oversight

Employee Benefits: Trends in Retiree Health Coverage

Published by the Government Accountability Office on 1990-07-27.

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

                  UnitedStates   GeneralAccountingOfRce
                  Testimony




 For Release       EMPLOYEE BENEFITS:         Trends
 on Delivery       in Retiree Health        Coverage
 Expected at
 9:30 a.m. EDT
 Friday
 July 27, 1990




                    Statement of
                    Joseph F. Delfico,     Director
                    Income Security    Issues
                    Human Resources Division
                    Before the
                    Subcommittee  on Retirement
                       Income and Employment
                    Select Committee on Aging
                    House of Representatives




GAO/T-HRD-90-51                                           GAO Form 160 w/87)
                                                  SUPlPlARY

Company-sponsored        health     plans   play  a major       role   in providing
retirees   with   access      to needed medical         services.        This health
coverage    is especially         important    to retirees        under age 65, because
most are not eligible           for Medicare.

Retiree     health     coverage       has become a major             concern      for companies
because     retiree     health      costs        have been--and        are expected        to
continue    --rising       dramatically.             An accounting        standard      proposal
would require         companies       to report        on their      financial       statements      the
amount of their          future     liabilities.           GAO supports         the proposed
requirement         as an appropriate             method   for recognizing           and disclosing
the costs       and liabilities           associated       with    retiree      health     benefits.

This proposal      has forced       an increased        focus    on retiree      health
benefits.      Concerns     about     increasing      costs     and the effects         of this
proposal   have raised        questions       about   companies'      ability      to continue
providing    these    benefits.         GAO developed       estimates       of retiree     health
coverage,    and analyzed        changes      companies     are making        to help limit
retiree   health    costs.

Based on our surveys,            GAO estimates        that   only about    4 percent       of              all
companies     provide     retiree    health     coverage.        Companies   with    retiree
health    benefits     were generally        larger--employing         40 percent      of
private    sector     workers.

GAO estimates          that   about   9 million     retirees       are currently               in company-
sponsored       plans.       About   39 percent     of these       retirees        are       under age
65. Two-thirds,           or 64 million,        of an estimated          96 million            private
sector    workers        do not have retiree        health      coverage.          The       remaining    32
million     workers       are in company health           plans    with     provisions             for
retiree     coverage.         If company health         plan provisions            do       not change,
these    are the workers           who may expect       to receive        retiree           health
beneEits      in the future.

GAO estimates          that     since     1984, fewer         than 1 percent           of companies
have terminated           retiree       health      benefits.          However,      companies     are
taking     measures       short      of termination           to limit      retiree       health   costs.
Companies      have changed           health      plan provisions           to shift       costs   to
retirees      or reduce         benefits,       and appear         to be doing         so at an
increasing       rate.        Retirees       currently        receiving       health      benefits    and
active     workers       who may expect           to receive         them when they retire             have
limited     protection          from such actions             under current          law.

The security        of company-sponsored                 retiree       health      benefits      is in
question.       Millions         of  workers      are      not     covered,      and    those    that    are
face an uncertain            future.       GAO    believes          that    if   the    Congress      wants      to
preserve     company-sponsored             retiree         health      benefits,        it may have to
take explicit         action.        In considering              the various         options     available,
the Congress        should       assess    the trade-offs              between      enhancing       benefit
security,      reducing        the budget        deficit,          and increasing           the regulatory
burden    on private         businesses.
Mr.      Chairman             and     Members               of     the        Subcommittee:


          I am pleased                   to        be here             today          to     discuss              the        results            of     our

analyses           of      company-sponsored                             retiree             health             coverage.



          Company             group         health              plans         play          a major             role         in     providing

active         and       retired            workers               and        their          dependents                  with        access            to

needed         medical             services.                    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         usually                 cover           similar            services.

This      health           coverage                is     especially                  important                  to     retirees             under           the

age      of    65,       because            most          are      not        eligible                  for      Medicare.



          Concerns             about           significant                     and         increasing                  retiree           health            costs,

and      the    effects             on business                    operations                    of      disclosing                 unfunded

liabilities                on accounting                         statements,                 have             raised           questions              about

wnether,             and      to    what           extent,             companies                 will          continue             to      provide            these

benefits.                The Congress                      is     faced         with         deciding                  whether           the         federal

government               should            take          steps          to     increase                 the      security              of      retiree

health         benefits.



          Mr.        Chairman,                to        help      in      addressing                    this          issue,        you        asked         us to

 (1)     summarize             our         findings               regarding                 the         extent          of        company-

sponsored               retiree            health              benefits,               (2)       determine                the       extent            to     which

companies               are       taking           steps          to      reduce            or        terminate                retiree            health

coverage,               (3)    describe                  the      protection                  under            current             law      for       retirees

covered          by company                   health             plans,          (4)        comment              on the            Financial
Accounting            Standards              Board's              (FASB)l            proposed               requirement              and how it

might        change         companies'                willingness                   to     offer        retiree            health        benefits,

and       (5)     explore           possible            options              for     ensuring               that        company-sponsored

retiree           health       benefits               play       a greater                 role       for        current         and     future

retirees.



EXTENT OF COMPANY-SPONSORED COVERAGE



            Companies           provide              retiree          health              benefits           to     workers          either

directly,            through           company             plans,            or     indirectly,                  through         multiemployer

plans.            To determine                 the      extent           to        which         companies              are     providing

retiree           health        benefits,               we surveyed                  a random               sample         of    5,550

companies            and      all      the      multiemployer                       health           plans         we could          identify.2



            Our    company           survey           shows         that           over      one-half              of    companies

provide           health        coverage              to     active           workers,               and     60 million              workers         are

in     company        health           plans.              Only       about           105,000,              or     4 percent           of     all
companies,            extend           health           coverage              to     retirees.                   Larger         companies           are

much        more     likely          to    provide             retiree              health           benefits--the                  relatively

few       companies           with        retiree            health           coverage               employ         40 percent              of

private           sector        workers.


1 An independent   authority                                responsible                    for       setting            accounting
standards   for the private                                sector.

2The results     of our company survey           are reported      in Employee
Benefits:     Extent     of Companies'      Retiree      Health  Coverage     (GAO/HRD-90-
92, March 28, 1990).          For more information           on multiemployer     plans,
see our report,       Employee    Benefits:        Extent    of Multiemployer     Plan
Retiree   Health     Coverage    (GAO/HRD-90-132,         July  17, 1990).


                                                                         2
About       Nine         Million            Retirees             Have        Benefits;

Millions           More       May Become                  Eligible



           Combining               the      results          of       the        two     surveys,               and assuming

nonrespondents                     had      provided             comparable                   coverage,              we    estimate           that

about       9 million               retirees              are        currently                in     company-sponsored                       health

plans.         This         estimate               is     based         on a 62 percent                         response            rate      for        our

company        survey.                   As we noted                 earlier,            retiree               health        coverage              is

especially               important               for      retirees               under            65 because              most      are      not        yet

eligible           for      Medicare.                    About         39 percent                   of    retirees           with      company-

sponsored           health               coverage          are        under        age            65.



           We estimate                   that      of     the        approximately                       96 million              private           sector

workers,           two-thirds,                   or      64 million,               do not                have     retiree           health

coverags.                They       are         either          in     company-sponsored                          health          plans       with            no

retiree        coverage,                   or    are      not        enrolled                in     a company-sponsored                       health

plan.         The        remaining               32 million                 workers                are    in    company           health           plans

with       provisions                for        retiree           coverage.                   If        company         health        plan

provisions               do not            change,          these           are        the         workers        who may           expect          to

receive        retiree              health             benefits             in    the         future.             (See       figure          1.)




                                                                            3
Figure 1: Workers’ Participation in
Company-Sponsored Health Plans, by                                                                     Workers Not in a Company-Sponsored
Retiree Coverage                                                                                       Health Plan




                                                                                                       Workers in Health Plans With Retiree
                                                                                                       Coverage




                                                                                                       Workers in Health Plans With No Retiree
                                                                                                       Coverage




           COMPANIES          ARE MAKING CHANGES

           TO LIMIT          RETIREE       HEALTH COSTS



                     Since     1984,       fewer          than      1 percent              of   companies           have     terminated              a

           health      plan       which        resulted           in    retirees            losing       their       coverage,              or

           active      workers          not      being      eligible             for       coverage        upon      retirement.

           However,          a recent          benefit           survey3         and       a recent        GAO study4             both       found

           that      companies          are      taking          measures          short        of    termination            to     limit

           retiree       health         costs.            Companies             have       changed       health       plan        provisions


           3Foster       Higgins,             Health       Care        Benefits            Survey      1988,        Report        of
           Survey       Findings,             1988.
           4Employee   Benefits:     Company Actions                                    to Limit         Retiree           Health
           Costs   (GAO/HRD-89-31BR,    February   1,                                  1989).

                                                                            4
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

part     icipants              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.                 Many multiemployer                                    health         plans           also       require             cost

sharing.                According              to      our         survey,               about            56 percent                of     multiemployer

plans           require            workers          OK       retirees                   to        share        coverage             costs.              Companies

may also              limit         their          costs           by requiring                        participants                   to     pay more              of

the      costs          for        services            received.



           Companies                appear          increasingly                             to     be shifting               more         of     the

coverage              costs         to      participants.                             A 1988           survey          of     over         1,600

companies               by the           consulting                  firm             Foster           Higgins             reported              that      21

percent            of     respondents                  offering                   retiree              health          coverage              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

health           plan         provisions               during               the         period            1984-88            to     require             retirees

to     pay       more         of    the       costs          for           coverage                 and       services            received.                When we

recontacted                   these         companies                 in     June             1989,         we found               that         21 of      the          29


                                                                                  5
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          retiree             health             coverage              altogether;

current            employees                 and       retirees            will           not        be affected,                     but      new

employees            will             not      receive            health           benefits                  upon         retirement.



CURRENT LAW PROVIDES

LIMITED            BENEFI'I            PROTECTION



           Retirees              currently                receiving                health             benefits                 and     active             workers

whs may            expect             to     receive          them         when           they        retire              have        limited

protection                from         such         actions          under           curr+nt                    law.          In    particular,                 the
conlprehensive                   protection                 now provided                        to    pension                 plans         under         the

Employee            Retirement                    Income          Security                Act        of         1974      (ERISA)            are      not

pro,vided           to      health             plans.             These           include                 (1)      giving           workers           and

retirees            nonforfeitable                        rights           to      accrued                 benefits                (vesting)              and        (2)

requiring            benefits                  to      be funded             in      advance                 to        help        ensure          that     money

is     available                to     pay        them.



           Although              it         has     not     legislated                    comprehensive                        benefit          protection

standards,                the         Congress            has      acted            to      protect                retiree            health          benefits

in     specific             situations.                     When LTV,                one         of        the         largest         companies                in

the      United           States,              filed        for      bankruptcy                      in      July         1986,        it      attempted               to

terminate             health                benefits          to     over           78,000            retirees.                     The Congress
enacted            temporary                 legislation                that          required                    LTV to           continue           to


                                                                             6
provide           health          benefits              to    these             retirees.                  In    June        1988,           the

Congress           enacted               the     Retiree            Benefits                Bankruptcy               Protection                Act        to

replace           the      temporary               legislation.                        This         act     prohibits              companies                that

file       for     chapter               11 bankruptcy                    from         modifying                retiree          health             benefits

unless           they      can      prove          in    court            that         modification                  is      necessary               to

avoid       liquidation.



           Further,              the        Consolidated                  Omnibus               Budget          Reconciliation                      Act     of

1985       (COBRA)              requires           companies                to       offer          retiring              and    other

terminated               employees               the     opportunity                       to     continue           to      participate                  in     a

company's               group          health         plan         for     a limited                 period          of      time,           generally

18 months,               at      the        former       employees'                       expense.



            Company              actions           to    modify             retiree               health         plans          have         been

challenged                in     court.            Recent            court           decisions              have          generally                upheld        a

company's               right          to      modify        its         plan        if      the     plan        documents              contained
explicit            language                reserving              the       right           to     make        changes.               Some courts
have       ruled         that          companies             have         the        right          to     increase             retirees'              health

insurance               rates          even      when        their          plans            do not         contain             such         language.



COMPANIES'                RETIREE              HEALTH

LIABILITIES                ARE LARGE



           Retiree              health          coverage             has         become            a major         concern             for

companies               because             retiree          health              costs          have       risen          and are            expected            to

continue            to         increase          dramatically                     in       the      future.               We estimate                that


                                                                             7
the       present                  value       of       unfunded            accrued                benefits              is     large--about                      $272

billion                this         year,        assuming              benefit                and cost-sharing                          provisions                 do

not       change              .5      Under          these       conditions,                       companies’                  annual            costs           ~111

rise         in        20 years              from        over        $9 billion                    in      1990       to       about        $25 billion

by     the         year            2010.6            Factors           causing                retiree            health              cost        increases

include                increased               numbers           of       people              retiring             in         the      future          and        living

longer,                increased               utilization                   of      medical               services,                 more        costly

medical                technology,                   and medical                   cost           inflation.



             Most         companies                  fund       these         costs               as they          come due                 (pay-as-you-

go) I rather                       than      set        aside         funds             to    help         pay     for         health            coverage              once

workers                retire              (advance            funding).                     Companies             currently                 recognize                  only

the       pay-as-you-go                        retiree              health              costs        as expenses                     on their              income

statements.                         However,             the        FASB has                 announced             its         intention                  to

require                companies                to      recognize             on their                    financial                 statements                  accrued

retiree                health             liabilities                 for     current                and       future               retirees.                   The FASB

has       tentatively                       postponed               for      a year               the      effective                 date        of       its

proposed                 requirement,                    with         the         final           standard              to     be effective                      for

fiscal             years            beginning               after           December                15,      1992.             The planned                      FASB

accounting                     standards                wou Id        require                companies             to         include            the       present

value             of     accrued              retiree           health              liabilities                   as a liabil                   ity       on annual

financial                     statements.




58mployee     Benefits     : Companies’                                         Retiree   Health                         Liabilities
Large,    Advance      Funding Costly                                         (GAO/HRD-89-51,                           June 14,                1989).

6These             cost            estimates             are        reported                 in     1988       dollars.


                                                                                    8
          We support                  the      proposed                    FASB disclosure                        requirements.                        From          a

financial               reporting              perspective,                         we agree               with         the       desirability                     of

recognizing                   these         costs           and        liabilities.                        Although               most       companies

have       the         flexibility                   to     change             their          retiree             health           plans          to        help

limit        costs,            the         existence                  of     such         plans           implies             an agreement

between           the         employer               and        its         employees               to     provide               a future             benefit                in

return           for        current           services.                      This         agreement,                therefore,                   gives            rise

to      a liability                  for      financial                     reporting               purposes               for      the      cost           of     those

future           benefits             as      the          service             is        performed.



Impact           of      FASB Proposal



            The FASB proposal                              has        forced             an increased                    focus        on retiree

health           benefits.                  Many companies,                              particularly                    those        with        an older

work        force           and      many          retirees,                 are         concerned               that         such        disclosure                    will

adversely                affect            their           short-run                    financial               position             as portrayed                       in

their        financial                statements.                           For     example,               officials                 at     26 of           the         29

Chicago            companies                 whose           plans           we reviewed                   expressed                 uncertainty                    about

their        companies'                    ability              to         continue              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.                     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.




                                                                                    9
          The FASB proposal                           does        not      require              companies            to     actually             set

aside         funds         to     pay       for      future            benefits.                Funding         in       advance,           as is

now done           for        pensions,               would        stabilize                companies'               annual         expenditures

and make          benefits                 more       secure,            but      would          be very         costly.               If

companies              had        begun          advance          funding           accrued           retiree             health

liabilities                 in      1988,          their       first-year                 funding           costs         would        have       been

$32 billion--three                           and      a half            times       their         pay-as-you-go                    costs.

Company          officials                  we spoke           with        in     Chicago            told       us that            expanded              tax

preferences                 would           provide          a major             incentive            for       advance            funding             their

benefit          payments.



OPTIONS          FOR INCREASING

RETIREE          HEALTH BENEFIT                       SECURITY



          Millions                of     workers            and      retirees             have       OK     may become                eligible

for      company-sponsored                           retiree            health           benefits.              HOWeVer,              the     security

of      these      benefits                 is     uncertain.                  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         medical             care.            Current           and        future          retirees         have         limited

protection               under             current          law      against             company           actions           to    reduce           OK


terminate              benefits.                   FASB's         proposal               that      companies               recognize             retiree

health          liabilities                   on their            financial                statements            has         caused         some

companies              to        reconsider                whether          they         will      continue               providing           retiree

health          benefits.




                                                                           10
           If      the           Congress                 wants                to     preserve                  retiree          health             coverage

through           company                 plans,                   it         may     have          to         take     explicit              legislative

action.                At        one      end            of        the         range          of     possible                 actions,              the       Congress

could           require             companies                           with         health          plans             to     extend          COBRA provisions

to    cover            all        retirees                     under            age         65.           Retirees              would         be charged                   the

employers'                   average                 cost               for     retiree              health               benefits,               but      would           have

access           to      coverage                    at        group            rates.               The main                 disadvantage                     is     that

some retirees                       will             have               to     pay         more          for      their         health            benefits,

because            companies                        would               no longer                 be paying                  as much          of        the     coverage

costs.



           At      the           other              end        of        the         spectrum,                  the       Congress            could            impose            a

complete               set        of       requirements                              similar              to      those         now applicable                        to

pension            plans                under             ERISA.                    This      would             probably              require             additional

tax       preferences                         for        advance                    funding              in     exchange              for     requiring

companies                   to    meet              minimum                   vesting              and         funding          standards.                     This        option

would           make health                         benefits                   of     current                  and     future          retirees                more

secure,            but           will          create                   tax         losses          for          the        federal          treasury                at    a time

when       reducing                     the         budget               deficit               is        extremely              important.                     This        option

could           also         be costly                        to        companies                  and         could         cause          taxes         from

corporate                profits                    to        fall.



In      considering                      the         various                   options              available,                  the         Congress                should

assess            the        trade-offs                         between                enhancing                  benefit             security,                reducing

the       budget             deficit,                     and           increasing                  the          regulatory                 burden            on private

businesses.


                                                                                            11
                                -   -   -




MK. Chairman,       this    concludes       my statement.   I would   be happy   to

answer   any    questions     at    this    time.




                                                12