Order Code RL32944
CRS Report for Congress
Received through the CRS Web
Health Insurance Coverage for Retirees
June 9, 2005
Hinda Ripps Chaikind
Specialist in Social Legislation
Domestic Social Policy Division
Fran Larkins
Information Research Specialist
Knowledge Services Group
Congressional Research Service ˜ The Library of Congress

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Health Insurance Coverage for Retirees
Summary
Many retired individuals depend on their former employer for retirement health
insurance as their sole source of coverage before reaching age 65, or as a supplement
to their Medicare coverage once reaching age 65. However, the future of these
benefits is uncertain. Burdened by rising costs, some employers have already
reduced or eliminated health insurance coverage for their retirees. With the aging of
the baby boom generation looming ahead, employers offering coverage to their
retired workers will face a huge future financial commitment. For this reason, some
employers are re-examining their commitment to providing retiree health benefits to
current workers.
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. 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 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 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 employees. The concept of special treatment aimed solely at protecting
the retiree population, without an equivalent treatment for current employees, 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.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Role of the Law and Courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Reasons for Eroding Coverage and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Costs of Health Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Prescription Drug Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Financial Downturn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Accounting Rules (FASB and GASB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Modify COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Tax Deductions or Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax-Advantaged Accounts for Health Care Expenditures . . . . . . . . . . . . . . 15
Medicare Buy-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Federal Employees Health Benefits Program Buy-In . . . . . . . . . . . . . . . . . 17
Enhance Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Employer Mandates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Pre-funding Retiree Health Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Legislative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. Supplemental Insurance Categories for the Medicare Non-
Institutionalized Population, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
List of Tables
Table 1. Percentage of Firms Offering Retiree Health Coverage, 1993-2003 . . . 4

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Health Insurance Coverage for Retirees
Introduction
Many retired individuals depend on their former employer for retirement health
insurance as their sole source of coverage before reaching age 65, or as a supplement
to their Medicare coverage once reaching age 65. However, given that employers are
not required to offer employer-sponsored health insurance in the first place, as well
as limited federal protections available for persons losing coverage, the future of
these benefits is uncertain. Burdened by rising costs, some employers have already
reduced or eliminated their commitment to insure their retirees. With the aging of
the baby boom generation looming ahead, employers offering coverage to their
retired workers will face a huge future financial commitment. 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. Retiree coverage could see further changes, once Medicare
begins to cover prescription drugs in 2006. However, Medicare coverage would only
affect those retirees who are over 65 and qualify for Medicare. Many individuals
retire before reaching 65 and their retiree health insurance would most likely be their
sole source of 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 retiree premium contributions, deductibles, and co-
payment amounts. In some cases when employers attempt to scale back or eliminate
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 decide to change their health insurance
coverage.

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CRS-2
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
the increase in their 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.1 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 could expect to live until 79, another 14 years.2
Since that time, Americans are living longer. According to the U.S. National
Center for Health Statistics, in 2001, persons reaching age 65 had an average life
expectancy of an additional 18.1 years. By 2002, the total number of persons over
age 65 had grown to 35.6 million, or 12.3% of the total population. As more people
live into old age, the age-profile of the population will continue to shift. 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. According to U.S. Census Bureau 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 from 35.6 million to 71.5 million and will comprise
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
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
1 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, DC, 1975).
2 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 [http://www.bls.gov/opub/cwc/print/
cm20030711ar01ps.htm]

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CRS-3
overall health among adults in late middle age.3 These long-term illnesses have a
negative effect on quality of life and can lead to severe disability.
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. Health insurance coverage
is thus a major consideration for persons making the decision about whether or not
to retire.
Today’s workers face many choices regarding retirement age. Some employees
retire as early as age 55, the minimum retirement age allowed by most defined benefit
pension plans. Others don’t retire until they are 62, the earliest retirement age at
which Social Security benefits are first payable, though these are permanently
reduced. Fewer workers wait until they reach the “full retirement age” under Social
Security which in 2004 is 65 years and four months. (The age at which unreduced
Social Security benefits are first payable will gradually rise to age 67.) In 2003,
more than 72% of retired-worker beneficiaries had elected to receive Social Security
retirement benefits before age 65.4 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 2003 Survey Report-
National Survey of Employee Sponsored Health Insurance, the median retirement age
is 61 in organizations offering retiree health insurance compared to 63 in those that
do not.
Because Americans approaching or at retirement age consume more medical
services than younger persons, their health care is more expensive. According to the
U.S. Administration on Aging’s report, A Profile of Older Americans: 2003, the
elderly averaged $3,586 in out-of-pocket health care expenditures in 2002. This can
be compared to the average out-of-pocket costs for the total population of only
$2,350. Even when near-elderly workers (ages 55 to 64) with health problems are
insured and have access to needed health services, they have average annual
expenditures of $5,000, nearly twice the level of their counterparts in excellent or
very good health ($2,548).5 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. 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
3 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.
4 2003 Annual Statistical Supplement to the Social Security Bulletin, Social Security
Administration, July 2004.
5 Alan C. Monheit, Jessica P. Vistnes, and John M. Eisenberg, “Moving to Medicare: Trends
in the Health Insurance Status of Near-Elderly Workers, 1987-1996,” Health Affairs,
Mar./Apr. 2001.

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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.6
Health Insurance Coverage
Retirees with Employer-Sponsored Health Insurance
Retirees from large firms are more likely to be offered health insurance than
workers retiring from smaller firms. In fact, the prevalence of retiree coverage
increases with firm size. For example, employees under age 65 retiring from firms
with 20,000 or more employees are twice as likely to be offered coverage as
employees in firms of 500-999 employees. Retirees over age 65 are almost three
times as likely to be offered retiree health benefits in the largest firms.7
However, regardless of firm size, the percentage of employers offering retiree
coverage has been steadily declining over the last decade. The percentage of firms
with more than 200 workers that offer retiree coverage fell by almost half between
1988 and 2004, from 66% to 36%.8 In 1993, 46% of employers with at least 500
employees offered coverage to their pre-Medicare eligibles and by 2003 this figure
declined to 28% of employers. Similarly, 40% of employers with at least 500
employees offered coverage to their Medicare eligibles in 1993, compared to 21%
in 2003.9 As shown in Table 1, there has been a steady decline in coverage over the
period.
Table 1. Percentage of Large Firms Offering Retiree Health
Coverage, 1993-2003
Pre-Medicare eligible
Medicare eligible
Year
retirees
retirees
1993
46%
40%
1995
41%
35%
1997
38%
31%
1999
35%
28%
2001
29%
23%
2003
28%
21%
Source: National Survey of Employer Sponsored Health Plans, 2003 Survey Report, Mercer.
6 Elisabeth Simantov, Cathy Schoen and Stephanie Bruegman, “Market Failure? Individual
Insurance Markets for Older Americans,” Health Affairs, July/Aug. 2001.
7 National Survey of Employer Sponsored Health Plans, 2003 Survey Tables, Mercer.
8 Kaiser/HRET Employer Health Benefits: 2004 Annual Survey.
9 National Survey of Employer Sponsored Health Plans, 2003 Survey Report, Mercer.

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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 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.10 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),11 which while not technically “additional
insurance”, does in many cases provide extra services beyond the basic package of
Medicare benefits.
Figure 1. Supplemental Insurance Categories for the Medicare
Non-Institutionalized Population, 2002
Other
Private Managed
Medicaid
1.8%
Care
12.6%
6.7%
Medicare
Managed Care
Medicare Only
11.7%
7.6%
Employer +
Medigap
6.2%
Employer
28.5%
Medigap
24.9%
Source : Chart created by CRS based on analysis of the Medicare Current Beneficiary Survey, Cost and
Use file, 2002
10 Medicare will cover a larger share of medical costs beginning in 2006, for enrollees who
purchase Medicare prescription drug coverage.
11 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.

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For retirees who are under age 65, and do not qualify for Medicare based on
disability or End-Stage Renal Disease (ESRD),12 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,13 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)
premiums would also likely be higher, particularly for older and sicker individuals.
Some states have passed laws to limit premium amounts, providing varying degrees
of protection.
Erosion in Coverage over Time
According to a Kaiser/Hewitt December 2004 survey of large private-sector
employers, between 2003 and 2004, 79% of large companies surveyed had increased
the share of the premiums paid by the retiree, 53% indicated that they had increased
the amount enrollees pay for prescription drugs, 45% had increased cost-sharing
requirements for other services, and 8% had eliminated subsidized retiree health
benefits for their new employees.14
Employers are also managing their retiree health insurance costs by providing
different benefits for current and future retirees. For example, 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. According to the 2003 Mercer National Survey of
Employer-Sponsored Health Plans, 30% of firms offering retiree health based their
12 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).
13 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, C. Stephen
Redhead.
14 “Current Trends and Future Outlook for Retiree Health Benefits, Now and in the Future,
Findings from the Kaiser/Hewitt 2004 Survey on Retiree Health Benefits,” The Henry
Kaiser Family Foundation and Hewitt, Dec. 2004.

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share of premium contributions on age and years of service. Among large employers
(500 or more employees), about 38% of pre-Medicare retirees pay 100% of their
premium, 49% share the premium costs with the employer, and 13% have their total
premium paid for by the employer. For the Medicare-aged retirees, 37% pay 100%
of their premium, 47% share the costs with the employer and 15% have the total
premium paid by the employer.
Role of the Law and Courts
An important feature about 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)15 In other instances, when employers have not preserved
their right to change a plan (e.g., Eardman v. Bethlehem Steel),16 the courts have
sided with the employee.17
Another issue brought before the courts was whether or not employers could
offer health benefits to their Medicare-eligible retirees that differed from those
offered to their retirees who were not Medicare eligible. In Erie County Retirees
Association v. County of Erie, Pennsylvania, 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
15 514 U.S. 73 (1995).
16 607 F. Supp. 196 (W.D.N.Y. 1984).
17 See John C. Garner, Health Insurance Answer Book, 6th ed. (New York: Aspen, 2001).

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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.18 Despite the apparent violation, the case was remanded to determine
whether the county’s actions were protected by the ADEA so-called equal benefit
safe harbor provisions.19 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. 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 reportedly plans to appeal the ruling to the Third Circuit. 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 become even more significant once the new Medicare prescription
drug program begins in 2006. 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. However, the standard Medicare Part D prescription drug benefit is
generally less generous than coverage offered by employers.
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 the Kaiser/Hewitt January 2004 survey, among their surveyed 333
employers with more than 1,000 employees, total costs for employer-sponsored
retiree coverage were $18.1 billion in 2002, including costs paid by the retiree and
18 220 F.3d 193 (3rd Cir. 2000).
19 Satisfying the equal benefit test requires that a plan not provide lesser benefits for older
participants compared to younger participants, and also that employers not require older
participants to pay a greater percentage of the premium cost. Employers do not violate the
act by permitting certain benefits to be provided by the government, that is, it is not
necessary for an employer to provide health benefits which are otherwise provided by
Medicare for certain participants.

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the employer. This figure increased by 13.7%, growing to an estimated $20.6 billion
in 2003.20
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 2002 and 2003, retiree medical costs for pre-Medicare eligibles
increased by 14% (with premiums increasing from $6,956 to $7,948) and by 11%
(with premiums increasing from $2,702 to $3,003) for Medicare eligible retirees.21
Looking at an overall premium increase for employer-sponsored health
insurance (not solely premium increases for retiree health insurance), according to
the Kaiser/HRET 2004 annual survey, increases in health insurance premiums are
outpacing increases in both workers’ earning and overall inflation. For example,
premiums increased by 11.2% from 2003 to 2004, compared with a 2.2% increase
in earnings and a 2.3% increase in inflation.22 In the early 1990s premium increases
were smaller each year, bottoming out at less than a 1% increase in 1996. However,
increases have gotten progressively larger since then, reaching double digits in 2001.
There was a slowdown in the increase between 2003 and 2004 from 13.9% to 11.2%,
although still a double digit increase. Double digit increases in premiums are
expected to continue, in part due to the anticipated continuation of the upwards turn
in the underwriting cycle, and in part due to increasing costs (inflation and
utilization) of medical claims.23 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, 94% of these large employers (at
least 500 employees) offering retiree coverage include prescription drug coverage.
Among firms with 500-999 workers, 92% offer coverage, increasing to 98% for firms
with more than 20,000 employers.24
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 for providing
20 “Retiree Health Benefits Now and in the Future: Findings from the Kaiser/Hewitt 2003
Survey of Retiree Health Benefits,” The Henry Kaiser Family Foundation and Hewitt, Jan.
2004.
21 “National Survey of Employer-Sponsored Health Plans,” 2003 Survey Report, Mercer.
22 “Employer Health Benefits, 2004 Annual Survey,” The Henry Kaiser Family Foundation
and Health Research and Educational Trust.
23 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.
24 “National Survey of Employer-Sponsored Health Plans,” 2003 Survey Tables, Mercer.

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prescription drug coverage, by ratcheting down these benefits. 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 three-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 non-
preferred).
Beginning in 2006, Medicare beneficiaries will be offered a new voluntary
benefit providing prescription drug coverage, as established in the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 108-173.
Medicare beneficiaries will be able to purchase either “standard coverage” or
alternative coverage with at least actuarially equivalent benefits. In 2006, “standard
coverage” will have a $250 deductible, 25% coinsurance for approved drug costs
between $251 and $2,250, then no coverage until the beneficiary has out-of-pocket
costs of $3,600 ($5,100 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.
Once Medicare begins to cover prescription drugs, employers may decide to
make changes to their health plans for retirees with respect to prescription drug
coverage, or even to their entire benefit package. 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 will equal 28% of a retiree’s gross25 covered retiree plan-related
prescription drug costs over the $250 deductible up to $5,000. (The dollar amounts
would be adjusted annually by the percentage increase in Medicare per capita
prescription drug costs.)
In the Kaiser/Hewitt December 2004 survey, the majority of responding
employers indicated that they were likely to continue to offer prescription drug
coverage, even after Medicare coverage begins. However, once the program is in
place, employers may wish to reassess their decision as to whether or not to continue
retiree coverage for either the entire retiree heath package or just the prescription
drug coverage. 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, once Medicare prescription drug coverage is available. 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
25 The employer’s subsidy covers “gross” costs, which includes any co-payments or co-
insurance paid for by the retiree.

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CRS-11
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 employees 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
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
costs.
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
pace.
Establishing caps, as a practical matter, limits the open-ended nature of a firm’s
liability, and thus constrains the dollar amounts that they would have to recognize as
a result of the FAS 106 rules. Firms often set the caps at a level they expected to
reach at some future date, possibly even 10-20 years in the future. However, given

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CRS-12
the rapid rate of increase in health insurance costs, employers may find that they
exceed the cap even sooner than anticipated, presenting an interesting dilemma for
the provision of retiree health benefits. First, firms could raise the caps; however,
this would require higher spending.26 Alternatively, they could 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 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 one time met the actuarial
equivalent standard required under Medicare law, may no longer meet that standard.
Then they may no longer qualify for the 28% employer subsidy.27
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 Medicare prescription drug
coverage in 2006, some companies are planning to maintain their prescription drug
coverage and will receive a 28% subsidy, which would 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.
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
106.
26 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 cancelling the expense reducing effect of the
cap.
27 Although the regulations issued by the Centers for Medicare and Medicaid Services
(CMS) on the 28% subsidy appear to allow employers considerable leeway in meeting the
actuarial standards, employers will have to wait and see how the regulations are actually
implemented.

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CRS-13
Policy Options
Out of concern for maintaining health insurance coverage for retirees, legislative
proposals have been offered to provide them some protections. 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 employees.
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 a situation where 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.
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.28 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
28 For a more detailed description of health insurance coverage under COBRA, see CRS
Report RL30626, Health Insurance Continuation Coverage under COBRA, by Heidi G.
Yacker.

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CRS-14
employees of companies in bankruptcy through the Pension Benefits Guaranty
Corporation, there are no 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
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’s 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 or 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.29 Credits could be expanded and designed to
29 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
(continued...)

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CRS-15
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.
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 services not covered by health insurance.30 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 the lesser of the deductible or a federally
established limit. Additional “catch-up” contributions (limited to $600 in 2005 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 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.
29 (...continued)
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-Axelrad and Bob Lyke.
30 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.

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CRS-16
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 already are 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 (over the
deductible), could be allowed 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 an example, 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. 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, 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 (an estimate of the allowed contribution
in a given year), 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
$190,000.31 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 funds cannot be carried over from one year to the
next so that unused funds are forfeited at the end of the year.32 Another limitation is
that only current employees and not annuitants are eligible to contribute to an FSA
31 EBRI Issue Brief no. 271, July 2004.
32 On May 18,2005, the Treasury Department and the IRS issued Notice 2005-42 which will
allow employers to modify FSAs to extend the deadline up to 2 ½ months after the end of
the plan year. Although helpful, this additional time would not add a significant amount of
time to FSA spending deadlines.

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CRS-17
on a pre-tax basis.33 Allowing these funds to be carried over from year to year and
accumulate, allowing retirees to also contribute to FSAs on a pre-tax basis, or
allowing FSA funds to be used for premiums of retirees, 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 age 65 and older, and certain disabled individuals, 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 Medicare-covered employment. Enrollment in
Medicare Part B, Supplementary Medicare Insurance (SMI), and Medicare Part D,
prescription drug coverage (available in 2006), 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 premiums over time, so that the premium charged to an
individual under age 65 would cover only part of the costs. Once attaining Medicare
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 care. 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 8.2 million individuals. FEHBP offers 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
33 Employers may contribute to the FSA for their retired workers, even though the workers
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.

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CRS-18
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 8.2 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 retirees 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 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 may increase, with the expansion of Medicare to include prescription drug
coverage, beginning in 2006. However, even for retirees covered by Medicare, there
are services that Medicare does not cover, such as long-term care expenses. 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, beginning in 2006). Medicare
could be enhanced to expand coverage or to offer a catastrophic limit. However, as
Medicare will begin to offer a new costly prescription drug benefit in 2006, it is
unlikely that other large expansions will take place in the near future that might serve
to replace or reduce the costs of retiree health insurance.

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CRS-19
Employer Mandates
Employer-sponsored health insurance is offered voluntarily by employers and
in general,34 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. In this situation, the retiree coverage would not change while the worker’s
would, possibly resulting in more generous benefits for retirees than workers.
Although rather unlikely, in the most extreme case, employers could drop coverage
for workers, while still providing coverage for retirees. The more likely outcome of
a such a requirement is that 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.
Furthermore, 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-
34 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.

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CRS-20
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.
Legislative Proposals
Bills that address retirees’ health insurance coverage are included in the
discussion below. These include legislation that has been introduced in the 109th
Congress. This list may not include all relevant bills. These bills cover a wide
variety of options for making retiree coverage more available and affordable such as,
options to expand Medicare or FEHBP coverage to certain retirees, prohibit group
plans from reducing benefits for retirees, or provide 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.
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 of 1986 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
employees.
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 percent deduction for the health
insurance costs of individuals.
! H.R. 2089, H.R. 765, 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.
! H.R. 1872 and S. 978 would provide tax incentives for the purchase
of qualified health insurance.

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CRS-21
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
employees.

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