage. 

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

One ERISA protection--the right to elect COBRA coverage from a former
employer if a worker is fired, laid off, or leaves a job--is
available to some but not all retirees.  Thus, COBRA allows covered
individuals, upon retirement, to continue employer-based coverage for
18 months if their company does not offer health benefits to
retirees.\15

Those eligible for COBRA coverage may have to pay the entire premium
plus an additional 2 percent.  For many individuals, the high cost of
COBRA coverage is a shock because under employer-based coverage,
large companies typically pay 70 to 80 percent of the premium.  COBRA
is not available, however, to retirees whose employer unexpectedly
terminates their health care coverage at some point after retirement. 
To address the coverage gap for such retirees, Members of the
Congress as well as the President have proposed allowing affected
retirees to purchase continuation coverage at a cost that reflects
their higher utilization of services until they become eligible for
Medicare. 


--------------------
\14 The decline 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. 

\15 COBRA only covers firms with 20 or more employees who offer
health benefits to active workers. 


-------------------------------------------------------- Chapter 0:4.1

Madam Chairman, this concludes my statement.  I will be happy to
answer your questions. 

RELATED GAO PRODUCTS

Health Insurance Standards:  New Federal Law Creates Challenges for
Consumers, Insurers, Regulators (GAO/HEHS-98-67, Feb.  25, 1998). 

The Health Insurance Portability and Accountability Act of 1996: 
Early Implementation Concerns (GAO/HEHS-97-200R, Sept.  2, 1997). 

Private Health Insurance:  Continued Erosion in Coverage Linked to
Cost Pressures (GAO/HEHS-97-122, July 24, 1997). 

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

Health Insurance:  Management Strategies Used by Large Employers to
Control Costs (GAO/HEHS-97-71, May 6, 1997). 

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

Employer-Based Health Plans:  Issues, Trends, and Challenges Posed by
ERISA (GAO/HEHS-95-167, July 25, 1995). 

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


*** End of document. ***