Health Insurance Coverage for Retirees

Health Insurance Coverage for Retirees
Updated January 22, 2007
Hinda Chaikind
Specialist in Social Legislation
Domestic Social Policy Division

Health Insurance Coverage for Retirees
Many retirees depend on their former employer for retirement health insurance,
either as their sole source of coverage for those under age 65 or as a supplement to
their Medicare coverage once they reach 65. However, the future of these benefits
is uncertain. With the retirement of the baby boom generation looming ahead,
employers offering coverage to their retired workers will face a huge future financial
commitment. For this reason, many employers are re-examining their commitment
to providing retiree health benefits. Some employers have already reduced or
eliminated health insurance coverage for their retirees. Further, among employers
who provide health insurance for current retirees, their current workers are less likely
to be guaranteed these benefits upon retirement.
An important feature of employer-sponsored health insurance, for retirees and
current employees, is that it is voluntary — employers are not required to offer health
insurance. Additionally, there are few protections to prevent employers from cutting
or eliminating benefits, unless the employer has made a specific promise to maintain
the benefits or has a contractual agreement with either the employee or a labor group.
As a result, even among retirees who currently have employer-sponsored retiree
health insurance, benefits are eroding as employers shift costs to retirees by
increasing premiums, copayments or deductibles. For companies in bankruptcy,
retiree health benefits are particularly vulnerable. Unlike defined benefit pensions
that offer some protections for employees of companies in bankruptcy through the
Pension Benefits Guaranty Corporation, there are no similar protections for retiree
health benefits.
There are a wide variety of policy options currently being discussed that
endeavor to make retiree coverage more available or affordable, or even to require
that employers maintain coverage. However, when considering any option, it is also
essential to consider the relationship between retirees’ health insurance and insurance
for current workers. The concept of special treatment aimed solely at protecting the
retiree population, without an equivalent treatment for current workers, could lead
to inequitable outcomes. Thus, any statutory requirement providing retirees with
health insurance coverage should be examined in the broader context of all employer-
sponsored coverage.
This report will be updated to reflect legislative activity.

In troduction ......................................................1
Demographics of the Retiree Population................................2
Health Insurance Coverage..........................................4
Retirees with Employer-Sponsored Health Insurance..................4
Other Sources of Insurance for Retirees............................5
Erosion in Coverage over Time...................................7
Role of the Law and Courts......................................8
Reasons for Eroding Coverage and Issues..............................10
Costs of Health Insurance......................................10
Prescription Drug Coverage.....................................11
Financial Downturn...........................................12
Accounting Rules (FASB and GASB).............................13
Employer Caps on Retiree Health Insurance........................13
Policy Options...................................................14
Modify COBRA..............................................15
Tax Deductions or Credits......................................16
Tax-Advantaged Accounts for Health Care Expenditures..............17
Medicare Buy-In.............................................18
Federal Employees Health Benefits Program Buy-In.................19
Enhance Medicare............................................20
Employer Mandates...........................................20
Pre-funding Retiree Health Benefits..............................21
Legislative Proposals..............................................22
List of Figures
Figure 1. Supplemental Insurance Categories
for the Medicare Non-Institutionalized Population, 2002...............6
List of Tables
Table 1. Percentage of Large Firms Offering
Retiree Health Coverage, 1993-2004...............................5
Table 2. Employer Premiums Contributions
for Retiree Health Insurance.....................................8

Health Insurance Coverage for Retirees
Many retirees depend on their former employer for retirement health insurance,
either as their sole source of coverage for those under age 65 or as a supplement to
their Medicare coverage once they reach 65. However, given that employers are not
required to offer employer-sponsored health insurance, as well as limited federal
protections available for persons losing coverage, the future of these benefits is
uncertain. With the retirement of the baby boom generation looming ahead,
employers offering coverage to their retired workers will face a huge future financial
commitment. Some employers have already reduced or eliminated their commitment
to insure their retirees. Recent trends indicate that retiree health benefits are
increasingly subject to higher beneficiary cost-sharing. Further, among employers
who provide health insurance for current retirees, their current workers are less likely
to be guaranteed these benefits upon retirement.
Retiree health insurance became prevalent after the passage of Medicare in
1965, as a result of the relatively low cost. Because Medicare is the primary payer
for qualified retired beneficiaries aged 65 and older, it was fairly inexpensive for
employers to provide retiree health benefits that supplemented the Medicare benefit.
In the late 1980s, retiree health benefits became more expensive for employers due
to both the rising costs of benefits not covered by Medicare and the changing
demographics of the retiree population. For example, employer-sponsored plans
often include coverage for prescription drugs, and depending on the cost-sharing
arrangements and level of coverage, the cost of including prescription drug coverage
can be very expensive. With the implementation of Medicare prescription drug
coverage in January 2006, retiree coverage may see further changes as employers
gain experience with the interaction between Medicare’s and their plan’s prescription
drug coverage. However, Medicare coverage affects only those retirees who are over

65, disabled, have End Stage Renal Disease (ESRD) and also qualify for Medicare.

Many individuals retire before reaching 65, and their retiree health insurance would
most likely be their sole source of health insurance coverage, including prescription
drug coverage.
Employer-sponsored retiree health insurance benefits are eroding as employers
attempt to control their costs by tightening eligibility requirements and shifting costs
to retirees through increased premium contributions, deductibles, and co-payment1
amounts. In some cases when employers attempt to scale back or eliminate

1 As an example, General Motors (GM) and Ford have made the decision to scale back
retiree health benefits. The changes made by these firms, known for their generous
employee and retiree health benefits, are seen by some as an acceleration in employer-wide
erosion in retiree health benefits. GM estimated that its revised health-care benefit plan for

coverage, employees have turned to the courts to try to retain their coverage. The
courts have sided with retirees in only limited instances because minimal federal
protections exist for retirees when employers change their health insurance coverage.
Demographics of the Retiree Population
Understanding the demographics of the retiree population helps to explain their
high health insurance costs. This issue is of growing concern to employers offering
retiree health insurance, especially as they face the retirement of their current “baby
boom generation” workers. As this group begins to consider retirement, a
combination of factors — the size of the group, their increasing life expectancies and
their increasing health costs as they age — will make it financially difficult for
employers to offer them retiree health insurance. Furthermore, absent retiree health
insurance from a former employer, this group can also generally expect to pay higher
amounts for the same or less coverage in the individual market.
In 1965 when Medicare was created, costs were relatively low for employer-
based retiree health benefits and there were few retirees compared to the number of
active workers. The 18.5 million persons over age 65 comprised only 9.5% of the
total population.2 Most workers waited to retire until the age of 65 when they were
eligible for retirement benefits under Social Security and health insurance coverage
under Medicare. At retirement, they had an average life expectancy of 14 more years,3
living to age 79. Since that time, Americans are living longer. According to the
U.S. National Center for Health Statistics, 2002 data indicates that persons reaching
age 65 had an average life expectancy of an additional 18.2 years, living beyond age
83. According to the U.S. Census, the total number of persons over age 65 has
almost doubled since 1965, reaching 35.6 million, or 12.3% of the total population
by 2002. This trend is projected to continue and, according to U.S. Census Bureau4
estimates for 2030, when the baby boomers are all over age 65, the total number of
persons 65 and older will have more than doubled again, growing from 35.6 million
to 71.5 million, comprising 20% of the U.S. population.
As individuals reach their late 50s and 60s, they become increasingly likely to
have acute and chronic health conditions such as heart disease, arthritis, and diabetes.
According to the National Center for Chronic Disease Prevention and Health

1 (...continued)
salaried retirees in the U.S. would reduce the company’s liability by about $4.8 billion and
its annual health-care expense by almost $900 million.
2 U.S. Bureau of the Census, Historical Statistics of the United States Colonial Times to

1970 Bicentennial Edition, Part 1, Series A 29-42 (Washington, D.C., 1975).

3 William J. Wiatrowski, Retiree Health Benefits: Data Collection Issues, U.S. Department
of Labor, Bureau of Labor Statistics, Compensation and Working Conditions Online.

0riginally posted July 29, 2003, at [].

4 Members of the first wave of the baby boom generation (persons born between 1946 and
1964) reached age 55 in 2001, and are beginning to consider options for retirement. This
first wave will reach age 65 in 2011.

Promotion, approximately 80% of all persons over age 65 have at least one chronic
condition and 50% have at least two. Furthermore, after adjusting for socioeconomic
factors, a lack of health insurance has been linked to an increased risk of a decline in
overall health among adults in late middle age.5
Americans approaching or at retirement age can expect to consume more
medical services than younger persons. According to the Administration on Aging,
in 2003, the elderly averaged $3,741 in out-of-pocket health care expenditures,
compared to the average out-of-pocket costs of only $2,416 for the total population.6
Employment-based insurance spreads these costs over all its enrollees in the same
plan, but private non-group insurance premiums generally reflect the higher risk
attributable to the policyholder’s age and health status. Retirees who have a greater
prevalence of health problems are less able than workers to obtain affordable health
insurance should they lose their employer-sponsored insurance before they are
eligible for Medicare. A 2001 Commonwealth Fund study found that adults aged 50
to 64 who buy individual coverage are likely to pay much more out-of-pocket for a
limited package of benefits than their counterparts who are covered by their
employers. An analysis of premium costs for individual coverage in 15 cities showed
a median cost of nearly $6,000 for individual coverage for a 60-year-old. Group rates
would have been less than half this amount, with a median annual premium cost of
employer insurance of $2,520 for a preferred provider organization (PPO) plan, and
workers would have been required to pay only 14% of this amount for single
coverage. 7
Today’s workers face many choices regarding retirement age. Some workers
retire as early as age 55, the minimum retirement age allowed by most defined benefit
pension plans. Because availability of health insurance benefits is an important
consideration for older workers, still others wait until the Medicare eligibility age of
65 to retire. According to Mercer, in its 2004 survey on employer-sponsored health
insurance, the median retirement age was 60 in organizations offering retiree health
insurance, compared to 64 in those that do not.8 While the discussion of the
significance of this age difference only focuses on whether or not firms offer retiree
health insurance, there may be other factors, such as overall benefit package and
salary levels that contribute to an individual’s decision of when to retiree.

5 David W. Baker, Joseph J. Sudano, Jeffrey M. Albert, Elaine A. Borawski, and Avi Dor,
“Lack of Health Insurance and Decline in Overall Health in Late Middle Age,” New
England Journal of Medicine, Oct. 11, 2001.
6 U.S. Department of Health and Human Services, Administration on Aging, A Profile of
Older Americans: 2004.
7 Elisabeth Simantov, Cathy Schoen and Stephanie Bruegman, “Market Failure? Individual
Insurance Markets for Older Americans,” Health Affairs, July/Aug. 2001.
8 National Survey of Employer Sponsored Health Plans, 2004 Survey Report, Mercer.

Health Insurance Coverage
Retirees with Employer-Sponsored Health Insurance
The prevalence of retiree coverage increases with firm size, so that retirees from
large firms are more likely to be offered health insurance than workers retiring from
smaller firms. For example, employees under age 65 retiring from firms with 20,000
or more employees are almost twice as likely to be offered coverage as employees in
firms of 500-999 employees. Retirees over age 65 are almost two and one-half times
as likely to be offered retiree health benefits in the largest firms.9
However, regardless of firm size, the percentage of employers offering retiree
coverage has been declining since the late 1980s. Kaiser/HRET’s 2005 survey of
employees10 found that the percentage of firms with more than 200 workers offering
retiree coverage fell by half between 1988 and 2005, from 66% to 33%.11 As shown
in Table 1, Mercer’s 2004 survey found that while coverage has been steadily
declining for more than a decade, the trend has leveled off more recently. In 1993,
46% of employers with at least 500 employees offered their pre-Medicare eligibles
coverage, compared to 29% in 2001. Since that time, coverage has remained fairly
constant, dropping to 28% in 2004. Similarly, 40% of employers with at least 500
employees offered coverage to their Medicare eligibles in 1993, compared to 23%
in 2001, dropping sightly to 20% by 2004.12

9 National Survey of Employer Sponsored Health Plans, 2004 Survey Tables, Mercer.
10 This report primary uses three sources of data for examining the current state of retiree
health insurance, although other sources are also utilized. The first is the National Survey
of Employer Sponsored Health Plans, 2004 Survey, conducted by Mercer, a representative
survey of all U.S. employers offering health insurance who have 10 or more employees.
Some survey results are displayed separately for large and small employers, using 500
employees as the cut-off. The sample includes private employers as well as government
agencies. The second source is the “Employer Health Benefits, 2005 Annual Survey,”
conducted by the Henry Kaiser Family Foundation and the Health Research and Educational
Trust. This survey samples private and public employers with three or more workers. Firms
with 200 or more employees are considered large. The third source, also from Henry Kaiser
Family Foundation and the Health Research and Educational Trust, is a survey of 300 large
(1000+ employees) private-sector companies offering retiree health benefits. This is the
2005 Survey on Retiree Health Benefits. While the trends indicated by the surveys are
generally consistent, there are instances in which the survey results differ more significantly.
11 “Employer Health Benefits, 2005 Annual Survey,” The Henry Kaiser Family Foundation
and Health Research and Educational Trust.
12 National Survey of Employer Sponsored Health Plans, 2004 Survey Report, Mercer.

Table 1. Percentage of Large Firms Offering Retiree Health
Coverage, 1993-2004
YearPre-Medicare eligibleretireesMedicare-eligibleretirees
1993 46% 40%
1995 41% 35%
1997 38% 31%
1999 35% 28%
2001 29% 23%
2003 28% 21%
2004 28% 20%
Source: National Survey of Employer Sponsored Health Plans, 2004 Survey Report, Mercer.
Other Sources of Insurance for Retirees
Sources of health insurance are very different for those individuals under age 65
than for those who are over 65 and therefore most likely covered by Medicare.
However, according to CRS calculations of Medicare Current Beneficiary Survey
Data for 2002, Medicare only covers about half of the medical costs of the 65 and
older group.13 To help defray costs of services not covered by Medicare, most
Medicare beneficiaries have additional health insurance coverage, including
employee coverage, government coverage, and private supplementary coverage
obtained through an individually purchased policy, commonly referred to as
Medigap. In 2002, less than 8% of Medicare beneficiaries had no additional
coverage, as shown in Figure 1. Almost another 12% of Medicare eligibles enrolled
in a Medicare managed care plan (Medicare Advantage),14 which while not
technically “additional insurance”, does in many cases provide extra services beyond
the basic package of Medicare benefits.

13 Beginning January 2006, Medicare can most likely expect to cover a larger share of
medical costs for enrollees who purchase and use Medicare Part D prescription drug
14 Medicare-eligible individuals who are enrolled in Parts A and B of Medicare may choose
to enroll in a Medicare Advantage plan and receive their Medicare services through the plan
if one is available in their area.

Figure 1. Supplemental Insurance Categories for the Medicare
Non-Institutionalized Population, 2002

OtherPrivate Managed
M e d i cai d 1.8% Care
12. 6% 6.7%
Medicare OnlyManaged Care11.7%
7. 6%
Employer +
M e digap
6. 2%
E mpl oye r
28. 5%
M e digap
24 . 9 %
Source: Chart created by CRS based on analysis of the Medicare Current Beneficiary Survey, Cost and
Use file, 2002
For retirees who are under age 65, and do not qualify for Medicare based on
disability or End-Stage Renal Disease (ESRD),15 insurance options are more limited.
Absent retiree health insurance, insurance through a spouse, or access to Medicaid
or other federal programs, these retirees would have to purchase insurance in the
individual market if they chose to be covered. Retirees moving from their
employer’s group plan to an individually purchased product are provided with certain
guarantees for health insurance coverage under federal law. However, while federal
law guarantees the availability of health insurance for these individuals moving from
the group to the individual market,16 there are no federal limits on the premium
amounts that may be charged. Because individual policies are likely to be subject to
underwriting (based on information such as the individual’s age and medical history)
15 Medicare is available for individuals or their spouses who have worked for at least 10
years in Medicare-covered employment and are 65 years old and a citizen or permanent
resident of the United States. Individuals might also qualify for coverage if they are a
younger person with a disability or with End-Stage Renal disease (permanent kidney failure
requiring dialysis or transplant).
16 These individuals are required to meet certain conditions, such as having no breaks in
coverage of 63 or more days, and having exhausted any continuation coverage required by
the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). For more
information about protections and requirements, see CRS Report RL31634, The Health
Insurance Portability and Accountability Act (HIPAA) of 1996: Overview and Guidance on
Frequently Asked Questions, by Hinda Chaikind, Jean Hearne, Bob Lyke, and C. Stephen

premiums would also likely be higher, particularly for older and sicker individuals.
Some states laws limit premium amounts, providing varying degrees of protection.
Erosion in Coverage over Time
According to a Kaiser/Hewitt December 2005 survey on retiree health benefits,
between 2004 and 2005, of the 300 firms in their survey with more than 1000
employees, 71% of those companies had increased the share of the premiums paid
by the retiree, 34% had increased retiree coinsurance or copayments, 39% indicated
that they had increased the amount enrollees pay for prescription drugs through
increased drug copayments or coinsurance, and 12% had eliminated subsidized
retiree health benefits for their new employees.17
Employers are also managing their retiree health insurance costs by providing
different benefits for current and future retirees. Following the same trend, although
less dramatic than the findings in the Kaiser/Hewitt survey, the Mercer National
Survey of Employer-Sponsored Health Plans 2004 study found that about 30% of its
respondents (slightly higher rates reported for Medicare-eligible retirees) reduced
their retiree health benefits by raising retiree contributions, increasing cost sharing,
or limiting coverage. Conversely, about 3% of firms increased retiree health benefits.
Some employers who offer retiree health insurance to their current retirees will not
provide coverage for individuals who retire in the future. Other firms may only
provide group access to health insurance for future retirees, requiring them to pay
100% of the premiums. Firms may also use a sliding scale based on factors such as
age at retirement, years of service at retirement, or a combination of the two to
determine their premium contributions for retirees. As shown in Table 2, 28% (for
pre-Medicare retirees) and 30% (for Medicare-age retirees) of firms offering retiree
health based their share of premium contributions on age and years of service.
Among large employers (500 or more employees) pre-Medicare retirees are more
likely to pay 100% of their health insurance than their Medicare counterparts.

17 “Prospects for Retiree Health Benefits as Medicare Drug Coverage Begins, Findings from
the Kaiser/Hewitt 2005 Survey on Retiree Health Benefits,” The Henry Kaiser Family
Foundation and Hewitt, Dec. 2005.

Table 2. Employer Premiums Contributions
for Retiree Health Insurance
Pre-MedicareMedicare age
Employer share of premiumsretirees (underretirees (65 and
age 65)older)
Base share of premiums on age and28%30%
years of service
Employer pays no premium40%32%
Employer shares premium with44%53%
Employer pays 100% of premium16%15%
Source: 2004 Mercer National Survey of Employer-Sponsored Health Plans, 2004 Survey Tables.
Role of the Law and Courts
An important characteristic of employer-sponsored health insurance, for both
retirees and current employees, is that employers are not required to offer health
insurance. There are few protections to prevent employers from cutting or
eliminating benefits, unless the employer has made a specific promise to maintain the
benefits or has a contractual agreement with either the employee or a labor group.
Employers or other plan sponsors are generally free to adopt, modify, or terminate
“welfare benefits,” which includes health insurance, as long as they have preserved
their right to modify such plans. Therefore, the documents governing the plan are
crucial. According to Employee Retirement Income Security Act of 1974 (ERISA,
P.L. 93-406) requirements, employers are required to provide individuals with a copy
of the summary plan description (SPD) within 90 days after they become a plan
participant. The SPD can change each year, but the SPD in effect when the
individual retired may be the controlling document. Employers may explicitly
reserve the right in the SPD and in other documents to change the terms of the plan.
Additionally, even when these documents promise that health benefits will continue,
they may not rule out the possibility for changes such as reduced benefits or increased
copayments. Language in the plan may be vague and as a result the courts have been
asked to step in to settle disputes. Records, correspondence, brochures, or other
documents that contain information about the duration or scope of coverage may be
used for clarification, as well as labor agreements that provide documentation
clarifying retiree coverage.
As a result of limited if any protections, retirees have turned to the courts to seek
relief. However, in cases in which the employer has maintained the right to modify
or terminate a plan, the courts have sided with the employers (e.g., Curtiss-Wright
Corp. v. Schoonejongen).18 In other instances, when employers have not preserved

18 514 U.S. 73 (1995).

their right to change a plan (e.g., Eardman v. Bethlehem Steel),19 the courts have
sided with the employee.20
Another issue brought before the courts is whether or not employers may offer
health benefits to their Medicare-eligible retirees that differ from those offered to
their retirees who are not Medicare-eligible. In Erie County Retirees Ass’n v. County
of Erie, a 2000 case involving a group of Medicare-eligible retirees and the Age
Discrimination and Employment Act (ADEA), the U.S. Court of Appeals for the
Third Circuit found that the county had distinguished impermissibly between its
Medicare-eligible retirees and its younger retirees with respect to their health
insurance coverage based on the age of the retirees.21 Later a settlement was reached
between the county and the Medicare-eligible retirees.
Along this line, the Equal Employment Opportunity Commission (EEOC)
issued a proposed exception to ADEA allowing employers to alter, reduce, or
eliminate retiree health benefits when retirees become eligible for Medicare.22 The
EEOC was planning to release a final rule, when the American Association of
Retired Persons was granted a preliminary injunction on the regulation. On March
30, 2005 a federal district judge blocked the rule, issuing a permanent injunction to
prohibit federal officials from publishing or implementing the regulation. EEOC
appealed the ruling. On September 27, 2005, a federal trial judge ruled that the
EEOC had not abused its discretion in issuing the regulation; however, the judge
granted AARP’s petition to keep the injunction in place (not allowing the EEOC to
publish the regulation) pending the decision by the U.S. Court of Appeals for the
Third Circuit. The case is set for oral argument in February 2007.
If issued as a final regulation, employers would be allowed to segment their
retiree population, providing different retiree coverage for those over 65 than for
those under 65. This could have significant consequences now that the new
Medicare prescription drug program is in effect. For example, plans could eliminate
their prescription drug coverage for their Medicare-eligible retirees, requiring these
individuals to enroll in Medicare Part D if they wanted to continue to receive
prescription drug coverage. Employers could choose to maintain prescription drug
coverage for only their younger retirees. However, because the standard Medicare
Part D prescription drug benefit is generally less generous than coverage offered by
employers, Medicare-eligible retirees who lose employer-sponsored retiree
prescription drug coverage would likely pay more or have less generous coverage or

19 607 F. Supp. 196 (W.D.N.Y. 1984).
20 See John C. Garner, Health Insurance Answer Book, 6th ed. (New York: Aspen, 2001).
21 220 F.3d 193 (3rd Cir. 2000).
22 For more information, see CRS Report FS21845, Final Equal Employment Opportunity
Commission Rules on Retiree Health Plans and the Age Discrimination in Employment Act,
by Jody Feder.

Reasons for Eroding Coverage and Issues
The erosion of health insurance coverage for the retiree population is based on
several factors. As previously discussed, the demographics of this group foreshadow
that employers may be facing coverage for a larger number of individuals who are
expected to live longer and therefore use a lot more health care services than
originally anticipated when these companies first began to offer retiree health
coverage. In addition, several other factors, described below, contribute to the
erosion of retiree health insurance, including increasing costs (especially for
prescription drugs), the economy, and changes in accounting practices.
Costs of Health Insurance
According to a Kaiser/Hewitt January 2005 survey on retiree health benefits,
among their surveyed 300 employers with more than 1,000 employees, total costs for
employer-sponsored retiree coverage were $20.8 billion in 2004, including costs paid
by the retiree and the employer, and were estimated to increase to $22.9 billion for
2005.23 The cost to employers for providing these benefits has been increasing, due
to an increasing number of retirees, as well as increased per capita costs. According
to Mercer, between 2003 and 2004, per-person retiree medical costs for pre-Medicare
eligibles increased by 8% (from $7,634 to $8,247) and by 7.8% (from $3,060 to
$3,300) for Medicare-eligible retirees.24
Looking at the overall premium increase for employer-sponsored health
insurance (not solely premium increases for retiree health insurance), according to
the Kaiser/HRET 2005 annual survey, increases in health insurance premiums are
outpacing increases in both workers’ earning and overall inflation. For example,
premiums increased by 9.2% from 2004 to 2005, compared with a 2.7% increase in
earnings and a 3.5% increase in inflation.25 In the early 1990s premium increases
were smaller each year, bottoming out at less than a 1% increase in 1996. However,
increases soon became progressively larger over time, reaching double digits by
2001. Recently, the increases have slowed to 11.2% between 2003 and 2004, and to

9.2% between 2003 and 2004. Increases in premiums are expected to continue, in

23 “Prospects for Retiree Health Benefits as Medicare Drug Coverage Begins, Findings from
the Kaiser/Hewitt 2005 Survey on Retiree Health Benefits,” The Henry Kaiser Family
Foundation and Hewitt, Dec. 2005.
24 “National Survey of Employer-Sponsored Health Plans,” 2004 Survey Report, Mercer.
(Because of low survey response on this particular question, results should only be viewed
as a general indicator of plan costs.)
25 “Employer Health Benefits, 2005 Annual Survey,” The Henry Kaiser Family Foundation
and Health Research and Educational Trust.

part due to increasing costs (inflation and utilization) of medical claims.26 The
largest of these increases appear to be concentrated in the smallest firms.
Prescription Drug Coverage
While most firms providing retiree coverage offer prescription drug coverage,
it is more prevalent for larger firms. On average, in 2004, 90% of large employers
(at least 500 employees) offering retiree coverage included prescription drug
coverage. Among firms with 500-999 workers, 86% offered coverage, increasing to
98% for firms with more than 20,000 employees.27 Except for the very largest firms
(those with more than 20,000 employees), coverage declined relative to 2003.
The annual increase in prescription drug spending has outpaced that of overall
medical benefits, in large part because of increased prescription drug utilization. As
a result, employers have looked for ways to hold down their costs, and plans have
continued to develop cost-saving mechanisms such as increasing cost-sharing or
requiring a mail-order prescription refill. Plans are also increasingly using multiple-
tier payment arrangements, such as one tier with lower out-of-pocket costs for the
enrollee purchasing generic drugs, and two tiers for non-generic drugs (preferred and
As of January 2006, Medicare beneficiaries may now participate in the new
voluntary Part D program providing prescription drug coverage, as established in the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L.
108-173. Medicare beneficiaries may purchase either “standard coverage” or
alternative coverage with at least actuarially equivalent benefits, depending on
availability in their area of residence. In 2007, “standard coverage” has a $265
deductible, 25% coinsurance for approved drug costs between $266 and $2,400, then
no coverage until the beneficiary has out-of-pocket costs of $3,850 ($5,451.25 in
total spending). Once the beneficiary reaches the catastrophic limit, the beneficiary
will pay nominal cost sharing. Coverage can be provided through prescription drug
plans or through a Medicare Advantage plan for individuals enrolled in such a plan
offering prescription drug coverage.
Employers who continue to provide retiree prescription drug coverage that is
actuarially equivalent to or better than Medicare coverage may be eligible for a
federal subsidy, as long as the retiree is eligible for but does not sign up for the
Medicare prescription drug benefit. Subsidy payments equal 28% of a retiree’s
gross28 covered retiree plan-related prescription drug costs over the $265 deductible

26 The underwriting cycle for health insurance is characterized by years of small increases
in premiums followed by years of larger increases. At some point, increases become smaller
and the cycle begins again. The cycles are in part the result of health insurance providers
first lowering increases in order to remain competitive and then raising increases as profit
margins drop and/or reserves are depleted.
27 “National Survey of Employer-Sponsored Health Plans,” 2004 Survey Tables, Mercer.
28 The employer’s subsidy covers “gross” costs, which includes any co-payments or co-

up to $5,350. (The dollar amounts are adjusted annually by the percentage increase
in Medicare per capita prescription drug costs.)
The majority of responding employers in the Kaiser/Hewitt December 2005
retirement survey indicated that for 2006, they were likely to continue to offer
prescription drug coverage. Among the respondents, 79% indicated that they were
likely to choose the subsidy, 10% planned to supplement Medicare coverage, 2%
planned offer their own Part D plan, and 9% planned to discontinue prescription drug
coverage.29 However, as employers gain a better understanding of the interaction
between their coverage and Medicare prescription drug program, in future years they
may decide to make changes to their health plans for retirees with respect to
prescription drug coverage, or even to their entire benefit package. For example, if
the subsidy covers a significant portion of the employer’s cost for providing
prescription drug coverage, then the employer’s continued coverage might be a
financially viable option. On the other hand, some employers may no longer be
willing to provide either prescription drug or even any retiree coverage. Some
employers may only have been willing to provide retiree coverage in the past because
it was generally a retiree’s sole source for prescription drug coverage. With the
inclusion of some coverage under Medicare, even if it is more limited than the
employer’s coverage, an employer may no longer feel a responsibility to provide
coverage to its retirees. Employers could drop the drug coverage or even choose to
drop all health insurance for retirees. The employer does have the option of
discontinuing its prescription drug coverage and paying the Medicare prescription
drug premium for its employees.
Finally, younger retirees, those under 65, will still depend on their employers
for prescription drug coverage. If the EEOC eventually issues its proposed exception
to ADEA, then employers could provide prescription drug benefits for only their
younger retirees and not their Medicare-eligible retirees.
Financial Downturn
During the booming economic years of the late 1990s, some workers were
shielded from the increasing health insurance costs. Firms were willing to absorb
these costs in order to remain competitive in a tight labor market. However, as costs
continued to escalate, and the economy took a downward turn employers found
themselves less able to absorb these costs. Furthermore, as the job market weakened
and workers had a more difficult time finding or switching jobs, employers did not
need to provide as many incentives to attract employees, and thus were less likely or
willing to absorb increasing health insurance costs. This issue is especially critical
for small firms, who often operate on narrow margins with little room to absorb

28 (...continued)
insurance paid for by the retiree.
29 “Prospects for Retiree Health Benefits as Medicare Drug Coverage Begins, Findings from
the Kaiser/Hewitt 2005 Survey on Retiree Health Benefits,” The Henry Kaiser Family
Foundation and Hewitt, Dec. 2005.

increased costs. Not surprisingly, the decline in offering health insurance coverage
is most notable among these small firms.
Accounting Rules (FASB and GASB)
Effective for fiscal years beginning after December 15, 1992, the Financial
Accounting Standards Board (FASB) established new requirements for the reporting
of non-pension retiree benefits in FAS 106, which includes health benefits. This rule
significantly changed the practice of pay-as-you-go accounting for these post-
retirement benefits to accrual accounting. The employer’s expense for these benefits
is now incurred at the time the employee renders the services necessary to earn their
post-retirement benefits, that is the employer must account for the cost of retiree
health insurance while the employee is working for the firm, rather than waiting until
the employee retires and enrolls in the retiree health insurance plan. This accounting
standard requires companies to more closely examine health insurance costs for their
retirees and this examination may have led them to realize the magnitude of these
In response to FAS 106, some companies announced changes in benefit
programs, such as eliminating retiree health coverage, establishing caps on their
dollar contribution, increasing cost-sharing, and linking the level of benefits with the
years of service. FAS 106 may have provided a convenient rationale for reducing or
eliminating retiree coverage. It may have also made some employers realize that
their commitment to retiree health insurance was open-ended and growing at a rapid
Recently, the Government Accounting Standards Board (GASB) adopted
statement No. 43, which changed the accounting rules for the costs of various post-
employment benefits for state and local governments. The new standard is similar
to FAS 106 standards in that it requires accrual accounting, but provides greater
flexibility. For example, FAS 106 prescribes a single actuarial method for the
calculation of post-retirement health costs, while GASB 43 allows a choice between
several different actuarial methods. The application of GASB 43 could have a
similar impact on employers’ commitment, causing them to rethink their retirees’
health insurance coverage. However, because this group of employees is state and
local government workers, they may have more bargaining power, or union
protections, than some of the groups in the private sector that were affected by FAS


Employer Caps on Retiree Health Insurance
Some employers have established caps on their contributions to retiree health
insurance in order to limit the open-ended nature of their liability. This also allows
employers to constrain the dollar amounts that they have to recognize as a result of
the FAS 106 rules. Although firms often set the caps at a level they expect to reach
at some distant future date, given the rapid rate of increase in health insurance costs,
employers may find that they exceed the cap even sooner than anticipated. This
presents an interesting dilemma for the provision of retiree health benefits.
According to the Kaiser/Hewitt study of retiree health benefits, among the surveyed

firms, about one-half have caps in place, and of those with a cap, 59% have already
reached the cap. Another 19% estimate that they will hit the cap in the next three
years.30 To alleviate this situation, firms can raise the caps; however, this would
require higher spending.31 Alternatively, they can choose to adhere to the caps, thus
eroding retiree health insurance by either increasing the retiree’s contribution or
reducing benefits.
Another potential issue is the convergence of the cap and the employer’s subsidy
for actuarially equivalent prescription drug benefits under Part D of Medicare. Some
firms may initially meet the standards required for receiving the subsidy in 2006.
Over time, as the cost of insurance increases, some firms will reach and exceed their
cap, thus possibly facing a problem, because once the cap is exceeded, the value of
their benefits would decline. As a result, employers who at first meet the actuarial
equivalent standard required under Medicare law may over time no longer meet that
standard. Then they may no longer qualify for the 28% employer subsidy.
On the other hand, when companies reduce their retirees’ health benefits, they
are not only spending less for these benefits, they are also able to report smaller post-
retirement health costs. For example, in response to new Medicare prescription drug
coverage, some companies will maintain their prescription drug coverage and receive
a 28% subsidy, which will reduce their post-retirement health costs. Other
companies may reduce their health plan costs by eliminating or reducing prescription
drug coverage, which would also reduce their liability. Both of these options would
help employers to lower their expenses and possibly remain under their cap.
Policy Options
There are a wide variety of policy options that endeavor to make retiree
coverage more available or affordable, or even to require that employers maintain
coverage. However, when considering any option, it is also essential to consider the
relationship between retirees’ health insurance and insurance for current workers.
Special treatment for retirees, compared to current workers could lead to inequitable
outcomes. For example, one policy option often discussed to protect retiree health
insurance is to require employers to continue to provide previously promised health
insurance coverage to their retiree population. Without a parallel requirement for
current workers, employers could find themselves in an awkward situation in which
they were financially unable to cover workers, but required to cover retirees. Thus
any statutory requirement to provide retiree health insurance coverage should be
examined in the broader context of all employer-sponsored coverage.

30 “Prospects for Retiree Health Benefits as Medicare Drug Coverage Begins, Findings from
the Kaiser/Hewitt 2005 Survey on Retiree Health Benefits,” The Henry Kaiser Family
Foundation and Hewitt, Dec. 2005.
31 In addition, under FAS 106, a pattern of repeatedly raising the caps would lead the
company’s auditors to conclude that the employer’s substantive commitment is to provide
retiree health benefits without a cap, thereby canceling the expense reducing effect of the

Modify COBRA
Under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA, P.L. 99-272), an employer with 20 or more employees must provide
employees and their families with the option to continue their coverage under the
employer’s group health insurance plan in the case of certain events.32 The former
employee is responsible for paying the premium, which is limited to 100% of the rate
charged to current employees, plus an additional 2% for administrative costs. In
general, when a covered employee experiences a termination or reduction in hours
of employment, including retirement, the continued coverage for the employee and
the employee’s spouse and dependent children must be offered for 18 months.
If a firm offers retiree health insurance coverage, retirees would most likely
decline the temporary coverage provided under COBRA in favor of the retiree
coverage, which may be less expensive (if the employer pays part of the premium)
and would not be limited to only 18 months. However, if an individual chooses
retiree coverage and the firm later discontinues this coverage, the retiree (no longer
a current worker) would not be eligible to elect COBRA. Only those retirees who
lose retiree health insurance benefits due to the bankruptcy (reorganization under
Chapter 11) of their former employer may elect COBRA coverage that can continue
until their death. Their spouses and dependent children may continue COBRA
coverage for an additional 36 months after the death of the retiree. Furthermore,
COBRA coverage is only available as long as the firm continues to offer health
insurance to its current workers. As a result, when firms declare bankruptcy and
cease operations, there are no current workers and no health insurance, so that the
retirees (as well as displaced workers) have no health benefits available to purchase
under COBRA. Unlike defined benefit pensions that offer some protections for
employees of companies in bankruptcy through the Pension Benefits Guaranty
Corporation, there are no similar protections for retiree health.
One option often discussed for providing health insurance coverage to
individuals who retire before reaching age 65 (eligibility age for Medicare) is to
expand COBRA by allowing younger retirees to continue to purchase their coverage
through their former employer, until they reach 65. There are some advantages and
disadvantages for both retirees and employers of expanding COBRA coverage. For
retirees, the greatest advantage may be their ability to purchase the same coverage
they were offered as employees. Although the Health Insurance Portability and
Accountability Act (HIPAA, P.L. 104-191) requires that certain individuals moving
from the group to individual market are guaranteed the right to purchase health
insurance coverage, HIPAA does not limit premiums. Older individuals, especially
those with more health care needs, may find that the available individual market
coverage is very expensive. Even the COBRA premium costs (up to 102% of
premiums) may be prohibitively expensive for individuals whose incomes decline
once they retire, complicated by the fact that while they were working their
employers most likely paid a large share of the premium. For some employers, there

32 For a more detailed description of health insurance coverage under COBRA, see CRS
Report RL30626, Health Insurance Continuation Coverage under COBRA, by Heidi G.

may be an incentive to substitute this expanded COBRA coverage for other retiree
coverage, thus decreasing the share of retiree health insurance they offer. Employers,
on the other hand, have argued that the 2% administrative allowance does not
adequately cover their additional burden. Furthermore, individuals who choose
COBRA are likely to be less healthy than the rest of the employee population, so that
102% of premiums that employers are allowed to charge could be significantly lower
than the claims incurred for the COBRA enrollees.
Tax Deductions or Credits
Under current law, the tax treatment of premiums paid by employers makes it
attractive for both employers and employees to purchase employer-sponsored health
insurance. Any amount that an employer pays towards premiums is not counted as
taxable income for the employee and not subject to payroll taxes by both the
employer and employee. Additionally, some employees are able to pay any required
premium contribution from pre-tax dollars. Retirees, unlike current workers, cannot
pay for their share of any premium from pre-tax dollars. For most individuals who
purchase their health insurance outside of their job, the only allowable tax deduction
is available to those who itemize and have health care expenditures exceeding 7.5%
of adjusted gross income.
Expanding tax options, such as allowing a tax deduction for premiums paid by
retirees, allowing retirees to pay for premiums from pre-tax dollars, or allowing a
deduction for those taxpayers who do not itemize, may make these premiums more
affordable whether the retiree has to pay all of the premium or some lesser share.
Additionally providing tax credits is another option for reducing taxes, thus making
premiums more affordable. Currently, there is a tax credit available on a limited
basis for a select group of individuals.33 Credits could be expanded and designed to
cover a retiree’s entire share of premiums, could be limited to a specific dollar
amount, could be linked to income or any combination of the three. However,
establishing tax credits for health insurance raises complex issues. One important
question is whether the credit would be the same for all taxpayers or more generous
for those with lower incomes. The credits would need to be large enough to
encourage individuals to buy the insurance, but might also have the adverse effect of
providing employers with an incentive to reduce their commitment to health
insurance. Additionally, if individuals with tax credits did not have access to the
group market, they might have limited and/or only expensive options for buying
health insurance, thus limiting the buying power of the credit.

33 The Trade Act of 2002 (P.L. 107-210) authorized a federal health coverage tax credit
(HCTC) for certain individuals who are eligible for Trade Adjustment Assistance
allowances because they have lost manufacturing jobs due to increased foreign imports or
shifts in production outside the United States and for other individuals whose defined
benefit pension plans were taken over by the Pension Benefit Guaranty Corporation due to
financial difficulties. The refundable and advanceable credit is for 65% of what eligible
taxpayers pay for qualified health insurance for themselves and their family members. For
more information, see CRS Report RL32620, Health Coverage Tax Credit Authorized by
the Trade Act, by Julie Stone and Bob Lyke.

Tax-Advantaged Accounts for Health Care Expenditures
There are a number of tax-advantaged accounts permitted under current law that
can be used for unreimbursed qualified medical expenses such as deductibles,
copayments and certain services not covered by health insurance.34 The newest of
these types of accounts is the Health Savings Account (HSA) established in the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, (P.L.
108-173). HSAs are personal savings accounts for qualified medical expenses not
covered by insurance or otherwise reimbursable. They can be established and
contributions made only when the account owners are covered by a qualifying high
deductible insurance plan and have no other coverage, with some exceptions. Annual
contributions to HSAs are limited to a federally established limit (for 2007, the limit
is $2,850 for self coverage and $5,650 for family coverage). Additional “catch-up”
contributions (limited to $800 in 2007 and reaching $1,000 by 2009) are allowed for
individuals who are at least 55 years of age but not enrolled in Medicare. Unused
portions of HSAs may be carried over from one year to the next, so that even though
Medicare-enrolled individuals are not allowed to add money to an HSA account, they
may continue to use any accumulated funds indefinitely. The HSA may be used to
pay for the high deductible insurance plan’s cost sharing, long-term care insurance
premiums, COBRA premiums, Medicare Part B premiums, and other qualified
medical expenses as defined by the Internal Revenue Service. HSA funds may also
be used for non-medical expenditures, subject to income tax and, for those under 65,
a penalty.
Thus any unused accumulated HSA funds may be very beneficial for retirees.
If the rules for contributing to HSAs were expanded, these funds have the potential
of being even more useful, although opponents of HSAs are already concerned with
their potential for syphoning off the healthier population and increasing insurance
costs for people with the highest healthcare needs. Expanding opportunities to
contribute to these funds could exacerbate these problems. While these issues must
be considered, HSAs have the potential to be altered and expanded for individuals
to help them pay for their own retiree health insurance coverage. For example,
individuals could be allowed to contribute even higher amounts each year, to make
even larger contributions after reaching age 55, or even to continue making
contributions after enrolling in Medicare. If individuals were allowed to put larger
sums into the account for medical expenses, then the structure of the fund might need
to be changed, so that withdrawals could only be used for medical expenses.
As example of the potential for growth in contributions to HSAs, the Employee
Benefit Research Institute (EBRI) calculated contributions to an HSA for 10, 20, or

30 years, along with the allowed catch-up payments for individuals over 55 years old.

34 There are four types of these tax-advantaged accounts permitted under current law:
Health Care Flexible Spending Accounts (HCFSA), Health Reimbursement Accounts
(HRA), Archer Medical Savings Accounts (MSA), and Health Savings Accounts (HSA).
For more detailed information, see CRS Report RL32467, Health Savings Accounts, by Bob
Lyke, Chris Peterson, and Neela Ranade, and CRS Report RL32656, Health Care Flexible
Spending Accounts, by Chris Peterson and Bob Lyke, and CRS Report RL33257, Health
Savings Accounts: Overview of Rules for 2007, by Bob Lyke.

They assumed that the funds in the HSA would earn 5% interest and that individuals
would be allowed to contribute the maximum of $2,600 per year (as the current limit
for 2007 is actually higher, the amount in the HSA account would be even larger),
indexed for inflation. They did not assume that any withdrawals would be made for
medical or other expenditures, although some or all of these funds would almost
certainly be withdrawn over the years. In their example, a 55-year old individual
contributing $2,600, plus catch up payments, earning 5% on funds held in the HSA,
with the maximum allowable contribution indexed for inflation, could accumulate
a maximum of $44,000 by age 65. If the individual were allowed to contribute for
20 years, the fund would grow to $101,000 and after 30 years it would grow to
$190,000.35 These figures only represent the contributions and earned interest, but
no withdrawals.
Another tax-advantaged account is a Flexible Spending Account (FSA).
Contributions to an FSA are voluntary, with accounts usually funded by an employee
(although employers aren’t prohibited from contributing) from his or her pre-taxed
salary, thereby reducing taxable income. Funds in a Health Care FSA (HCFSA) can
be used to pay for qualified medical expenses that are not reimbursed or covered by
any other source. Qualified medical expenses include coinsurance amounts,
copayments, deductibles, dental care, glasses, hearing aids, as well as certain over-
the-counter medical supplies that are not cosmetic in nature. One significant
limitation of the HCFSA is that, at best, funds can only be carried over for a limited
time after the end of the plan year.36 Any money remaining in the fund at the end of
this time is forfeited. Another limitation of health care FSAs is that only current
employees and not annuitants are eligible to contribute to an FSA on a pre-tax basis.37
Allowing these funds to be carried over and accumulate without any deadlines,
allowing retirees to also contribute to FSAs on a pre-tax basis, or allowing FSA funds
to be used for retiree premiums, are all options that could help retirees pay for their
own health insurance.
Similar to expanding these funds, proposals have been discussed that would
allow withdrawals above the current limit from other tax-favored accounts for
retirement savings, such as IRAs and 401(k) plans, as long as the withdrawals were
for medical expenses.
Medicare Buy-In
Most persons aged 65 and older are automatically entitled to Medicare Part A,
Hospital Insurance. These individuals, or their spouses, established entitlement by
paying the HI payroll tax on earnings for the required number of quarters of

35 EBRI Issue Brief no. 271, July 2004.
36 On May 18, 2005, the Treasury Department and the IRS issued Notice 2005-42 allowing
employers to modify FSAs to extend the deadline up to 2 ½ months after the end of the plan
year. Although helpful, this action does significantly extend the FSA deadline.
37 Employers may contribute to the FSA for their retired workers, even though the retirees
may not. However, few employers make these contributions for their workers and given the
decline in health insurance coverage, this is not a likely option for retired workers.

Medicare-covered employment. Additionally certain disabled individuals and
persons with End Stage Renal Disease may also qualify for Medicare. Enrollment
in Medicare Part B Supplementary Medicare Insurance (SMI), and Medicare Part D
prescription drug coverage are voluntary and qualified individuals choosing to enroll
are required to pay a monthly premium.
One option for increasing coverage for the younger retirees is to allow
individuals to purchase Medicare, prior to their attaining age 65. However, similar
to COBRA coverage, the premiums could be prohibitive, and as a result several
options for lowering premiums have been discussed. For example, one option would
be to spread out the cost of the premiums over time, so that the premium charged to
an individual under age 65 would cover only part of the costs. Once reaching age 65,
the official age for Medicare aged eligibility, the individual would pay the standard
Medicare Part B premium plus an additional monthly amount for the rest of his or her
life, to compensate for the costs of the earlier coverage. A similar arrangement could
be developed for the prescription drug benefit, Part D of Medicare. Initially, the total
program costs would be higher than revenues, but as the population aged, revenues
from the older individuals paying the incremental premium amount would offset the
unmet expenses of the younger group.
Federal Employees Health Benefits Program Buy-In
Federal employees, Members of Congress, annuitants, and qualified dependents
are entitled to participate in the Federal Employee’s Health Benefits program
(FEHBP). FEHBP is the largest employer-sponsored health insurance program,
covering about 8 million individuals, offering enrollees a choice of nationally
available fee-for-service plans, HMOs serving limited geographic areas, as well as
high deductible health plans coupled with tax advantaged accounts (e.g., HSAs). The
government’s share of premiums, which is the same for workers as it is for retirees,
is 72% of the weighted average premium of all plans in the program, not to exceed
75% of any given plan’s premium. Although there is no core or standard benefit
package required for FEHBP plans, all plans cover basic hospital, surgical, physician,
and emergency care. Plans are required to cover certain special benefits including
prescription drugs (which may have separate deductibles and coinsurance); mental
health care with parity of coverage relative to general medical care coverage; child
immunizations; and protection of enrollee out-of-pocket costs for “catastrophic”
health care costs.
Similar to the Medicare buy-in, Congress has considered proposals to allow
small businesses and individuals, whether they are working or retired, to buy into
FEHBP. Some of these proposals would require that plans choosing to participate
in FEHBP would also be required to make these same plans available to the newly
qualifying group of individuals or businesses. Most often these proposals separate
the risk pools for the newly qualifying eligibles from the currently existing pool of
eligibles. In this case, premiums for the new group could potentially be higher than
premiums for the existing federal pool, because the new pool wouldn’t have the
advantage of spreading the risk across 8 million people. As a result, premiums for
the expanded FEHBP might not be significantly less expensive than other individual
or small group options available in the market today. On the other hand, if risk was

spread across the entire group of new enrollees, essentially developing a new large
group entity, then premiums could be less than these entities could find on their own.
The key advantage of the expanded FEHBP might be that it offered this new group
availability, choice and a guarantee that the products being purchased (the same
offered to federal employees, annuitants and Members of Congress) included a
reasonable set of benefits.
Enhance Medicare
Medicare is the primary payer for qualifying retired individuals over age 65.
If a retired Medicare enrollee also has employer-sponsored retiree health insurance
coverage, that insurance would “wrap around” the Medicare benefit paying for
coinsurance, deductibles, and services covered by the plan but not Medicare.
Expanding Medicare might replace or reduce the costs of retiree health insurance for
this population. Although employers cannot currently divide their retiree population
into Medicare and non-Medicare retiree groups, more Medicare coverage translates
into overall reduced costs for employer’s covering retirees, as this coverage would
be secondary to Medicare for the Medicare-eligible group. As previously mentioned,
Medicare covers only about one-half of a beneficiary’s average medical expenses.
This percentage will most likely increase for those beneficiaries who enroll in and
use the new Medicare Part D prescription drug program. However, even for retirees
covered by Medicare, there are services that Medicare does not cover, such as most
routine check-ups. Also, Medicare does not have a catastrophic limit on beneficiary
out-of-pocket expenditures for covered services (with the exception of Part D
prescription drug services and regional Medicare managed care plans). Medicare
could be enhanced to expand coverage or to offer a catastrophic limit. However, as
Medicare has just begun to offer its new costly prescription drug benefit, it is unlikely
that other expansions will take place in the near future that might serve to replace or
reduce some of the costs of retiree health insurance.
Employer Mandates
Employer-sponsored health insurance is offered voluntarily by employers and38
in general, they have the right to change coverage at any time. This includes
changes such as raising copayments, increasing deductibles, requiring larger premium
contributions from employees, using formularies for prescription drug coverage, or
even eliminating coverage entirely. Employer mandates could be established to
require that any retiree coverage offered to either current retirees and/or promised to
current workers upon retirement could not be changed or eliminated. However,
employers who wanted to reduce their health insurance costs, and were not allowed
to change the coverage for their retirees would be forced to reduce costs only for their
workers. Employers could reduce benefits, increase premium contributions,
deductibles, or coinsurance for current workers, while still being required to maintain
the more generous package for their retired workers. Although rather unlikely, in the
most extreme case, employers could drop coverage for workers, while still providing

38 Employees who have contractual agreements with employers or arrangements with unions
may have guarantees for health insurance coverage and may also limit an employer’s ability
to make changes to that coverage.

coverage for retirees. Faced with restrictions, employers might discontinue offering
the promise of retiree health benefits to newly hired individuals, so that at least for
this group of employees, they would not be required to offer retiree benefits when
these workers eventually retire.
Pre-funding Retiree Health Benefits
Unlike defined benefit pension plans, there is no requirement that employers
pre-fund their retiree health benefit plans. The ideal pre-funding vehicle would allow
employers to take a tax deduction for contributions to the fund, permit sufficient
amounts to be contributed for orderly accumulation of funds to discharge future
obligations, and allow for investment income on the fund to be tax-free. These are
all advantages enjoyed by defined benefit pension trusts.
Under current law, such an ideal funding vehicle is only available for certain
employee populations. Specifically, an employer sponsoring a retiree health plan for
a collectively bargained employee population may set up a Voluntary Employee
Beneficiary Association (VEBA) to pre-fund retiree health benefits for this
population. Such a VEBA has comparable advantages to a defined benefit pension
trust. Investment income on a VEBA established to pre-fund retiree health benefits
for non-union employees, on the other hand, is subject to the unrelated business
income tax. Moreover, health care inflation may not be taken into account in
determining the contribution to such a VEBA. Some employers have used a 401(h)
sub-account of a defined benefit pension plan for the pre-funding of retiree health
benefits. While the investment income on assets in such a sub-account is tax-free,
only limited amounts can be contributed to it. To date, employers who have pre-
funded retiree health plans have tended to be utilities such as gas and electric
companies who could include the cost of pre-funding in rates charged to consumers.
Most recently, a new program was created for some colleges and universities,
Emeriti Retirement Health Solutions. Institutions that chose to participate in this
program make contributions to a tax-exempt trust, a VEBA, for retirement health
insurance. Employees may also contribute, on an after-tax basis to a separate VEBA.
The contributions and investment income earn tax-free interest. At retirement,
employees eligible for Medicare, can use these funds, tax-free, to pay for certain
uncovered health care expenses, such as Medicare premiums or enrollment in a
qualified health care plan. Employees who met their institution’s retirement
eligibility requirements but retire before they are Medicare-eligible can also withdraw
funds, tax-free, for certain health care-related expenses. While current tax laws limit
the ability of many private employers to use VEBA on a tax effective basis, changing
those laws might expand opportunities for creating programs like that offered through
the Emeriti Retirement Health Solutions program.

Legislative Proposals
The 110th Congress has not yet introduced bills relating to retire health
insurance. However, given the continued reduction in employer-sponsored retiree
health insurance, it is likely that this issue will be as active in the 110th Congress asth
it was in the 109 Congress. Therefore, listed below is a summary of some of the
bills introduced in the 109th Congress, to provide a sense of the types of legislative
solutions that were proposed to address retirees’ health insurance coverage. The
109th bills cover a wide variety of options for making retiree coverage more available
and affordable such as, options for expanding Medicare or FEHBP coverage to
certain retirees, prohibiting group plans from reducing benefits for retirees, or
providing tax relief. Several bills address the needs of specific groups of retirees.
Other legislation provides for comprehensive health insurance for all Americans, not
just retirees. This list does not include bills that would amend Medicare prescription
drug coverage or associated employer subsidies. The list will be updated in responseth
to congressional activity in the 110 Congress, as information becomes available.
Expand Medicare or FEHBP coverage
!H.R. 55 would make FEHBP available to individuals age 55 to 65
who would not otherwise have health insurance.
!H.R. 2072 would provide access to Medicare benefits for
individuals ages 55 to 65 and would amend the Internal Revenue
Code to allow a refundable and advanceable credit against income
tax for payment of such premiums.
Protect retirees who lose their health coverage
!S. 329 would increase the amount of unsecured claims for salaries
and wages given priority in bankruptcy to provide for cash payment
to retirees to compensate for lost health insurance benefits resulting
from bankruptcy of their former employer.
!H.R. 1322 would prohibit profitable employers from making any
changes to retiree health benefits once an employee retired. The bill
would require plan sponsors to restore benefits for retirees whose
health coverage was reduced before enactment of the bill, and create
a loan guarantee program to help firms restore benefits. It would not
restrict employers from changing retiree health benefits for current
Provide tax relief
!H.R. 218 would allow a deduction for amounts paid for health
insurance and prescription drug costs of individuals.
!H.R. 2176 would provide a 100% deduction for the health insurance
costs of individuals.
!H.R. 2089, H.R. 765, S. 4 and S. 160 would allow individuals a
refundable credit against income tax for the purchase of private
health insurance, subject to income and other limitations.

!S. 1573 would amend the Internal Revenue Code to encourage
funding of collectively bargained retiree health care benefits.
!H.R. 1872 and S. 978 would provide tax incentives for the purchase
of qualified health insurance.
Protect specifically defined groups of retirees through a variety of methods
!H.R. 299 and S. 162 would clarify that certain coal industry health
benefits may not be modified or terminated.
!H.R. 602 and S. 407 would restore health care coverage to certain
retired members of the uniformed services.
!H.R. 322 would allow a refundable credit to military retirees for
premiums paid for coverage under Medicare Part B.
!H.R. 994 and S. 484 would allow federal civilian and military
retirees to pay health insurance premiums on a pretax basis and
allowed a deduction for TRICARE supplemental premiums.
Provide comprehensive employer or national health insurance
!H.R. 15, H.R. 676, H.R. 1200, and H.R. 2133 would establish
national health insurance programs.
!H.R. 1955, S. 637, and S. 874 would establish a national health
program administered by the Office of Personnel Management to
offer health benefits plans to individuals who are not federal