Early Retiree Health: Health Security Act Would Shift Billions in Costs
to Federal Government (Fact Sheet, 07/21/94, GAO/HEHS-94-203FS).
The President's proposed Health Security Act would relieve private
industry of much of the financial burden of providing health insurance
to early retirees. This would shift billions of dollars in costs each
year to the federal government. Today, about 9 million private sector
retirees and one-third of all private sector workers are in company
health plans with coverage for health care between retirement and age
65--when Medicare kicks in. If the Health Security Act is enacted, the
federal government, beginning in 1998, would not only pick up the tab
for early retirees' share of their health costs but would also pay the
major portion of company costs. The federal government's share would be
$6 billion in the first year, growing to nearly three times that amount
3 years later. At the same time, companies would save $11 billion in the
first three years, and would ultimately save over $130 billion after 10
years.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-94-203FS
TITLE: Early Retiree Health: Health Security Act Would Shift
Billions in Costs to Federal Government
DATE: 07/21/94
SUBJECT: Employee retirement plans
Employee medical benefits
Health insurance cost control
Health care costs
Proposed legislation
Retirement benefits
Cost analysis
Health insurance
Health care planning
National policies
IDENTIFIER: Medicare Program
Health Security Act
Clinton Health Care Plan
National Health Care Reform Initiative
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Cover
================================================================ COVER
Fact Sheet for the Chairman, Subcommittee on Health, Committee on
Ways and Means, House of Representatives
July 1994
EARLY RETIREE HEALTH - HEALTH
SECURITY ACT WOULD SHIFT BILLIONS
IN COSTS TO FEDERAL GOVERNMENT
GAO/HEHS-94-203FS
Health Costs Shifted to Government
Abbreviations
=============================================================== ABBREV
CPI - Consumer Price Index
CPIMC - Consumer Price Index for Medical Care
HSA - Health Security Act
Letter
=============================================================== LETTER
B-257695
July 21, 1994
The Honorable Fortney H. (Pete) Stark
Chairman, Subcommittee on Health
Committee on Ways and Means
House of Representatives
Dear Mr. Chairman:
Company-sponsored health plans play a major role in providing
retirees and their dependents with access to medical services. We
estimate that about 9 million private sector retirees and one-third
of all private sector workers are in company health plans with
retiree coverage. Such care has become a major concern because of
demographic and economic trends. Retiree health care costs have
grown, in part, because there are more retirees than ever
before--workers retire earlier and live longer. Also, medical cost
inflation is outpacing general inflation by over 3 percentage points
annually. The combination of more retirees receiving higher cost
medical care is straining companies' resources.\1
This fact sheet responds to your request for information on the
financial costs to U.S. companies of providing retiree health care
under the President's Health Security Act (HSA).\2 As agreed with
your staff, we developed information on (1) projected costs of early
retiree (retirees between ages 55 and 64) health benefits, (2)
estimated federal government costs, and (3) companies' and early
retirees' savings for these benefits under HSA. We did not estimate
HSA's effects on costs or savings for early retirees covered by
government-sponsored health plans. Nor did we attempt to estimate
the combined impact of the retiree health provisions in HSA and other
HSA provisions on companies' costs.
In addition to HSA, a wide range of health care proposals have been
introduced into the Congress recently. Each of these proposals deals
with early retiree coverage in one way or another. The information
we provide on the costs of early retiree health benefits is pertinent
to the upcoming debate of these alternative health care reform
proposals.
We used output from our model of retiree health costs and liabilities
to describe projected aggregate retiree health costs.\3 Provisions
from HSA were used to make detailed breakdowns of expenditures by
companies, retirees, and the government. All data are reported for
the aggregate group of companies with retiree health benefits.
Annual costs are expressed in nominal dollars. To make interpreting
the information easier, the projected costs are presented in a table
format accompanied by brief narrative descriptions in the sections
that follow.
These data show the costs for company-sponsored retiree health
benefits for 1998 and beyond, and what expenditures would be for
early retirees, companies, and the federal government if HSA were
enacted.\4 We also estimate what these costs and savings would be
over the first 10 years that HSA would be in effect.
The following major changes in the financing of early retirees'
health care would occur under HSA:
Savings would be generated for both companies and their retirees
because HSA would shift to the federal government three-fourths
of company costs, on average, and would relieve covered early
retirees of any charges beginning in 1998. Under current rules,
early retirees on average pay about 20 percent for health
benefits and companies, 80 percent. Beginning in 1998, early
retirees with company-sponsored benefits would, on average,
realize a substantial savings on their health benefits premiums
(see fig. 1 for the relative shares). Starting in that year,
companies would pay 20 percent of their early retirees' health
benefit costs plus a transition assessment during 1998 through
2000 (see sec. 1, table 1.1). The federal government would pay
the remainder. After the year 2000, when the transition
assessment would end, companies would pay 20 percent and the
government, 80 percent.
Given that it does not pay any premiums for early retirees in the
current system, the federal government would have its financial
commitments increase substantially under the proposed HSA (see
fig. 2). For example, in the first 10 years of the act's
implementation the government would spend $184.5 billion for
early retiree health costs (see sec. 2, table 2.1). In 1998,
if the act becomes effective, the government would spend
approximately $6 billion for early retiree health benefits. In
2001, after the 3-year assessment period ends, the federal share
would nearly triple to $16.7 billion.
Companies would save $133.4 billion in the first 10 years following
HSA's enactment (see table 2.1). During the first 3 years,
companies would save over $11 billion and in the first 5 years,
over $37 billion. After 10 years, companies would save over
$130 billion. Companies' savings would be lower in the first 3
years because of the assessment they would pay during the
transition years, 1998 to 2000.
Companies' accrued liability for their active workers who will
retire early and early retirees receiving health benefits would
drop by about $188 billion in 2001 (see sec. 3, table 3.1).
Companies would realize an increase in their net worth if the
accrued liability for early retiree health benefits were
ultimately removed through (1) enactment of HSA and (2) the
termination of employer responsibility for such benefits. The
accrued liability for the early retirees who we project would be
receiving benefits in 2001 would fall by $44 billion (75
percent).
In summary, if HSA is enacted, beginning in 1998, early retirees with
company-sponsored health plans would pay nothing for their health
benefits. That year, the federal government would not only pick up
retirees' share of their health costs, but would also pick up the
major portion of companies' costs. The federal government's share
would be $6 billion in the first year, growing to nearly three times
that amount 3 years later. On the other hand, companies would save
$11 billion in the first 3 years after HSA's implementation and over
three times that amount 2 years later, ultimately saving over $130
billion after 10 years. Companies' accrued liability for their
active workers projected to retire early and early retirees would
fall by $188 billion in 2001, 3 years after HSA's implementation,
thus increasing those companies' net worth.
Figure 1: Current and Future
Shares of Early Retirees'
Health Care Costs, 1993-2007
(See figure in printed
edition.)
Figure 2: Federal Share of
Health Coverage Costs for Early
Retirees Under HSA, 1993-2007
(See figure in printed
edition.)
--------------------
\1 Retiree Health Plans: Health Benefits Not Secure Under
Employer-Based System (GAO/HRD-93-125, July 9, 1993).
\2 S. 1757, H.R. 3600.
\3 See Employee Benefits: Companies' Retiree Health Liabilities
Large, Advance Funding Costly (GAO-HRD-89-51, June 1989). The model
was used to estimate the effect of legislation on companies' costs
and liabilities. See our testimonies, Significant Reductions in
Corporate Retiree Health Liabilities Projected if Medicare
Eligibility Age Lowered to 60 (GAO/T-HRD-92-7, Nov. 5, 1991) and
Employee Benefits: Companies' Retiree Health Liabilities Large, Even
With Medicare Catastrophic Insurance Savings (GAO/T-HRD-89-29, June
14, 1989).
\4 As noted in our prior report, Retiree Health Plans: Health
Benefits Not Secure Under Employer-Based System, a number of U.S.
circuit courts of appeals have generally held that an employer may
modify or terminate retiree health benefits for current and future
retirees if the company reserved its right to do so in benefit plan
documents or collectively bargained agreements. Whether the
enactment of HSA would affect the legal right of specific employers
to terminate their retiree health coverage may ultimately be
determined by the courts on a case-by-case basis.
---------------------------------------------------------- Letter :0.1
As arranged with your office, we will distribute copies of this fact
sheet to selected congressional committees and subcommittees and make
it available to others.
This information was prepared under the direction of Donald C.
Snyder, Assistant Director, Income Security Issues, who may be
reached at (202) 512-7204 if you or your staff have any questions.
Carolina Martinez, Evaluator-in-Charge, also contributed to this
report.
Sincerely yours,
Joseph F. Delfico
Director, Income Security Issues
RETIREE HEALTH CARE COSTS AND
LIABILITIES
============================================================ Chapter 1
Many large companies finance all or part of the health care costs of
their early retirees, including those who retiree before age 65
before they are eligible for Medicare. The growing cost of providing
retiree health care benefits to current employees has raised
questions about the security of retiree health benefits and
companies' ability to pay future costs. The accrued liability for
these benefits was $412 billion in 1993, up from $227 billion in
1988.\5 We estimate that companies' accrued liabilities for retiree
health benefits will grow to $818 billion by 2001 (see sec. 3, table
3.1).
Much of companies' annual cost for retiree health benefits is
incurred for early retirees. Specifically, the cost for an early
retiree is over three times the cost of a retiree eligible for
Medicare because companies are the secondary payer for retirees aged
65 and over. We estimate that in 1993 approximately 39 percent of
retirees covered by these plans were under age 65 and not yet
eligible for Medicare. The accrued liability for these early retiree
health benefits was $127 billion in 1993.
--------------------
\5 See appendix IV of Employee Benefits: Companies' Retiree Health
Liabilities Large, Advance Funding Costly for a detailed description
of the methodology and data used to make the original estimate of
companies' liabilities.
HSA PROVISIONS
---------------------------------------------------------- Chapter 1:1
The Health Security Act would set up a system of managed competition
through regional and corporate alliances. It would also require
employers to pay a portion of employee health premiums, establish a
standard benefits package, and set a national budget target to
control health care costs.
Most important in terms of this report, HSA contains a provision to
cover early retirees aged 55 to 64 who are not eligible for
Medicare.\6 Under that proposal, retired workers aged 55 to 64 would
receive health care coverage through regional alliances and would pay
only 20 percent of the total premium required to finance the
coverage. However, companies would be responsible for paying that
20-percent share for their early retirees if they were providing
those retiree health benefits as of October 1993. The federal
government would pay the remainder. Lastly, HSA requires companies
to pay an assessment for 3 years based on whichever is higher: 50
percent of their savings under HSA or 50 percent of their adjusted
costs (see table 1.1). The adjusted costs are calculated by
increasing companies' 1993 costs by the Consumer Price Index for
Medical Care.\7
Table 1.1
Assessment Calculation for Companies
With Retiree Health Plans in 1993
(Dollars in billions)
Adjusted base 50 percent 50 percent of
period retiree of adjusted companies'
Year health costs costs savings
---------- ------------------ ------------ --------------
1993 $7.9
1994 8.6
1995 9.3
1996 10.1
1997 11.0
1998 11.9 $6.0 $4.6
1999 12.9 6.5 5.1
2000 14.0 7.0 5.7
------------------------------------------------------------
--------------------
\6 See title VI, section 6114, in H.R. 3600, the Health Security Act
of 1993, by the 103d Congress, 1st Session.
\7 This provision is in title VII, section 7121, in H.R. 3600, the
Health Security Act of 1993.
LARGE SAVINGS FOR RETIREES AND
COMPANIES FROM HSA
---------------------------------------------------------- Chapter 1:2
HSA's provision for early retirees would generate large savings for
both companies and retirees. These savings result because the
proposal shifts to the federal government three-fourths of company
costs, on average, and relieves retirees who have company-sponsored
retiree health benefits of any cost. Currently, early retirees pay,
on average, about 20 percent of retiree health care costs and
companies, 80 percent. Beginning in 1998, when the transition
assessment would begin, companies would pay the assessment cost plus
their 20-percent share of retiree health care costs. With the
implementation of HSA, which would take full effect in 2001, the
federal government would pay 80 percent of the cost of early retiree
health coverage, while companies would only pay the remaining 20
percent.
FEDERAL GOVERNMENT COSTS WOULD
GROW BY BILLIONS UNDER HSA
============================================================ Chapter 2
In the first 10 years under HSA, the federal government would pay
$184.5 billion for the cost of early retiree health care (see table
2.1). These payments would increase gradually in the first 3 years.
For example, the government would pay out $21 billion after the first
3 years of HSA's implementation, but a total of approximately $56
billion in the first 5 years.
RETIREE HEALTH COSTS WOULD
SHIFT UNDER HSA
---------------------------------------------------------- Chapter 2:1
If HSA became effective in 1998, the total cost for early retiree
health coverage would be $15.1 billion. Early retirees with
company-sponsored benefits would realize a substantial savings by not
paying any of their health benefit premiums (see table 2.1). Of
those costs, companies would pay $9 billion ($6 billion in
assessments and $3 billion for their 20-percent share); the
government would pay the remainder, $6.1 billion. While companies
would be paying significantly more than the government at this point,
they would still have a net saving of $3.1 billion. These companies
would continue to pay 20 percent plus the assessments through the
year 2000. Beginning in 2001, the federal government would pay the
full 80 percent of the costs of early retiree health care, $16.7
billion.
Table 2.1
Early Retirees', Companies', and the
Federal Government's Current and Future
Costs of Health Coverage
(Dollars in billions)
Early
retiree Federa Companies'
benefit Retirees Companie l net
Year cost ' share s' share share savings
-------- ---------- -------- -------- ------ ----------
1993 $9.9 $2.0 $7.9 0 0
1994 10.9 2.2 8.7 0 0
1995 11.9 2.4 9.5 0 0
1996 12.9 2.6 10.3 0 0
1997 14.0 2.8 11.2 0 0
1998 15.1 0 9.0 $6.1 $3.1\a
1999 17.0 0 9.9 7.1 3.7\a
2000 18.9 0 10.8 8.1 4.3\a
2001 20.9 0 4.2 16.7 12.5
2002 23.3 0 4.7 18.6 13.9
2003 25.6 0 5.1 20.5 15.4
2004 28.6 0 5.7 22.9 17.2
2005 31.9 0 6.4 25.5 19.1
2006 35.0 0 7.0 28.0 21.0
2007 38.8 0 7.8 31.0 23.2
10-year $255.1 $0 $70.6 $184.5 $133.4
total
------------------------------------------------------------
\a Companies' savings in 1998-2000 after assessment is paid.
The costs to the federal government of providing early retiree health
benefits would increase from zero in 1997 to a total of $184.5
billion 10 years later (see table 2.1). The government's share of
the costs of providing these benefits is projected to increase
slightly during the 3-year assessment, from $6 billion in 1998 to
over $8 billion in 2001. Beginning in 2001, the federal share of
early retiree health coverage would double from $8.1 billion to $16.7
billion, thus nearly tripling annual costs since the first year of
HSA's implementation.
COMPANIES WOULD SAVE BILLIONS
UNDER HSA
---------------------------------------------------------- Chapter 2:2
In contrast to its impact on the federal government's increased
costs, HSA's early retiree provision would result in significant cost
savings for companies in the act's first 10 years. Like the federal
government's costs, the companies' savings would increase gradually
in the first few years. For example, companies would save $11.1
billion during the first 3 years of HSA's implementation, but a total
of $37.5 billion after the first 5 years (see table 2.1). Companies'
savings would be lower in the first 3 years because of the assessment
they would be required to pay during the transition from 1998 to
2000. However, after 10 years, companies would save over $133
billion.
Early retirees' savings would increase by the rate of medical
inflation after 1997 if HSA were implemented. Covered retirees would
save $10.3 billion in the first 3 years and $19.2 billion after the
first 5 years.
COMPANIES' NET WORTH COULD
INCREASE UNDER HSA
============================================================ Chapter 3
Large companies are the principal sponsors of retiree health
coverage. Although only about 4 percent of all companies provide
retiree health coverage, approximately one-third of all private
sector workers are in company health plans with retiree coverage.\8
Under Financial Accounting Standards Number 106, "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions,"
employers have to report the cost of postretirement benefits over the
period employees earn them. Balance sheets must be made more
informative and more complete by including a measure of the
obligation to provide postretirement benefits.
We estimate that in 1993, companies paid over $13 billion of
retirees' health care costs and had $412 billion in accrued retiree
health liabilities (see table 3.1). That figure is projected to
increase to $818 billion by 2001 if the current system remains
unchanged. Because HSA could remove three-fourths of company costs
for retiree health care during the 3-year assessment period,
companies could begin reporting an increase in their net worth on
their balance sheets in 1998. Our estimates show that companies'
accrued liabilities would fall to $630 billion in 2001 when HSA would
become fully effective. This 23-percent reduction in liabilities
would give companies an increase in net worth of $188 billion, other
things remaining constant. Similarly, the accrued liabilities for
the early retirees who we project would be receiving benefits in 2001
would fall by $44 billion (75 percent).
Table 3.1
Companies' Retiree Health Costs and
Liabilities in 1993 and 2001
Ye
ar All Early All Early All Early All Early
-- -------- -------- -------- -------- -------- -------- -------- --------
19 $13.7 $7.9 $155 $29 $257 $98 $412 $127
93
20 28.8 16.7 313 59 505 192 818 251
01
w
i
t
h
o
u
t
H
S
A
20 16.3 4.2 269 15 361 48 630 63
01
w
i
t
h
H
S
A
In $188
c
r
e
a
s
e
i
n
c
o
m
p
a
n
i
e
s
'
n
e
t
w
o
r
t
h
----------------------------------------------------------------------------------
--------------------
\8 Retiree Health: Company-Sponsored Plans Facing Increased Costs
and Liabilities (GAO/T-HRD-91-25, May 6, 1991).
SCOPE AND METHODOLOGY
=========================================================== Appendix I
We used our 1988 projections of the future costs of early retiree
health benefits to provide the projected costs under the proposed
Health Security Act of early retiree health benefits and to estimate
companies' and early retirees' savings and federal government costs
for these benefits. It should be noted that the methodology assumes
that the federal government would assume responsibility for retiree
health benefits. A determination of whether a specific employer may
be relieved of its responsibility to provide retiree health benefits
or the accounting of such benefits under Financial Accounting
Standards Number 106 may be affected by particular court decisions or
guidance subsequently provided by the Financial Accounting Standards
Board.
Our estimate of retiree health liabilities made in 1988 was based on
a projected stream of benefit payments that sponsors would pay into
the next century. The forecast used assumptions that have since
proven to be true, so we believe the original forecast is still
valid.
To arrive at values for our 1988 baseline estimate of companies'
liabilities, we reviewed and combined information from a number of
sources to model retiree health liabilities originally estimated by
the Department of Labor.\9 Our model's output of retiree health
liabilities and funding costs depended on a variety of demographic,
economic, and actuarial assumptions. For example, we needed to
estimate (1) the ages and numbers of covered workers and early (under
age 65) and normal retirees (because their health care costs are
different), (2) companies' past and projected average costs of
providing health benefits to early and normal retirees, and (3)
future mortality rates and medical cost inflation. The stream of
estimated future benefit payments was discounted to obtain the
present value of these liabilities.
We analyzed provisions of HSA to develop estimates of the costs of
early retiree health care shared by companies and the federal
government beginning in 1998. We did not estimate HSA's effects on
costs or savings for early retirees covered by government-sponsored
health plans. Nor did we attempt to estimate the combined effect of
all HSA provisions on companies' costs.
--------------------
\9 U.S. Department of Labor, Pension and Welfare Benefits
Administration, Employer Sponsored Retiree Health Insurance, May
1986, appendix D.
CURRENT COSTS OF HEALTH
BENEFITS FOR RETIREES
--------------------------------------------------------- Appendix I:1
The cost of providing retiree health benefits varies considerably
among companies in part because of differences in the average age of
retirees. Companies with a higher percentage of retirees aged 65 and
older tend to have lower costs because Medicare covers a substantial
portion of the medical costs for these persons. Large companies are
the principal sponsors of retiree health coverage. While only about
4 percent of all companies provide retiree health coverage,
approximately one-third of all private sector workers are in company
health plans with retiree coverage.\10
--------------------
\10 Retiree Health: Company-Sponsored Plans Facing Increased Costs
and Liabilities.
RECENT AND PROJECTED MEDICAL
COST INFLATION
--------------------------------------------------------- Appendix I:2
Companies' average retiree health costs have risen more than all
other prices on average. These historically higher costs have
resulted from increases in medical personnel and supply costs, new
and expensive technology, and higher utilization. Because of the
rapid development of these factors and expectations by some experts
that medical expenditures will continue to grow as a share of total
output, companies' costs of providing health benefits to retirees are
expected to continue to rise faster than general inflation.
To estimate the differential growth of retiree health costs, we used
the difference between the Consumer Price Index (CPI) and the
Consumer Price Index for Medical Care (CPIMC). CPI, which measures
general inflation, is based on prices of several household budget
items, including food, transportation, housing, and medical care.
CPIMC measures medical inflation--it represents the price of a market
basket of medical goods and services. CPIMC averaged 2.3 percentage
points more per year than CPI in the 1960s and over 4 percentage
points more per year in the early 1980s. Most recently (1989 to
1993), this difference was 3.6 percentage points as CPI averaged 4.1
percent growth per year, while CPIMC grew by an average rate of 7.7
percent per year (see table I.1). To forecast retiree health costs
from 1988 forward, we assumed a difference in medical and general
inflation of 3.5 percentage points. The actual difference in general
and medical inflation averaged approximately what we assumed it would
during the first 5 years of our forecast, so we believe that using
the output of our earlier estimate is appropriate for the purpose of
answering Representative Stark's request.
Table I.1
General and Medical Cost Inflation,
1989-1993
(Percentage change)
CP CPIM Differen
Year I C ce
---------------------------------------- -- ---- --------
1989 4. 7.7 2.9
8
1990 5. 9.0 3.6
4
1991 4. 8.7 4.5
2
1992 3. 7.4 4.4
0
1993 3. 5.9 2.9
0
Average 1989-1993 4. 7.7 3.6
1
------------------------------------------------------------
Source: Monthly Labor Review, Bureau of Labor Statistics, March
1994.
In addition, the number of retirees and spouses covered by company
retiree health plans is slowly increasing. Over the next 10 years,
we expect about a 2.8-percent annual increase in the number of
persons covered by company retiree health plans and a 1.9-percent
annual increase in the number of retirees receiving health benefits.