Employee Benefits: Extent of Companies' Retiree Health Coverage

Published by the Government Accountability Office on 1990-03-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Extent of Companies’
Retiree Health

    United States
    General Accounting  Office
    Washington, D.C. 20548

    Human Resources Division


    March 28,199O

    The Honorable Edward R. Roybal
    Chairman, Select Committee on Aging
    House of Representatives

    The Honorable J.J. Pickle
    Chairman, Subcommittee on Oversight
    Committee on Ways and Means
    House of Representatives

    This report is in response to your.,request for information on the extent
    to which companies provide retiree health benefits. We determined the
    (1) percentage of companies with retiree health plans, (2) number of
    workers enrolled in company health plans that extend coverage to retir-
    ees, (3) number of retirees enrolled in company health plans, and (4)
    percentage of companies that have terminated retiree health plans since

    The data we obtained showed that companies provide health coverage
    to active workers much more often than they do to retirees. A very
    small percentage of companies provide retiree health coverage. How-
    ever, because the companies providing retiree coverage tend to be
    larger, a relatively high percentage of people worked for firms with
    retiree health coverage. Specifically, in our study population:

. Over one-half of all companies provide health coverage to active work-
  ers, and nearly two-thirds of private sector workers are in company
  health plans.
l About 4 percent of companies have retiree health plans. Sixty-seven
  percent of those without plans said they had no retirees.
l Companies with retiree health benefits employed 40 percent of private
  sector workers. About 30 million workers are enrolled m company
  health plans that provide for continued coverage upon retirement.
. Over 5 million retirees are now in company-sponsored health plans.
  About 2 million, or 40 percent, of these retirees are under age 65.

    Fewer than 1 percent of companies have terminated a health plan that
    resulted in retirees or active workers losing retiree health coverage since
    1984. However, companies are taking measures short of termination to
    limit retiree health costs. Over one-third of companies with health plans
    for active workers or retirees required participants to help pay for cov-
    erage. A recent benefit survey, as well as previous GAO work, show that

    Page 1                                    GAO/HRD-99-92   Retiree   Health   Coverage
                                                                                                                        ,, .I’:

              companies are increasingly requiring participants to share coverage
              costs or shifting more of the costs to participants.

              The data we obtained do not include retiree health benefits that compa-
              nies are providing indirectly, through multiemployer plans. We will pro-
              vide information on these plans in a separate report to be issued in late

              Company group health plans play a major role in providing active and
,:ackground   retired workers and their dependents with access to needed medical ser-
              vices. Through group health plans, workers and their dependents may
              obtain hospitalization, physician, and other health services at less cost
              than they could purchase them individually. Retiree health plans usu-
              ally cover similar services. This health coverage is especially important
!             to retirees under the age of 65, because most are not eligible for

              Although seen as a low-cost employee benefit decades ago, retiree health
              coverage has now become a major concern for companies because retiree
              health costs have risen and are expected to continue to increase dramat-
              ically in the future. Most companies fund these costs as they come due
              (pay as you go), rather than set aside funds to help pay for health cov-
              erage once workers retire (advance funding).

              Companies currently recognize only the pay-as-you-go retiree health
              costs as expenses on their income statements, The Financial Accounting
              Standards Board (FASB),’ however, has announced its intention to
              require companies to recognize on their financial statements retiree
              health liabilities for current and future retirees. Companies have
              expressed concerns about the impact that such disclosure could have on
              their operations since it will result in a less favorable picture of their
              financial position.” The increasing costs of retiree health benefits and
              potential adverse effects on businesses’ financial statements from dis-
              closing unfunded liabilities have raised questions about companies’ abil-
              ity and willingness to continue providing these benefits.

              ‘An independent authority responsible for setting accounting standards for the private sector.
                           nefits: Companies’ Retiree Health Liabilities Large, Advance Funding Costly
                           9-51, June 14, 1989).

              Page 2                                                   GAO/HRD-99-92     Retiree   Health   Coverage

Currdnt Law Provides         Under current law, retirees who are receiving benefits, as well as work-
Limi ed Benefit Protection   ers who expect to receive health coverage after they retire, have little
                             protection from company actions to reduce or terminate benefits.
    d                        Retiree health benefits are specifically excluded from many of the pro-
                             tections provided to pension benefits under the Employee Retirement
                             Income Security Act of 1974 (ERISA). For example, companies are not
                             required to advance fund retiree health benefits, and there are no stan-
                             dards to ensure that employees will not have to work an unreasonable
                             number of years before having a nonforfeitable right to benefits accrued
        /                    (vesting).

                             The Congress has taken some actions to protect retiree health benefits;
                             however, these actions offer only limited protection. The Consolidated
                             Omnibus Budget Reconciliation Act of 1985 (COBRA) requires companies
                             to offer retiring and other terminated employees the opportunity to con-
                             tinue to participate in a company’s group health plan for a limited
                             period of time, generally 18 months, at the former employees’ expense.
                             The Retiree Benefits Bankruptcy Protection Act, passed in June 1988,
                             prohibits companies that file for chapter 11 bankruptcy from modifying
                             or terminating retiree health benefits unless they can prove in court that
                             modification is necessary to avoid liquidation.

                             The Congress has recently considered other legislative proposals
                             designed to enhance the security of retiree health benefits and provide
                             companies with tax incentives to encourage advance funding. Bills intro-
                             duced during 1989 would have changed federal tax law to encourage
                             advance funding; permitted tax deductions for employer contributions
                             to retiree health trusts that meet certain requirements, including vest-
                             ing, transfer, and distribution standards; and provided for federally
                             guaranteed loans to certain distressed companies to provide retiree
                             health benefits. While none of these proposals was enacted, some may
                             be considered during the current congressional session.

                             Page 3                                   GAO/HRD-90.92 Retiree Health Coverage

Lidited Data on the Extent   Information on the extent to which retiree health benefits are offered is
of oenefits                  limited. Several private and public sector studies present data on com-
                             pany health plans, but they primarily cover medium and large compa-
                             nies.” Little is known about smaller companies’ health benefits,
                             especially companies with fewer than 100 employees.

                             We collected data in response to your questions from March to August
SC pe and                    1989. In doing so, we mailed questionnaires to a random sample of 5,550
M thodology                  companies, stratified by size and industry group. We developed the
                             strata by grouping companies into four sizes and six industry categories.
  i                          Our sampling frame of 6.9 million companies was developed from the
                             Dun’s Marketing Service database. We selected this database because it
                             had the most complete and current information on companies of all sizes
      /                      and industry types.

      ,                      The responses we received to our survey allow us to generalize the
                             results to a population of 2.5 million of the 6.9 million companies. We
                             did not independently verify the data companies submitted. (For details
                             of the sampling and survey procedures used, see app. I.)

                             Through our questionnaire, we examined the relationship between com-
Larger Companies             panies with group health plans for active workers and those with retiree
M&e Likely to Have           health benefits. Overall, only about 105,000, or 4 percent of all compa-
Retiree Health               nies, extend health coverage to retirees beyond the time required by
                             COBRA. Larger companies extended coverage much more often than
Benefits                     smaller ones. Nearly all companies with over 500 employees have health
                             coverage for active-workers-and about 43 percent of these also offer
                             retiree coverage. In contrast, only one-half of the companies with fewer
                             than 25 employees offer health coverage to active workers; only 2 per-
                             cent of these provide retiree coverage. (See fig. 1.) These small compa-
                             nies constitute 85 percent of all companies.

                             “Examples include: U.S. Department of Labor, Bureau of Labor Statistics, Employee Benefits in
                             Medium and Large Firms, August 1989; Foster Higgins, Health Care Benefits Survey 1988, Report of
                             Survey Findings, 1988; The Wyatt Company, A Survey of Health and Welfare Plans Covering Sala-
                             ried Employees of U.S. Employers, 1988; and Equicor, Looking to the Future of Retiree Health Bene-
                             fits, conducted June-August 1986.

                             Page 4                                                  GAO/HRD90-92     Retiree   Health   Coverage
    b       ~                            B233632

Figure I: Percentage of Companies With
Health @enefits for-Active and Retired
                                         loo   Ponrmt
Workerd, by Company Size

                                                Numbor ol Employon

                                               1        ] Aotlve Worker Coverage
                                                          Retiree coverage

                                         We estimate that over 5 million retirees are currently in company group
Five Million Retirees                    health plans, including about ‘2 million, or 40 percent, who are under age
Hav’eBenefits;                           65.4 Nearly 80 percent of companies with retiree health benefits cover
Millions More May                        retirees under age 65; over 60 percent of companies with retiree health
                                         benefits cover retirees regardless of age. As noted earlier, health cover-
BecomeEligible                           age is especially important for retirees under age 66, because most are
                                         not eligible for Medicare.

                                         Far more workers may become eligible for retiree health coverage than
                                         the number of companies with retiree coverage might suggest, because
                                         most workers are employed by larger companies, About 73 percent are
                                         employed by companies with 100 or more employees. Our work shows
                                         that companies with retiree health coverage employ 38 million work-
                                         ers-40 percent of an estimated 96 million private sector workers.

                                         “For sampling errors associated with worker, retiree, and company characteristic estimates, see
                                         tables I.6 and 1.6.

                                         Page 6                                                   GAO/HRD-90-92 Retiree Health Coverage
                                       About 30 million of these workers,5 or nearly one-third of all workers,
                                       are in company-sponsored plans that cover retirees (see fig. 2). Assum-
                                       ing company health plan provisions do not change, these are the work-
                                       ers companies must consider in calculating future retiree health
                                       liabilities, and who may expect to receive retiree health benefits in the

Paqicipatlon in Company Health Plane                                                          Workers in Company Health Plans with
                                                                                              Retiree Coverage

                                                                                              Workers Not in a Company Health Plan

                                       We compared health coverage for active workers and retirees by type of
Retiree Health                         industry, to determine whether certain industries are more or less likely
Coverage Varies Little                 to provide these benefits. While differences were sizable for active
Among Industries                       worker coverage, we found little variation among companies with
                                       retiree health benefits when comparing companies by industry group.
                                       (See fig. 3.)

                                       “Some workers are not enrolled in company plans because they either (1) do not meet eligibility           l

                                       requirements, (2) are covered through a multiemployer plan, or (3) choose not to participate.

                                       Page 6                                                    GAO/HRD-99-92     Retiree   Health   Coverage

Figure 4 Percentage of Companies With
Health ‘enefitr for Active and Retired      loo     hwllt
Worker by lndurtry Group










                                         Industry   Qroup

                                                    I        AcUve Worker Coverage
                                                             Retiree Cwemge

                                            Note: For sampling errors, see table 1.8.

                                            All six of the industry groups shown in figure 3 are characterized by a
                                            high percentage (78 percent or more) of companies with fewer than 25
                                            employees. Because few small companies offer retiree health benefits,
                                            the percentage of companies with these benefits is relatively low among
                                            all industry groups. The construction industry had relatively fewer com-
                                            panies with retiree health coverage; the construction and retail trades
                                            had fewer companies with health coverage for active workers.

                                           Page 7                                       GAO/H&D99-92   Retiree   Health   Coverage

                                          We asked the companies in our survey that did not offer retiree health
M&t Companies Cited                       benefits to select the reasons, from those cited in several health surveys
“No Retirees” as a                        we reviewed, why they did not offer this benefit. Table 1 shows that 67
Rebsonfor Not Having                      percent of these companies selected “no retirees” as the reason they do
                                          not have a retiree health plan. “Little or no demand by employees” was
RbbireeHealth                             the second most selected reason at 29 percent.
Tab1 1: Reasons Companies Selected
for : ot Having Retiree Health Benefit8   Reason                                                                                    Percent0
                                          No retirees                                                                                      67
                                          Little or no demand by employees                                                                 29
                                          Not a normal practice within the industry                                                        25
                                          Retirees covered by Medicare                                                                     12
                                          Cannot qualify for group coverage                                                                Id
    I                                     Employees receive benefits through a multiemployer       plan                                     2
                                          No reason selected                                                                                2
                                          Other                                                                                            11
                                          aPercentages do not add to 100 because respondents   could select more than one reason.

Companies    Are                          plan that resulted in retirees losing their coverage, or active workers not
Making Changes to                         being eligible for coverage upon retirement. A benefit survey” and a GAO
Liqnit Retiree Health                     study7 both found, however, that companies are taking measures short
                                          of termination to limit retiree health costs. Companies have changed
Coists                                    health plan provisions to shift costs to retirees or reduce benefits, and
                                          appear to be doing so at an increasing rate.

                                          One way companies can limit their health costs is by requiring partici-
                                          pants to share in the cost of coverage. Our survey shows that, as of
                                          1987, over one-third of companies with health plans for active workers
                                          or retirees required contributions to help pay for the cost of coverage.x
                                          A 1988 survey of over 1,600 companies, by the consulting firm Foster
                                          Higgins, reported that 62 percent of survey respondents required contri-
                                          butions from retirees under age 65; 53 percent required those age 65 and
                                          over to contribute.

                                          “Foster Higgins, Health Care Benefits Survey 1988, Report of Survey Findings, 1988.
                                          7Employee Benefits: Company Actions to Limit Retiree Health Costs (GAO/HRD-89-31BR,
                                          Feb. 1, 1989).
                                          “For sampling error, see table 1.6.

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    )-       ~   E233632

                 Companies appear increasingly to be asking participants to share cover-
                 age costs, or are shifting more of the costs to participants. In the Foster
                 Higgins survey, ‘21 percent of respondents offering retiree health cover-
                 age had increased the level of contributions in the last 2 years or
                 planned to increase it by 1990.

                 In our February 1989 report, we reviewed the changes that a sample of
                 29 medium and large companies in the Chicago area had made to limit
                 retiree health costs. All 29 companies had changed their plan provisions
                 during 1984-88 to require retirees to pay more of the costs for coverage
                 and services received. We concluded that future changes companies may
                 make to help contain costs could be more substantial. Officials at 26
                 companies expressed uncertainty about their companies’ ability to con-
                 tinue providing retiree health benefits in the face of rising costs and the
                 FASB proposal to require companies to disclose future retiree health costs
                 on their financial statements.

                 In June 1989, we recontacted these companies and found that 21 of the
                 29 had made additional changes in the last year.!’ While many of these
                 changes were similar to those made in previous years, a few made even
                 more significant changes to help limit retiree health costs. One company
                 has decided to phase out this coverage altogether; current employees
                 and retirees will not be affected, but new employees will not receive
                 health benefits upon retirement. Officials at 21 companies said they
                 were considering further changes to their retiree health plan structures;
                 at 10 companies officials said they were studying the impact of FASB’S
                 proposed regulations before making changes.

                 Millions of workers and retirees have or may become eligible for
Concluding       company-sponsored retiree health benefits. The private sector’s role in
Observations     providing these benefits is changing, however. Companies are taking
                 actions to limit rising retiree health costs. While few companies have
                 terminated benefits, many are requiring retirees to pay more for their
                 health care. Current and future retirees have limited protection under
                 current law against company actions to reduce or terminate benefits.
                 FASB’s proposal that companies recognize retiree health liabilities on
                 their financial statements has caused some companies to reconsider
                 whether they will be able to continue providing these benefits.

                 “Employee Benefits: Companies’ Retiree Health Liabilities Large, Even With Medicare Catastrophic
                 Insurance Savings (GAO/T=-89-29,      June 24,198Q).

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