Retiree Health Care: Back to Passing the Hat?
By RUDY OSWALD

Retiree health care is regressing to the period when one “passed the hat” if a co-worker or retiree became sick or disabled. Most believed that period was ancient history because employer-provided health care and government programs (such as Medicare and Medicaid) have protected workers and retirees for decades. Now many of these protections are under attack.

“Passing the hat” didn't work very well: some benefited, others fell through the cracks; some contributed, others reneged. Some stayed healthy; some suffered long and costly illnesses. The devastation was often random and unpredictable.

In most industrial countries, the answer was universal health insurance, run or mandated by the government. Following World War II, the Murray-Dingell-Biemiller bill would have adopted a similar strategy for the United States , but Congress never passed the proposed legislation. In 1994, President Bill Clinton proposed a universal health insurance plan, built upon the employer-based model. Attacked by many insurance companies and employers, that bill also failed. Meanwhile, the burden on retirees continues to grow.

Employer-Based Insurance

In the United States , the answer to “passing the hat” was found in employer-based group insurance, paid as part of the employee's compensation package. Individual insurance was found to be prohibitively expensive because of the dangers of adverse selection, thus the turn to group policies. Initially coverage was accorded to active workers and then extended to their families, and eventually to retirees and their families. These compensation costs were considered as alternatives to direct wage increases. Under the wage controls of World War II and the Korean War, these health benefits were favored and spread rapidly. Such insurance policies were viewed as not contributing to inflationary pressures because they did not increase disposable income.

Unions negotiated health-care plans to replace the haphazard “pass the hat” technique of meeting members' doctor and hospital bills. It was worth it, in their view and that of their members, to forego some wage increase in exchange for health insurance.

Non-union employers also established health plans to meet employee needs and to look after sick employees and their families. Besides being the humane thing to do, establishment of these plans increased productivity and helped companies retain trained employees. Large employers were able to make available health-insurance policies that spread the risks of illness and disability. Some employers and unions helped establish non-profit health-insurance providers among doctors and hospitals, known as Blue Cross and Blue Shield plans. Private, for-profit insurance companies quickly offered group-insurance health plans, and some employers decided to self-insure.

Large employers could often negotiate favorable financial terms with insurance companies, or with groups of doctors or hospitals, under preferred provider programs. Also in various parts of the country, health maintenance organizations were set up under union-management contracts or as community plans, such as the Kaiser Health plans, originally created on the West Coast. The United Mine Workers, with funds set aside from each ton of coal produced, helped establish hospitals in the sparsely populated regions of Appalachia .

By the late 1970s, these policies led to almost universal coverage for employees of large and medium-size firms. In recent years, however, coverage has begun to decline.

Erosion of Coverage

Two-thirds of retirees from large corporations were covered by health insurance in 1988, with smaller percentages at smaller firms. The coverage at large firms dropped to one-third in the subsequent fifteen years. 1

This trend in declining retiree coverage has coincided with both an increase in the number of workers retiring before age 65 and eligibility for Medicare. The result has been a growing proportion of Americans without health coverage among those between the ages of 55 and 65.

Many retirees feel betrayed by the disappearance of their health coverage. They had foregone wage increase during their working lives in exchange for promised health care in retirement. Employers, however, have often created a legal dodge for themselves by retaining the right to unilaterally change health benefits. Under union contracts there often is a contractual obligation to provide retiree health insurance, but even this guarantee is being shred through bankruptcy proceedings. 2

Employers often argue they must terminate, restrict or r edu ce health-care coverage because such costs are skyrocketing. Yet most retirees rely on fixed incomes and are even less able to shoulder the burden of rising medical costs than corporations.

Few Alternatives for the Early Retiree

Regardless of the cause of a lack of employer-provided health insurance, the uninsured retiree below age 65 is faced with few good alternatives. Over the years, Congress tried to offer some small help through a variety of programs, known by such acronyms as COBRA, HIPAA, TAARA, and HSA. In addition, Medicaid is often relied upon as the public program of last resort.

Finding affordable individual health insurance coverage is a daunting ordeal. Individual plans come with very high costs and frequently with restricted coverage. Since the individual insurance market is state regulated, the plan offerings, underwriting restrictions and rate levels vary greatly from state to state. In most states, an individual is not guaranteed access to an individual health-insurance policy. Insurance companies often deny insurance to people suffering diseases such as Alzheimer's, diabetes, hypertension, migraine headaches, or rheumatoid arthritis. If an insurance company does sell an individual policy, it may exclude an existing health condition or set conditions on coverage of illnesses such as asthma, glaucoma and ulcers.

COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1985, allows workers leaving the employ of a company to continue their health coverage for up to 18 months following separation or retirement. This provides short-term continuation of coverage under a group health plan, but involves substantial out-of-pocket costs for a retiree because the employer is not required to pay any part of the premium. 3

HIPAA, the Health Insurance Portability and Accountability Act of 1996, restricts private health insurers from limiting coverage for preexisting conditions and prevents insurers from denying coverage because of past or present conditions. However, it does not restrict the premiums that may be charged to older or less healthy individuals. Moreover, to be HIPAA eligible an individual must have had at least 18 months of creditable group insurance coverage, with no break of more than 63 consecutive days, and must have exhausted COBRA or similar plans.

TAARA, the Trade Adjustment Assistance Reform Act of 2002, expands Trade Adjustment Assistance to provide a fully refundable and advanceable federal income-tax credit to cover health-insurance costs for certain trade-displaced workers and retirees receiving payments from the Pension Benefit Guarantee Corporation. The law provides states with funds to help extend health coverage to beneficiaries and to establish and operate high-risk pools. Coverage, however, is very limited under this program. 4

HSAs, Health Savings Accounts (part of the 2003 Medicare Modernization Act), allow individuals with certain high-d edu ctible health benefits during their working years to contribute to a savings account earmarked for health-care expenses. These new plans seem designed for the healthy and wealthy. Many view these plans, pushed by the current Bush Administration, as an excuse for employers to abandon traditional health-insurance plans and throw the onus for health care back on the individual. 5

No average worker can save for the anticipated costs of retiree health care. As of 2002, a person, aged 65, needed to have saved $194,000 to pay for the basic gaps in his or her Medicare coverage over the next 15 years. (Double that amount for a couple.) This estimate was made prior to passage of the Medicare 2003 Prescription Drug law, and is based on the costs of Medicare Part B premiums, the insurance cost of a “Medigap” plan, and average out-of-pocket expenses. These estimates by the nonpartisan Employee Benefit Research Institute do not include funds needed for long-term care. 6

Medicaid provides health care for very low-income individuals and families, as well as for many retirees receiving long-term nursing care. Eligibility depends upon the income and the assets that people have accumulated. It is a joint venture through which the federal government sets general guidelines and the states administer the program according to their own specific rules. Unfortunately, some who meet the threshold levels do so because of a catastrophic medical episode that has consumed most of their savings. Often people facing high long-term care costs in hospitals, nursing homes, and assisted living facilities have no other place to turn except Medicaid.

While in theory the Medicaid program provides those eligible with a comprehensive health plan and requires very little cost-sharing, budget cuts made by Congress and the states over the past few years have fallen heavily on Medicaid and other programs designed to help the poor.

Options for Those Over 65

For those over age 65, Medicare, passed in 1965, is typically the primary source of health-insurance coverage, often supplemented by employer-paid health insurance. Most older retirees can count on Medicare to provide a little more than half of the costs (53 percent) of health care, excluding long-term care. Medicare part A covers part of the hospital costs for up to 150 days, as well as certain skilled-nursing, home health-care and hospice-care costs. Most individuals also opt to purchase a Part B that covers some doctor visits and outpatient hospital care.

Medicare does not cover long-term hospital stays, nursing-home care, or assisted-living care. Those without employer-provided supplemental coverage sometimes rely on individual insurance policies to cover these costs, generally up to a set dollar amount and for a specified period. Since these plans are often expensive, many people rely instead on their savings when an illness requires long-term care—and when the savings are exhausted they turn to Medicaid.

The 2003 Medicare Prescription Drug legislation contains high d edu ctibles, monthly premiums, and a notorious “doughnut hole,” which causes Medicare payments to start, stop and then begin again as a patient's health-care expenses rise. It lacks cost controls (the legislation actually prohibits the federal government from using its purchasing power to r edu ce drug costs), and its premiums are projected to increase substantially in future years. 7 The program also provides subsidy payments to employers who retain retiree health plans containing drug benefits; this subsidy is equal to 28 percent of a covered retiree plan. Many policy analysts are rightly concerned that employer drug benefits will continue to erode because the law does not require companies to maintain existing plan benefit levels. 8

Proposed Alternatives

A number of alternatives have been proposed to enhance coverage for retirees:
1. Allow early-retirees to buy into Medicare;
2. Allow early retirees to buy into the federal employee health plans;
3. Extend health-care protections through state programs;
4. Protect existing employer-provided programs; and
5, Implement universal health care.

Except for the alternative of universal health care, these programs do not provide adequate health-insurance coverage for a worker or retiree who no longer has employer-provided health insurance. Are we destined to regress to “passing the hat”?

NOTES

1.  Kaiser Family Foundation and Health Research and Educational Trust. September 2003. Employer Health Benefits: 2003 Annual Survey . Henry J. Kaiser Family Foundation: Menlo Park , CA.

2.  U.S. Government General Accounting Office. May 2001. Retiree Health Benefits: Employer Sponsored Benefits May be Vulnerable to Further Erosion . GAO 01-374.
3.  Meyer, Jack A. and Larry Stepick. November 2002. Portability of HIPAA and COBRA . The Commonwealth Fund: New York.

4. Dorn, Stan. March 2003. “The Trade Act of 2002: Coverage Options for States,” In Focus Issue Brief (Vol. 4, No. 2). State Coverage Initiatives, an initiative of the Robert Wood Johnson Foundation: Washington , DC.

5. AFL-CIO analysis of President George W. Bush's Budget Proposal for Fiscal Year 2005.

6. Fronstin, Paul and Dallas Salisbury . February 2003. “Retiree Health Benefits: Savings Needed to Fund Health Care in Retirement.” EBRI Issue Brief No. 254. Employee Benefit Research Institute: Washington , DC . See also: Fronstin, Paul. Winter 2006. “Health Savings Accounts as a Means of Saving for Retirement Health Care Expenses,” Perspectives on Work (Vol. 9, No. 2), pp. 23-25; in that article, Fronstin concludes: “The HSA will likely never be sufficient” as a means of saving for retirement health care expenses.

7.  Letter to Senator Don Nickles from Congressional Budget Office Director Douglas Holtz-Eakin. November 20, 2003. Congressional Budget Office: Washington , DC.

8. See, for example, Weller, Christian E. and Jeffrey B. Wenger, “The Retiree Health Insurance Crisis Leaves Workers between a Rock and a Hard Place,” Perspectives on Work (Vol. 9, No. 2), pp. 20-22.

Rudy Oswald is an economist and former AFL-CIO research director. This article is adapted from Broken Promises: Retiree Health Care , which he wrote in 2004 for the Alliance for Retired Americans (Washington , DC ).

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