SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4846 words

COMMITTEE: HOUSE EDUCATION AND THE WORKFORCE

HEADLINE: RETIREMENT SECURITY

TESTIMONY-BY: PATRICIA NEUMAN, SC.D., VICE PRESIDENT OF THE

AFFILIATION: HENRY J. KAISER FAMILY FOUNDATION

BODY:
Committee on Education and the Workforce Hearings

Testimony of

Patricia Neuman, Sc.D. Vice President of the Henry J. Kaiser Family Foundation

November 1, 2001

Thank you, Mr. Chairman and Members of this Subcommittee. I am pleased to be here to testify on retiree health issues and the health challenges facing aging Americans. I am Patricia Neuman, a Vice President of the Henry J. Kaiser Family Foundation and Director of the Foundation's Medicare Policy Project. I am also an associate faculty member at the Johns Hopkins University School of Public Health in the Department of Health Policy and Management.

Employer-sponsored health plans play a critical role in providing health insurance for retirees. Retiree health benefits bridge a potentially risky gap in coverage for many who retire in their late fifties or early sixties-years before they are eligible for Medicare. Health coverage offered by employers provides needed health insurance for early retirees at a time in their lives when they face increasing health problems and might otherwise find health insurance difficult to obtain. For those ages 65 and older, employer-sponsored health plans are a vital source of insurance that supplements Medicare by assisting with cost- sharing requirements and paying for critically needed benefits that are not covered by Medicare, especially prescription drugs. Over the past decade, however, there has been a steady erosion of retiree health insurance benefits that threatens to increase the number of early retirees who are uninsured and to diminish needed supplemental coverage for seniors on Medicare. In addition, there is concern that the recent downturn in the economy, coupled with double-digit increases in health-care costs, will hasten the decline of retiree health benefits. Within just the past few weeks, two large national firms (Polaroid and Bethlehem Steel) filed for Chapter 11 bankruptcy protection and, as part of that process, signaled their intent to substantially reduce their retiree health obligations. These events underscore the vulnerability of retirees to changes that could significantly impact their health and financial security.

Health Needs of Aging Adults

Health insurance matters to Americans of all ages but is especially important to retirees as they grow older and tend to experience more acute and chronic health problems. Mid-life and older adults are far more likely than younger adults to report being in fair or poor health (Exhibit 1). They are also more likely to be living with chronic health conditions such as heart disease, arthritis, and diabetes (Exhibit 2).

As a result, older adults tend to have a greater need for medical services that can be prohibitively expensive without the financial protection offered by health insurance. The average number of physician contacts per person increases with age, as does the share of adults reporting one or more hospital episodes per year (Exhibit 3). Prescription drug use also increases with age, with adults between the ages of 45 and 64 filling more than twice as many prescriptions-and those ages 65 and older filling four times as many-as do younger adults (Exhibit 4).

Insurance Challenges Facing Early Retirees

Today, the majority of 55- to 64-year-olds (865 percent) have ve some form of health insurance (Exhibit 5). Two-thirds (66 percent) have health insurance from an employer (as workers, retirees, or dependents); another 123 percent have coverage under public programs (mainly Medicaid and Medicare); and 7 percent purchase coverage in the private, individual market. Adults ages 55 to 64 are less likely than 35- to 54- year- old younger adults to have job-based insurance, but are more likely to rely on individually purchased policies and public coverage under Medicare and Medicaid. These public programs offer a vital safety net for people with permanent physical or mental disabilities, but are limited to those who meet eligibility requirements, including the income and asset tests for Medicaid.

There are more than three million About 15 percent of 55- to 64- year-old Americans who are uninsured today. While Rates of uninsured are roughly the same across the 35-to-564 year-olds are just as likely to be age group uninsured as are those ages 55 to 64-with 14 percent of adults in each of these age groups (3 million people) are uninsured-slightly less than the 18 percent average for the entire non-elderly population. While rates of uninsurance are virtually the same across but uninsured-lacking health insurance poses more more serious risks for people in this older group because they tend to have more health problems than do younger, uninsured adults. More than a quarter (26 percent) of uninsured adults between the ages of 55 and 64 report being in fair or poor health, compared with 16 percent of uninsured adults between the ages of 35 and 54, and 7 percent of uninsured adults under age 35 (Exhibit 6). Lack of insurance disproportionately impacts women, racial and ethnic minorities, non-workers, and adults with low incomes in this age group (Exhibit 7).

More than half of uninsured adults between the ages of 55 and 64 have incomes below 200 percent of the federal poverty level. For a widow in her early sixties, this is an annual income of roughly $17,000. These low-income, uninsured early retirees are especially vulnerable because they lack the financial resources either to purchase health insurance in the private market or to pay directly for their medical care out-of-pocket. They may be further disadvantaged by poor health, since low incomes and health problems are highly correlated.

There is now a significant body of evidence documenting the problems faced by Americans who lack health insurance, including uninsured, early retirees. The uninsured are far more likely than those with health insurance to postpone or forgo needed health care (Exhibit 8). They are also less likely to get preventive services such as pap smears, mammograms, and prostate exams. Without insurance, many cannot afford to get the care they need. Nearly a third of uninsured adults report not having filled a prescription in the past year and more than a third went without a recommended medical test or treatment, citing costs as the reason. A study published earlier this month in the New England Journal of Medicine presented new evidence that uninsured adults between the ages of 51 and 61 are more likely than insured adults in this age group to experience a major decline in health status (Exhibit 9).

Despite the incontrovertible need for health insurance, it can be difficult or in some cases impossible for older adults to find affordable, comprehensive health insurance on their own. If workers retire before age 65 and their employer terminates retiree health coverage, they do not currently have a right under COBRA to purchase health coverage under a plan offered by their former employer to active workers. At this stage in their lives, they may be unable to find another job that offers health insurance. And, until they reach age 65, they do not qualify for Medicare. Many in this age group look to purchase non-group policies in the individual market, but these policies have proven to be a less than reliable source of affordable coverage- particularly for those with a history of medical problems and those with modest incomes.

Premiums in the individual market can be prohibitively expensive for early retirees, presenting a considerable financial hurdle for those living on fixed incomes. For example, a new report prepared by the Urban Institute found that a 60-year old man who is a non-smoker with one health problem could expect to pay nearly $7,000 in insurance premiums. Clearly, few retirees have the resources to pay such premiums. For the majority of uninsured adults ages 55 to 64 who live on incomes below 200 percent of the poverty level, this premium would consume about 40 percent of their income. Among older adults with chronic diseases such as hypertension or depression, premiums would be considerably higher, potentially posing an even greater financial burden for those with substantial health-care needs.

Many early retirees are unable to buy insurance in this market at any price. According to a 1998 report prepared for the Kaiser Family Foundation, one by Karen Pollitz and colleagues from Georgetown University, and the other by Deborah Chollet and Adele Kirk of the Alpha Center, insurers in the individual market tend to underwrite aggressively-screening applicants for pre-existing conditions, excluding coverage for the very services that people with specific health conditions need, or denying coverage altogether. In states where insurers are not required to guarantee issue, for example, insurers may deny coverage for such common conditions as rheumatoid arthritis, chronic headaches, angina, kidney stones, heart attacks, and stroke.

Given the limitations of the individual market for older adults, and the limited access to alternative sources of coverage, employer-sponsored retiree health benefits provide a critical safety net for many workers who retire before they are eligible for Medicare.

Insurance Challenges Facing Retirees 65+

Retirees ages 65 and older confront a different set of insurance challenges when they lose employer-sponsored retiree health benefits. Unlike than do early retirees, seniors By contrast, they are fortunate to have Medicare as a safety-net insurer and their primary source of basic health insurance protection. For 65+ retirees seniors, the challenge is finding supplemental insurance to assist with Medicare's high cost-sharing requirements and with paying for services and items that are excluded from Medicare's benefit package, particularly prescription drugs. Given the limitations of Medicare's benefit package relative to plans typically offered to workers, supplemental coverage is particularly important. Beneficiaries who lack supplemental coverage are substantially more likely than those with private coverage such as employer-sponsored retiree health benefits to experience serious access problems and to delay getting needed care due to costs (Exhibit 10).

Today, more than a third of all seniors-almost 14 million people on Medicare-have supplemental coverage from an employer plan (Exhibit 11). Others get coverage from a variety of sources, including Medicare HMOs, Medigap, and Medicaid. Unfortunately, the supplemental insurance market has become increasingly unstable in the past few years, jeopardizing retirees' access to needed coverage. Medicare HMOs HMOs, once considered a promising and affordable source of supplemental benefits part of the Medicare+Choice program, have also experienced turbulent times, with more than 173 HMO plans pulling out of the Medicare+Choice program since 11998, disrupting coverage for more than one million beneficiaries and limiting the ability of seniors to get help with their prescription drug expenses. In addition, Medigap premiums have become increasingly unaffordable; premiums for policies that cover some prescription drugs have risen by more than 30 percent since 1999.

Given this instability, This instability helps to explain why employer-sponsored retiree plans are an especially important source of supplemental coverage for millions of older Americans. Retiree coverage assists seniors in many ways, often helping with Medicare's cost-sharing requirements and covering the costs of services not included in the basic Medicare benefit package, such as prescription drugs and, in some cases, dental care. benefits are so valued by retirees.

Virtually all employer-sponsored retiree health plans provide prescription drug benefits today. In fact,

employer-sponsored health plans are the primary source of prescription drug coverage for seniors, providing drug benefits to one-third of all people on Medicare. Drug benefits offered under retiree health plans tend to be more generous than the three standard Medigap policies that include prescription drug coverage and most Medicare+Choice plans. These benefits are therefore especially valuable for retirees, given recent and fairly dramatic increases in prescription drug spending and the absence of alternative, reliable, affordable sources of drug coverage for people on Medicare.

The Role of Retiree Health Benefits

Given the limitations of the individual market for older adults, and the limited access to alternative sources of coverage, employer-sponsored retiree health benefits provide a critical safety net for many workers who retire before they are eligible for Medicare. Health benefits offered to early retirees are generally comparable to the benefits offered to active workers, and far more comprehensive and affordable than policies typically sold in the individual market. As a result, retirees often rely on this source of coverage during the years that bridge retirement age and Medicare eligibility.

Employer-sponsored health plans are critical to Medicare-eligible retirees as well. They serve as the primary source of prescription drug coverage for this population, providing drug benefits to one-third of all beneficiaries. This coverage is especially valuable given recent and fairly dramatic increases in prescription drug spending among seniors and the instability of alternative sources of drug coverage.

Retiree health benefits tend to be substantially more generous than other forms of private supplemental coverage for Medicare- eligible retirees-particularly in the area of prescription drugs. To date, for example, drug benefits included in retiree health plans tend to be unlimited (i.e., without a cap), in contrast to both the three standard Medigap policies that include prescription drug coverage and most Medicare+Choice plans. As a result, Medicare beneficiaries with supplemental retiree health benefits typically have lower average out-of-pocket drug costs than do those with Medigap ($313 versus $546), according to a recently published analysis of the 1998 Medicare Current Beneficiary Survey. The absence of this coverage would clearly signal a rise in out-of-pocket prescription drug costs for a large share of seniors on Medicare.

The Erosion of Retiree Health Benefits

The prevalence of retiree heath coverage has declined over the past decade. Among large employers-who are far more likely than small or mid-sized employers to offer retiree health benefits-the share offering coverage to pre-65 retirees decreased from 88 percent in 1991 to 76 percent in 1999 (Hewitt Associates, 2000). During this same period, the share of large employers offering retiree health benefits to retirees ages 65+ dropped from 80 percent in 1991 to 66 percent in 1999 (Exhibit 12). Since 1999, the share of firms offering health benefits to retirees ages 65 and older has fallen by 10 percentage points, according to a recent survey of employers in mid-size to large firms (Kaiser/Commonwealth/Health Research and Educational Trust, forthcoming). This decline is a function of the rising number of employers terminating coverage as well as fewer new companies offering retiree health benefits. Typically, but not always, terminations affect future retirees, eroding the promise of retiree coverage for younger workers, while "grand fathering" current retirees and those close to retirement.

The decline in retiree health benefits observed in the early- and mid-1990s has been attributed to new accounting rules issued by the Financial Accounting Standards Board (FASB) that required employers to account for their future liability for retiree health benefits on their balance sheets. More recent declines, however, have been attributed to the recent rise in health-care spending. Health-care premiums for job-based insurance grew at a higher rate than in previous years, increasing by 11 percent between 2000 and 2001 (Kaiser/Health Research and Educational Trust, 2001).

Confronted with a fiscal downturn, employers may look to cut costs by reducing their retiree health obligations in an effort to keep their margins up. Retiree health is a voluntary benefit and, where it is not negotiated with unions or provided under other contractual arrangements, employers may choose to terminate coverage on a prospective basis under the assumption that providing benefits to active workers is more important to maintaining business performance than is providing benefits for retirees.

Among firms that continue to offer retiree health coverage, there is mounting pressure to control the growth in spending for these benefits. Many employers impose stringent eligibility rules to cut costs, including both minimum eligibility age requirements (e.g., ages 55 and older) and minimum-years-of-service rules (e.g., 10 to 15 years) as conditions for receiving retiree health benefits. These rules reward workers who make a long-term commitment to firms offering retiree health benefits, but make it difficult for many workers to qualify for these benefits when they are ready to retire.

In addition, a growing share of large employers are raising premiums and cost-sharing requirements, making retirees cover a greater share of their own health-care costs. In particular, employers are continuing to bear down on prescription drug costs that are projected to represent as much as 80 percent of health- care costs for Medicare-eligible retirees in 2003 (Hewitt Associates, 2000). These changes will ultimately erode the value of retiree benefits for seniors, exposing them to higher out-of- pocket spending.

Looking to the future, there is ample reason to suspect that the trend of declining retiree health benefits will continue, if not accelerate. In a 1999 survey of large employers, many said they would seriously consider major changes in their benefits, including increasing premiums and cost-sharing for retirees ages 65 and older (83 percent), shifting to a defined contribution approach to cap their own liability (51 percent), cutting back on prescription drug coverage for 65+ retirees (36 percent), and terminating coverage prospectively for elderly retirees (29 percent) (Hewitt Associates, 1999) (Exhibit 13) (Hewitt Associates, 1999). It is important to note that these findings are from 1999-a time when the economy was considerably stronger, the labor market was tighter, and health-care costs were growing far more slowly than they are today. In the current climate, the outlook for retirees could be substantially worse.

Policy Options

There are a variety of policy options that could help address problems that arise from eroding employer-sponsored retiree health benefits. Some aim to provide health insurance coverage to retirees who were adversely affected by the decisions of employers to terminate health benefits. These range from more comprehensive approaches (which are not currently under discussion) to more incremental approaches. Others seek to reinforce the role of employers, by encouraging them to maintain commitments to their retirees. , ranging from comprehensive approaches (which are not currently receiving serious consideration) to more incremental strategies.

Among the more incremental proposals to assist early retirees, For pre-65 retirees whose option would be to modify existing COBRA rules to make the termination of retiree health benefits a qualifying event and give early retirees the right to purchase health insurance coverage under a plan offered by that their former employer to its active workers. To minimize the risk of subsequent gaps in coverage, These COBRA protections-generally limited to 18 months-could be extended to cover retirees until they reach the age of Medicare eligibility, to minimize the risk of subsequent gaps in coverage.

A COBRA This approach would give many early retirees access to relatively generous health insurance benefits under group health plans coverage. However, COBRA premiums are relatively high, because those who buy into a plan are typically required to pay both the employer and employee share of the premium plus a 2 percent administrative fee. As a result, the COBRA option, by itself, may be unaffordable for many who need coverage. Premium subsidies, while adding costs to the federal government, would clearly help to lower the costs borne by retirees, potentially increasing the number of people who would opt for coverage under this approach. s concern that premium costs would be too high to help many of those in need. Under COBRA, those who buy into a plan typically pay both the employer and employee share of the premium plus a 2 percent administrative fee. An additional concern is that many early retirees would not qualify for these new protections because COBRA rules do not apply to employers with fewer than 20 workers.

Another option under discussion would be to provide tax credits to help early retirees (and others) purchase health insurance on their own. Under this general approach, retirees would turn to the individual insurance market, choose a health plan, and people would choose their own health plan and apply for premium subsidies by filing a tax return. This idea has been raised by many as a strategy to help the uninsured of all ages. Proponents suggest that tax credits would ease the financial burden on consumers by making health insurance premiums more affordable than it is today, without expanding the role of public programs such as Medicare or Medicaid.

Others observe, however, that most tax credit proposals cwould be of minimal help because premiums in the individual market tend to be expensive, particularly for people in this age group, and proposed tax credit amounts (typically $1,000 for an individual and $2,000 for a family) please check ] are unlikely to be high enough to make this coverage affordable. Furthermore, even if the tax credits were substantially increased to cover not offer credits at a high enough level to offset a larger share of the high the premium cost, many early retirees could face of health insurance premiums for individuals in this age group, especially for those living on modest incomes. A tax credit approach, by itself, would not address barriers to coverage as a result of related to underwriting and rating practices in the non-group market.

A third option to provide coverage -and one that was proposed by President Clinton and others-would permit early retirees to buy into the Medicare program before they turn 65. The success of this approach would depend on its design and the generosity of the premium subsidy offered to retirees. If designed to be cost- neutral and financed fully by individual premiums, then a Medicare buy-in would expand access to coverage, but would again be unlikely to help those with modest incomes. If adequately subsidized, however, a Medicare buy-in could be a relatively direct way to provide affordable coverage to early retirees, including those with modest incomes and those with medical problems, bridging the gap between retirement and Medicare eligibility (Johnson, et al., 2001).

For seniors who lose Policy options to assist seniors ages 65 and older that lose their retiree health benefits but who, unlike early retirees, are fortunate to have basic coverage under Medicare, the policy options under discussion tend to focus more broadly on strategies to enhance Medicare benefits. These options are integrally related to ongoing discussions about Medicare reform. The erosion of coverage for retirees ages 65 and older underscores the problems facing seniors today who lack access to affordable supplemental coverage-particularly those who lack access to prescription drug benefits. There are now a variety of options under discussion that would address this concern. Some would modify the current program, by adding prescription drugs to the basic Medicare benefit package. Others would offer access to new benefits as part of more fundamental changes to the structure of the program.

It is also worth noting that a new Medicare prescription drug benefit-while designed to achieve the specific objective of increasing access to prescription medications for those on Medicare-could also have the indirect effect of strengthening the capacity of employers to continue to offer retiree health benefits. This is because a Medicare drug benefit could offer employers significant financial relief forom the cost of retirees' prescription drugs. In fact, the majority of large employers surveyed in 2000 said they would continue to offer retiree health benefits as wrap-around coverage, if a Medicare drug benefit were enacted (Exhibit 14) (Hewitt Associates, 2000).

Another strategy for addressing the predicted decline in retiree health benefits would encourage employers to be to target employers by encouraging them to maintain their health commitments to their retirees. Some would offer financial incentives, while others would impose penalties on plans that reduced retiree health benefits post-retirement.

As these policies are considered, it will be important to strike a balance between . . .. encourages employers to retain retiree health benefits by. . . and by providing civil monetary penalties on employers. . . encouraging employers to maintain medical coverage for retirees, while guarding against changes that could accelerate the erosion of these highly valued benefits. This could prove to be especially challenging given the current economic outlook.

It is also worth noting that a new Medicare prescription drug benefit-while designed to achieve the specific objective of increasing access to prescription medications for those on Medicare-could have the indirect effect of slowing the rising costs of retiree coverage and of thus allowing employers to continue offering retiree health benefits more easily as wrap- around coverage (Exhibit 14) (Hewitt Associates, 2000)..

Implications

While millions of retirees enjoy the financial protections offered by employer-sponsored retiree health benefits, it is clear that fewer workers will be able to rely on such coverage when they retire. A combination of factors-the -steady decline of employers offering retiree health coverage, the implementation of strict eligibility requirements imposed as a condition for receiving benefits, and predictions that benefits will continue to erode in the future-all suggest that the current generation of workers will be far less likely than their parents' generation to receive employer-sponsored retiree health benefits.

current environment suggests the continued decline of retiree health benefits-a trend that may accelerate with the downturn in the economy and one that will impact both pre-65 and Medicare- eligible future retirees and, consequently, the present generation of workers.

The erosion of retiree health benefits poses serious risks for adults who retire before they are eligible for Medicare. Those who retire in their late 50s or early 60s -for health concerns, because they worked for a firm that downsized, or other reasons- have greater difficulties than younger workers finding new jobs, and are thus less likely to obtain insurance from another employer. Early retirees-particularly those with health problems or modest incomes-face major challenges finding affordable health insurance in the private individual market. Without insurance, they are less likely to get needed care, are more likely to experience a decline in health outcomes, and are highly vulnerable to large medical bills that could wipe out their life savings. and are at greater risk of going without needed care and medications.

For the Medicare population seniors on Medicare, the erosion of retiree health benefits could is likely to expose millions of seniors beneficiaries to rising out-of-pocket costs for health benefits that are not covered by Medicare. Today, employer plans provide drug coverage to one-third of all beneficiaries. If employers cut back on these benefits-as many say they are seriously considering-a growing number of elderly people will be left without prescription drug coverage. There is ample evidence that seniors without drug coverage are more likely than those with coverage to go without needed medications, and in so doing, risk serious medical complications and preventable health problems. Clearly, the predicted decline of retiree health benefits will only add to the growing pressure for improvements in the Medicare program

The decline in retiree benefits underscores both the need to provide affordable health insurance for early retirees older adults who are uninsured but too young for Medicare and also the urgency of making prescription drug coverage available to older retirees covered by Medicare who lose access to such benefits under an employer plan. who lack access to such benefits under an employer plan. Employers, workers, and retirees have much at stake in the outcome of these decisions.



LOAD-DATE: November 2, 2001