American Journal of Law & Medicine

Trav'lin light: early retirees and the availability of post-retirement health benefits.

I. INTRODUCTION

George Eastman may not have been a father, but to the residents of Rochester, New York, the principal founder of Eastman Kodak was a doting uncle.(2) In addition to donating millions of dollars to Rochester-area schools and hospitals, Eastman reportedly paid to remove the tonsils of every child in town.(3) Even after his death in 1932, his company looked after of its employees and retirees.(4) For example, Kodak refused to use its size to negotiate for cheaper medical care for its Rochester employees. If it had, most small businesses in the area would have likely faced higher insurance rates and the prospect of eliminating health benefits for their employees entirely.(5) Only about seven percent of Rochester residents do not have health insurance today, compared with fifteen percent nationally.(6)

That may change, however. Faced with growing foreign competition and demands for higher returns, last summer Kodak threatened to desert its long-standing approach to buying insurance and encouraged its 44,000 retirees to join a health plan that excluded two high-priced hospitals.(7) The company also told 16,000 Rochester retirees who are eligible for Medicare that, starting January 1, 1996, they would have to pay part of the cost of their supplementary insurance premiums, unless they signed up for a Medigap plan that costs Kodak less money.(8) "We feel betrayed by Kodak," said Hugh I. Race, a 67-year-old retired Kodak sheet metal worker.(9) Race said that when he retired in 1993, Kodak promised him in writing that his free health insurance, covering any doctor or hospital he chose, would continue for the rest of his life.(10) Race now considers joining a possible Kodak retirees class action lawsuit against the company.(11) "If they get away with this," Race said, "what's next?"(12)

What could be next for the retirees of Kodak, as well as retirees across the U.S., is a protracted struggle to retain the present level of their employer-provided post-retirement health benefits. Corporate "doting uncles" like George Eastman, who fostered a cradle-to-grave relationship between the company and the employees, are fast becoming relics.(13) Moreover, the traditional "social contract" enjoyed between employers and employees is changing due to rapid turnover and constant flux in the workforce. Employers feel less inclined to provide long-term benefits, particularly when faced with their high cost and the need to remain financially competitive in domestic and international markets.(14) Employees, however, look to health insurance as a particularly important employee benefit.(15) Health benefits remain a vital part of the overall compensation package and help a company compete for employees.(16)

This Note focuses on the health benefits of so-called early retirees, those typically between the ages of fifty-five and sixty-four who are ineligible for Medicare and choose to rely on their former employers for health insurance.(17) Part II examines the considerations faced by private corporations(18) that offer post-retirement health benefits to employees and retirees. A number of factors make it difficult for companies to offer such benefits, and those that do must either develop creative financing mechanisms or shift greater costs onto employees. One factor in particular, Medicare, will likely lead employers to redefine their post-retirement health benefits programs, if Congress successfully overhauls it. Part III examines the legal status of retiree health benefits, including federal regulation. This Part evaluates the legal claims and remedies available to retirees who sue their former employers for reducing or eliminating their health insurance benefits.

Part IV examines various proposals suggested to improve the availability of post-retirement health benefits for early retirees. In addition to congressional proposals, various private proposals offer a host of possibilities. This Note concludes that both employers and employees must share the costs of providing post-retirement health benefits. It proposes creating voluntary medical savings accounts for retiree health benefits, coupled with tax incentives for the employer, to ensure the existence of sufficient coverage for current early retirees. Given Congress' shift away from universal health care coverage, a long-term approach is essential to ensure that, as the elderly population increases and health care costs rise, some form of health benefits will exist for future retirees.

II. PRIVATE SECTOR CONSIDERATIONS

An increasingly limited number of retirees receive health benefits from their former employers, and retirees who contribute to their benefits spend more than before.(19) According to a Department of Labor study based on 1994 Census Bureau data, employer-sponsored health plans covered only thirty-four percent of the 23.4 million retirees age fifty-five and older, which exhibits a decrease from forty-four percent in 1988.(20) A number of different factors contributed to this decline.(21) Paramount among them is health care cost inflation. In 1992, employers paid an average of $3,968 per employee for health care coverage, up from $3,217 in 1990.(22) Another study noted that in 1985, an employer's typical cost for health benefits per retiree under sixty-five was $2,000 annually, whereas the cost for a retiree over sixty-five was $500 (because of Medicare eligibility).(23)

Another major reason for the drop in post-retirement health insurance offerings is attributable to a 1990 federal regulation requiring employers to account for retiree health benefits on an accrual basis.(24) The Financial Accounting Standards Board (FASB) requires employers to calculate their accumulated post-retirement benefit obligations, i.e., the cost of providing future health benefits, and to charge the cost against current earnings.(25) Not only must employers amortize the present value of expected future retiree health obligations, but they must also make reasonable assumptions about future health care costs.(26)

This FASB standard is particularly troublesome to employers because all but a small percentage of firms offering retiree health benefits pay for the benefits as they are incurred (known as "pay-as-you-go financing").(27) Moreover, American companies accumulated a vast unfunded liability for the coverage of current and future retirees.(28) In response to the FASB standard (and possibly in conjunction with other economic considerations), companies increased enrollee premium contributions and cost sharing and/or tightened eligibility for benefits.(29) Those companies that opted not to terminate their retiree health benefit plans altogether began to set aside funds for their retiree health liabilities.(30) Known as prefunding, this savings mechanism provides few tax benefits for corporations under current law and is not a popular option.(31)

A company's need to remain competitive in local and global markets presents a third reason for the decline in post-retirement health benefit offerings.(32) Finding a workable balance between offering post-retirement health benefits and remaining competitive in the marketplace is not easy. An increasing number of Americans retire early (i.e., before the traditional age of retirement - sixty-five),(33) but for a variety of financial reasons, including the high costs of health care, many of these same retirees return to the workforce to take a "bridge job" to supplement their income until they become eligible for Social Security and Medicare.(34) The reason is simple: medical expenditures for fifty-five- to sixty-four-year-olds are high and uncertain.(35) primarily because as people get older, they will more likely suffer greater illness.(36) Neither individual health insurance plans nor self-insurance are attractive options because of the related cost or limitation in services provided.(37) Nonetheless, evidence indicates that more employees would retire earlier if their employers provided medical benefits.(38)

A. DESCRIPTION OF POST-RETIREMENT HEALTH BENEFITS

Neither federal nor state law requires companies to provide health insurance to its retirees.(39) A company choosing to offer a self-insured health benefit plan, however, is subject to Employee Retirement Income Security Act (ERISA) guidelines.(40) ERISA categorizes health benefits as "employee welfare benefit plan[s]."(41) and subjects companies offering them to disclosure and reporting requirements,(42) fiduciary responsibilities and rules,(43) and enforcement and remedial rules (for participants, beneficiaries, administrative agencies, and fiduciaries).(44) Unlike ERISA pension plans, minimum vesting and funding rights do not apply to welfare benefit plans,(45) and ERISA does not establish an insurance program-similar to that administered by the Pension Benefit Guaranty Corporation (PBGC).(46) Thus, companies must follow few substantive guidelines.(47)

ERISA's reporting and disclosure requirements, however, are expansive. Companies offering welfare benefit plans must prepare a description of the rights of the participants and their beneficiaries in a summary plan description (SPD).(48) The SPD must inform the plan's participants and beneficiaries of rights and obligations under the plan,(49) and it must include a statement outlining eligibility for benefits.(50) Perhaps more important for litigation purposes, the SPD must clearly state the circumstances "which may result in disqualification, ineligibility, or denial, loss, forfeiture, or suspension of any benefits."(51)

Typically, retirees receive health benefits through group health plans sponsored by the employer.(52) Rather than provide retirees with a capped dollar amount each year or benefit period, employers usually offer benefits service.(53) A split then arises between those retirees under sixty-five (and ineligible for Medicare) and those over sixty-five. The under-sixty-five retirees receive health benefits that typically reflect what they received as employees.(54) For the over-sixty-five retirees, benefits are considered "Medicare wrap-around plans," because the coverage supplements what Medicare provides, filling in the gaps in Medicare coverage.(55) Companies that offer health benefits to their employees must continue to do so under prescribed circumstances, including retirement.(56) The duration of coverage varies with the factual situation, but employers usually provide retirees with continued health coverage for the first eighteen months of retirement.(57)

B. Effect of Medicare Reform

According to Medicare's Board of Trustees, Medicare's Hospital Insurance trust fund(58) will be exhausted shortly after the turn of the century.(59) Expenditures for Medicare's Supplemental Medical Insurance program,(60) meanwhile, outpaced the gross domestic product.(61) While federal lawmakers recognized the necessity of reform to ensure that current and future Medicare recipients benefit from the program,(62) severe disagreement over a Medicare solution has blocked all reform efforts.(63) Nonetheless, the Medicare program, which relies on company payroll taxes and other support from corporate America, has the ability to influence the design and extent of health benefits offered to early retirees.(64)

Currently, employer payroll taxes finance Medicare's Hospital Insurance program, although government contributions provide additional funding.(65) Congress has raised the employer payroll tax six times since 1965.(66) Initially, the Medicare Board of Trustees only recommended an increase in the payroll tax.(67) Rejecting this approach, Congress presented a Medicare reform proposal that could have hidden costs because of the potential for cost-shifting among the various participants in the health care system.(68) One cost may shift to health care consumers: hospitals and doctors could attempt to make up for the loss of Medicare revenue by increasing charges to private employers and employees.(69) This could result in an increase of employee premiums, reduced wage growth or even less coverage.(70) Another possibility (and criticism) is that because Medicare reform does not do enough to encourage savings, health insurance could become too costly for some employers and force other companies to reduce their benefit packages.(71) All of these criticisms and concerns could be augmented, depending on the extent of Medicare reform. One provision in the House of Representative's Medicare reform plan would further reduce payments to doctors and hospitals, if cost savings elsewhere in the reform provisions do not materialize.(72)

Companies enrolled in managed health care plans may not feel the effects of Medicare reform cost-shifting as much as other businesses.(73) As more employees enroll in the managed care plans, employers may better negotiate prices and rates with insurers, which presumably would mean that medical care providers would have a more difficult time shifting such costs.(74) But this bargaining power may dissipate if a congressional Medicare reform provision passes that exempts provider service networks from rules barring anti-competitive conduct.(75) Some business groups believe this provision will raise employers' costs because competing providers can fix prices and other terms of participation, specifically for Medigap plans.(76) Finally, employers' costs may still increase if the number of uninsured people grows. The Medicare reform package does not change the liability of hospitals to care for the uninsured, and that could result in billions of uncompensated costs shifting to the health care consumer.(77)

Medicare cost-shifting can particularly affect early retirees through an employer's ability to purchase Medicare supplemental insurance. One way employers provide their early retirees with health insurance is to purchase Medigap polices, through either picking up all of the cost or reimbursing retirees for their own Medigap premiums.(78) Employer-sponsored retiree health insurance plans represent a substantial share of the elderly's Medigap insurance. Among all people aged sixty-five or older with private insurance to supplement Medicare, approximately seventy-five percent purchase, or have available through their own or a spouse's employment or former employment, some type of private health insurance coverage to help pay for medical expenses, services and supplies that Medicare either does not cover or pay in full.(79) If the cost-shifting anticipated by businesses materializes, Medigap coverage may prove too costly to provide, or more of the premium's costs may shift to the retiree.(80)

Nonetheless, corporate America generally supported the Medicare reform proposal,(81) despite the fact that its burden of the projected $270 billion reduction in Medicare and Medicaid spending would cost businesses ninety-one billion dollars in the next seven years.(82) That figure could increase if dwindling government payments result in the closing of some public hospitals, pushing more of the uninsured and underinsured into private sector hospitals that in turn would tack the added costs onto private payers' bills.(83)

A second provision in the Republican seven-year budget plan could also affect the availability of health benefits for early retirees. Since 1990, employers (as defined by ERISA) could transfer excess pension funds (those exceeding current liabilities) to fund current retiree health care liabilities.(84) The new pension reversion provision, however, would allow employers to use the excess funds for a multitude of purposes.(85) Specifically, section 420 of the Internal Revenue Code (IRC) would expand to permit a transfer of "excess assets"(86) from defined benefit pension plans to pay for certain employee benefits provided to a broad group of employees and regulated under ERISA and the IRC.(87) The amount transferred is includable in the gross income of the employer, but it is not subject to an excise tax on reversions.(88) This provision would remain in effect until 2001.(89)

Through 1993, companies made about 100 such transfers, and pension plans lost about $3.1 billion to fund retiree health care liabilities. …

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