Copyright 1992 by The Cerontological Society of America The Cerontologist Vol. 32, No. 5, 693-703

Using nationally representative data, we report the prevalence of retiree health insurance as a fringe benefit in private and public settings, and take an in-depth look at its content. We examine how it coordinates with Medicare to characterize the "total insurance" of beneficiaries who hold these supplements. Retiree health coverage is now widespread and typical benefits are far more generous than those found in medigap policies, the other major type of Medicare supplement. When a typical retiree plan is overlaid on Medicare, the resulting total insurance benefits are more generous than those held by either the working nonelderly or beneficiaries with a medigap supplement. Key Words: Retiree health insurance, Medigap insurance, Medicare supplements

Employer-Sponsored Postretirement Health Benefits: Not Your Mother's Medigap Plan1

Some 62% of the elderly have private health insurance to supplement Medicare coverage (Chollet, 1989). Much of this supplemental coverage is provided not through so-called "medigap" policies but through a former employer. The benefits provided in these plans are radically different from those offered through private medigap policies: their scope of coverage is much broader, and because their benefits overlap considerably with Medicare's, issues of coordinating duplicative coverage with Medicare arise. The scope of employer-sponsored coverage is important for three reasons. First, the provision of additional insurance benefits results in an increased use of covered medical services (McCall et al., 1991). Second, since many of the benefits in retiree plans overlap those already provided by Medicare, the presence of this coverage increases government program costs. This occurs because, as the "first payer" of all dually covered expenses, Medicare pays the brunt of extra expenditures that occur with such coverage. Finally, the content of employersponsored plans and their distribution among the elderly help explain the strong opposition voiced against the short-lived 1988 Catastrophic Coverage Act. We describe here the content of postretirement health insurance and how it alters the "total insurance" of Medicare beneficiaries who carry these sup-

g from the Health Care Financing Administration (HCFA) under cooperative agreement 18-C-99181/5-01 is gratefully acknowledged. The comments and conclusions contained herein are our own and do not necessarily represent the views of the Health Care Financing Administration. We thank Jerry Riley, Marian Cornick, and Jim Lubitz for useful comments on an earlier draft, and Mario Valenti for able programming assistance. 2 Wayne State University, Institute of Gerontology, 71C East Ferry, 223 Knapp Bldg., Detroit, Ml 48202. 3 University of Alabama at Birmingham.

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plements. In the process, we discuss the coordination of benefits with Medicare, and how the coverage within these plans differs from medigap coverage. Background

Monheit and Schur (1989) estimate that in 1987 approximately 8.4 million persons in the U.S. age 65 and older with Medicare had some form of employer-sponsored retiree health insurance. This represents 31.1% of all aged Medicare beneficiaries, and indicates that retiree coverage within this population has increased significantly since 1977, when only 19.7% had these supplements (Short & Monheit, 1988). Chollet (1989) reports that two-thirds of persons covered by retiree benefits in 1984 had yearly family incomes of $15,000 or more and 29.8% had incomes of $25,000 or more. Nearly one-third of those age 65 to 69 had such coverage while only a quarter of those age 75 or more did. Thus, employersponsored coverage is fairly common among the elderly, and more frequently found among the young old and those with higher family incomes. Morrisey, Jensen, and Henderlite (1990) report that employer-sponsored retiree health insurance is mostly a large firm phenomenon. Among retirees age 65 or older covered by a private sector employer supplement in 1988, 85.6% received their coverage from a firm with 1,000 or more workers. Only 1.6% received their coverage from a firm with fewer than 100 workers. A plurality (47.2%) were covered by a manufacturing firm. Employer-sponsored supplements will likely become more prevalent over the next several years, as workers who are currently promised these benefits retire and receive them. In 1988, 57.8% of all current private sector employees were promised health benefits upon retirement (Morrisey, Jensen, & Hen-

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Gail A. Jensen, PhD,2 and Michael A. Morrisey, PhD]

same trends have been observed in coverage for active workers (Jensen, Morrisey, & Marcus, 1987). Cafferata's study also provides detail on nongroup supplements, which include many but not all medigap policies (individually purchased trade group supplements were excluded). In 1977 among aged Medicare beneficiaries with nongroup coverage, nearly all (98%) had extra coverage for hospital care, typically full payment of the Part-A deductible (92%) and the copays for days 61-90 (87%). In those respects, the plans were like group plans. Coverage for nonhospital services, however, was less common than in group plans: only half had extra coverage for physician office visits (53%) or mental health care (46%), and nonhospital prescription drug coverage was unusual (24%). None covered dental care. When physician visit coverage was present, the plan more often limited its reimbursement to the statutory coinsurance and allowable Medicare charge. Also, unlike group supplements, roughly three-quarters of nongroup policies lacked catastrophic coverage. Although these data are old and indeed predate the federal Baucus amendments (see Cafferata, 1984b), two more recent content analyses by Consumer Reports (1984) and Scheffler (1988) broadly confirm these patterns and suggest that, at least along these major dimensions, medigap coverage did not change much between 1977 and 1986 (the year of Scheffler's data). This is in marked contrast to employersponsored plans. The Consumer Reports and Scheffler studies additionally discuss how little SNF care was covered in the medigap supplements. Plans tended to limit their benefits to the copays on Medicare-covered days and few plans covered SNF days beyond 100. Data Sources and Methods

Our data are from two sources: the BLS Employee Benefit Survey (EBS) conducted in 1981, 1986, and 1987, and a HCFA-funded survey of retiree health benefits, conducted by the Health Insurance Association of America (HIAA) in 1988. The EBS provides data on the content of retiree coverage promised to employees of medium and large private sector firms (in 1981 and 1986) and to employees of state and local governments (in 1987), including options available for retiree coverage, premium sharing arrangements, surviving spouse's benefits when a covered retiree dies, and the actual scope of benefits within the plans. The 1988 HLAA survey provides data on how private sector employers coordinate their retiree benefits with Medicare. Together, these sources paint a broad-brush picture of the "total insurance" carried by persons (about one-third of the elderly) dually covered by Medicare and a postretirement plan. Approximately 46% have medigap supplements only, 7% have Medicaid, 4% have active worker coverage, and almost 14% have no Medicare supplement of any kind (Jensen & Morrisey, 1992). The EBS in 1981 and 1986 provides nationally representative data on the retiree coverage promised to currently insured full-time nonexecutive employees

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derlite, 1990). This prevalence rate appears to have held relatively stable over the 1980s. Among active employees in larger private sector firms (the only group for which data over time are available), the proportion promised postretirement coverage was essentially unchanged between 1981 and 1986 (employer-paid coverage was promised to 55% and 56%, respectively). This may have been due to employer concerns over the right to modify coverage subsequent to retirement (Schmidt, 1989), the tax treatment of prefunded benefits (Employee Benefit Research Institute, 1991), and the impending changes in financial accounting standards for unfunded retiree health benefit liabilities (Siegel, 1990). In addition to postretirement coverage, just over half of the over-age-65 population (52.7%) have purchased a nongroup medigap supplement from Blue Cross/Blue Shield or a commercial insurer (Jensen & Morrisey, 1992). Roughly one out of seven of these medigap policyholders also have postretirement coverage. Persons with both supplements tend to be women, many of whom are widowed and carry the retiree coverage in their deceased husband's name. Morrisey, Jensen, and Henderlite (1990) and Cafferata (1984a) examine the features of employer supplements. Among all retirees in 1988 who were covered by an employer plan, 62% had benefits that plan sponsors characterized as "about the same" as those provided to active workers. The remainder had "less comprehensive" benefits. Coverage for prescription drugs and home health services was commonplace in 1988 (94% and 91%, respectively) and hospice and nursing home care were also often covered (73% and 66%). With the exception of hospital coverage, however, these studies' data lack detail on the cost sharing and entitlement features of specific benefits. For hospital care, 57% of covered retirees faced a deductible under their supplement in 1988, and a large majority (76%) had to have a stay preapproved in order to be covered under the supplement. Drawing on the earlier 1977 National Medical Care Expenditure Survey (NMCES), Cafferata (1984a) examined Medicare "group" supplements, which include but are not limited to employer-sponsored plans. Although employer plans constituted most (94%) group supplements, the latter included policies sold to individuals by trade organizations such as the American Association of Retired Persons (AARP). In 1977,71% of group supplements covered prescription drugs, 77% covered physician office visits, 79% covered mental health care, 58% covered skilled nursing facility (SNF) care, and 11% covered dental care. Nearly all plans (95%) covered Medicare's hospital deductible in full as well as the coinsurance for hospital days 61-90 (92%). Almost 60%, however, left Medicare's Part-B deductible intact. Although not strictly comparable to the Morrisey, Jensen, and Henderlite sample (due to their inclusion of trade group plans, these data nonetheless suggest that employer retiree coverage changed between 1977 and 1988. Cost sharing for hospital care appears to have increased slightly, and the categories of care covered by these supplements have broadened. The

Findings

Broad Features of Retiree Coverage Among medium and large private sector firms, approximately two-thirds (65.7%) of workers with health insurance are now promised retiree coverage that will continue indefinitely beyond age 65 (Table 1). Among insured workers in state and local governVol. 32, No. 5,1992

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ments, 74.5% are made a similar promise for continuous coverage in old age. A small percentage (1.9% and 2.7% of private sector and government employees, respectively) are promised coverage only for a limited period, typically several months beyond their retirement date. Fifty-six percent of workers in larger private firms will have continuous retiree coverage either fully or partly paid by their employers, compared with only 43.8% among state and local government workers. When the employer contributes, more often than not the contribution covers the entire supplement premium (see Table 1). The contribution, however, rarely extends to payment of the retirees Medicare Part-B premium. Among workers promised employer-paid coverage in 1981, 93.6% were to be entirely responsible for their Medicare premium. When the premium is jointly financed, how large is the retiree's contribution? Although the EBS lacks information on this, the HIAA survey indicates that the retiree pays 28% of the premium on average when a contribution is required, and the employer pays the balance (72%). (Although economic theory argues that workers pay for these benefits in the form of reduced wages [Morrisey, 1992].) For private sector firms the EBS provides some limited information on the status of a survivor's benefits if a covered retiree dies. In 3 out of every 10 cases, the plan clearly states that coverage will continue indefinitely for dependent survivors. Less often, survivor's benefits will be provided for a limited period (see Table 1). Nearly always, the premium and benefit levels are the same as previously. Apparently, the plans of many persons are completely silent on the issue of survivor's rights (37.3% and 52.3% of covered persons in 1981 and 1986). Health Maintenance Organization (HMO) retiree options are available to more than half of the EBS workers promised postretirement coverage. More who work for a state or local government have this option (64.4% versus 54.4% for employees of larger private firms), in part reflecting the overall larger presence of HMOs in public sector fringe benefits. (Six out of every 10 state and local government workers have access to an HMO, compared with half the employees in larger private sector firms.) In 1981, however, fewer than one in eight with retiree coverage were offered an HMO option. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is undoubtedly responsible for much of this change in retirees' access to HMOs. The Act permitted all qualified HMOs to offer services to Medicare beneficiaries in exchange for a prospectively paid capitation from Medicare. Eighty-four percent of TEFRA HMOs in 1986 required a small premium —typically under $38 per month—from elderly enrollees in addition to the Medicare capitation they received (Brown & Langwell, 1988). Presumably, many firms made this amount their contribution to a retiree's HMO coverage. Benefit levels typically coincide with those of current workers, that is, retiree plans cover the same services and stipulate the same deductibles and copayments. Among employees promised coverage,

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in some 45,000 large U.S. businesses. These firms, which at the time of the surveys employed at least 50, 100, or 250 workers, depending on the industry, collectively employ about 30% of the private sector labor force. The 1986 survey, for example, covered 21.3 million workers, 20.2 million of whom were fulltime and receiving health insurance as a fringe benefit. Approximately 1,500 firms were surveyed in 1981 and 1986, and of those 86% and 87% responded, respectively. The policy booklets for insurance plans were collected by BLS field workers and taken to Washington, DC, where trained staff coded the detailed benefit data. The BLS achieved remarkably high response rates for specific aspects of coverage using this approach — 98% or more on most items. The EBS1987 survey of state and local governments provides representative data on approximately 10.3 million full-time employees who work in some 25,000, U.S. government units. Although limited to establishments that employed at least 50 workers, the survey covers entire state governments and four categories of local government: health service delivery organizations, educational institutions, special districts (e.g., water, sewage, and park authorities), and general administrative establishments, which were units other than those already listed. A probability sample of 1,006 units were actually surveyed, and of those 993 responded. Again, all coding of actual plan documents was done in Washington. (For further details, see Bureau of Labor Statistics, 1982, 1987,1988.) Although EBS data reflect the coverage of "currently employed" workers, employers who promise retiree insurance beyond age 65 typically offer benefits identical to those of the currently employed. In 1986 and 1987, for example, 79.1 % and 92.4%, respectively, of those promised postretirement insurance were offered benefits identical with those of active workers. In describing the details of retiree plan provisions in each year, we restrict our sample to this subpopulation of persons with comparable coverage. Thus, while not representative of all retiree plans, our statistics do characterize the large majority of plans being offered to EBS-covered employees. The data we present from the 1988 HIAA survey are representative of retiree benefits offered to workers in medium and large private sector firms — the same group covered by the BLS 2 years earlier. Although the HIAA survey covered workers in small businesses as well, we restrict attention here to those in larger firms for consistency with our EBS data. (For a detailed discussion of the HIAA survey, see Morrisey, Jensen, & Henderlite, 1990.)

Table 1. Postretirement Health Insurance at Age 65 Promised by Private and Public Sector Employers Medium and large private sector plans

State and local public plans

% of workers with trait in 1981

% of workers with trait in 1986

% of workers with trait in 1987

—

Among all insured workers3 67.6 65.7

77.2 74.5

Employer-paid coverage promised beyond age 65 Employer-paid coverage continues indefinitely

56.3 55.0

57.2 56.0

44.5 43.8

HMO(s) available for retiree coverage Firm offers an HMO but retiree coverage is only available in its conventional plan

8.2

36.8

49.7

0.4

12.1

9.6

Coverage Retiree coverage promised beyond age 65 Such coverage continues indefinitely

Among those workers promised retiree coverage15

Method used to coordinate with Medicare Coordination-of-benefits Carve out Exclusion Multiple methods No coordination Not determinable

40.5 1.2 47.5 0.5

18.3 0.7 79.1 0.7

6.4 0.0 92.4 1.0

0

If retiree dies, survivor's benefits Cancelled immediately Continued for a limited period Continued indefinitely Not determinable

18.1 53.0

10.4 8.4 0.1 10.0 8.5 22.7 31.5 37.3

Premium sharing Retiree pays entire premium Retiree pays part of premium Employer pays entire premium Not determinable

2.1 16.0 29.6 52.3 15.4

24.1 57.5 1.7

42.0 25.9 30.0 2.2

Note: — Indicates that data on this item were unavailable in this year. The total number of insured workers was 18,162,394 in 1981, 20,296,401 in 1986, and 9,684,619 in 1987. b The total number of workers promised retiree coverage was 10,060,769 in 1981,13,716,760 in 1986, and 7,481,559 in 1987. Data for 1981 on benefit levels and survivor's benefits are among workers with employer-paid retiree coverage. •These data are from the 1988 HIAA survey and pertain to medium and large private sector plans. a

79.1% and 92.4% in private sector firms and government units, respectively, are offered policies fully congruent with those of active workers. For private firms this is a sharp departure from 1981 practices; fewer than half at that time had uniform benefits. Part of the change may have been due to the growth of self-insurance between 1981 and 1986, up from 21% to 39% within this sector. Where benefits differ, the coverage offered is nearly always more restrictive for retirees.

Carve-out works like this: when expenses are incurred, the firm makes an assessment of reimbursements due the retiree based solely on the plan's provisions. This amount is then reduced by what Medicare pays toward the expenses. A specific example can illustrate. Consider a retiree who has $600 in bills for physician office visits in 1 year. For simplicity assume that these fees are considered reasonable under the Medicare definition. Medicare would pay 80% of the amount over $100 (its annual deductible), or $400. Suppose the firm's plan has a $150 deductible, an 80/20 coinsurance arrangement, and uses carve-out coordination. In this case the firm would have a potential liability of $360 absent Medicare (80% of [$600 - $150]). However, subtracting the Medicare payment ($400) from this amount leaves an actual liability of $0. The retiree is left with a $200 bill, the same out-of-pocket liability he or she would have under Medicare-only coverage. Thus, with carveout a beneficiary may be no better off than with

Benefit Coordination with Medicare Benefit levels alone do not describe the actual value of retiree coverage to the elderly, however. How such plans coordinate with Medicare is equally important in determining how much "extra" coverage they really offer. Overwhelmingly, employers use a "carve-out" method to determine their payments as "second payers" after Medicare (Table 1).

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Benefit levels Less than active workers Greater than active workers Same as active workers Not determinable

Medicare-only coverage. He or she will never be worse off, however — Medicare out-of-pocket expenses serve as the upper bound on a beneficiary's liability for services covered by both Medicare and the supplement. Under the less common coordination-of-benefits (COB) method (applicable to 18.1% of covered persons), the firm again first calculates its payment absent Medicare, but then applies Medicare's payment to satisfy the retiree's copays under the employer plan. Consider the earlier example of a $150 supplement deductible, 80/20 coinsurance, and $600 in physician bills. Medicare continues to pay $400. In the absence of Medicare the firm would pay $360 once the insured's copays of $240 were satisfied. The firm using COB treats Medicare's payment as available to meet this $240 enrollee copayment. Thus, the retiree would pay nothing out of pocket. The firm's liability, however, would be $200. Since retiree costs are often reduced to zero, the COB method results in nearcomplete coverage for those services dually covered by Medicare and the supplement. In fact, it differs from "no coordination" only in that the retiree cannot "make a profit" from filing claims with the two insurers. The exclusion method is relatively rare (10.4%). With exclusion, the firm applies its plan's deductible and coinsurance schedule to the expenses left un-

covered by Medicare. In the above example, the retiree has $200 in Medicare out-of-pocket obligation. After subtracting the firm's $150 deductible and applying its 80% coinsurance, the employer plan would pay $40. The exclusion method typically yields an employer liability between those implied by the carve-out and COB methods. In contrast to postretirement plans, integration with Medicare is not an issue for most privately purchased medigap policies. Since by design most cover only Medicare's enrollee copayments, there is no multiplicity of coverage to require coordination. Detailed Provisions of Postretirement Plans

Table 2. Medicare Part-A Services Covered by Retiree Plans' % of insureds with trait in: Characteristics of benefits Total with hospital care coverage Preadmission certification required Disincentives for a weekend admission Complete front-end coverage Deductible and/or coinsurance required No limit on days of coverage Basic benefit covering hospital care With special hospital-specific deductible With usual major medical provisions applicable0 Extended care facility stay covered Unlimited extended care paid in full Limits or cost sharing apply: Prior hospital stay required Special days limit per 1-year period Special days limit per confinement Covered charges based on a percentage of the semiprivate room rate at prior hospital

Medium and large public plans in 1986

State and local public plans in 1987

100.0% 16.1 9.4 57.5 42.5 50.1 65.9 8.5 28.2

100.0% 23.2 6.9 81.2 18.8 65.1

73.6%

81.8% 11.3 70.5 28.7 15.7 10.6

7.7

65.9 40.0 16.6 40.3 11.8

b b b

b

Home health care covered Unlimited home health care paid in full Limits or cost sharing apply: Prior hospital stay required Special days limit per 1-year period Special days limit per confinement

18.4 24.8 6.5

80.5% 27.8 52.7 11.0 14.7 2.2

Hospice care covered

35.3%

27.4%

66.5% b b

a

Data for 1986 and 1987 describe the provisions covering 11,060,899 and 7,017,546 workers, respectively, promised retiree coverage beyond age 65. Retiree coverage for these persons is identical to current workers' coverage. Provisions describe the coverage of hospital room and board expenses. b Data on this item unavailable for this year. C AII medical expenses, including hospital care, are subject to an annual deductible and coinsurance above the deductible (nearly always 80%/20%).

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Services Covered Under Medicare Part-A. — Table 2 describes how services covered under Medicare Part-A are treated by retiree plans. Well over half of retiree enrollees are in plans lacking any front-end cost-sharing requirements for hospital care, especially among public sector enrollees (81.2%). Persons in plans with cost sharing (42.5% and 18.2% of private and public sector covered enrollees, respectively) tend to be in free-standing major medical plans, in which hospital expenses are subject to the same deductible and coinsurance rules that apply to physician visits and other categories of care. Only

60 or 100 days, the same as for ECF care. Hospice benefits, also fairly new with employers, are available to roughly one-third of persons with coverage. Services Covered Under Medicare Part-B. — Table 3 reports how employers treat physician care, the major Part-B benefit under Medicare. Most persons are in plans that apply an annual deductible and coinsurance. Only 7%-8% face a deductible lower than Medicare's, however, and most have the same 20% copay above that deductible. Thus, under the common carve-out coordination method, most dually covered beneficiaries still face the full Medicare physician deductible. In addition to Part-B's deductible and 20% copay, the elderly are liable for all fees that physicians charge above Medicare's allowed amounts. Among beneficiaries who used Medicare-covered services in 1985, 63% faced at least some "balance billing" from a provider (Holahan & Zuckerman, 1989). The average annual liability was $169 per beneficiary in that year, but for 2% of the elderly the balance billed was over $1,000. Retiree plans normally pay part of these non-Medicare-covered expenses since they tend to use a more generous "usual, customary and reasonable" (UCR) charge rule for reimbursements (Cabel etal.,1988). The UCR rule works like this: pay the physician's submitted bill, unless it exceeds either of two screens. The "customary charge" screen is the physician's average charge for that service during the prior year (adjusted for inflation). The "usual charge" screen is the 90th percentile of customary charges for that service of all physicians in the same specialty and vicinity. Although Medicare has used a related "customary, prevailing, and reasonable" (CPR) payment rule, its usual charge screen is set at the 75th percentile, and it also uses different data to calculate the customary charge screen. The CPR is being phased out with the implementation of the Medicare Fee Schedule. Faced with a Medicare balance bill, the employer's plan would calculate its UCR payment for the care rendered and, assuming its deductible was satisfied, pay 80% of the difference between that and Medicare's allowed payment (assuming carve-out coordination). The maximum benefit would be 80% of the balance bill, but less if the UCR rate was not the full charge. Most persons are in plans that contain a "catastrophic expenses" provision, whereby a retiree's out-of-pocket expenses are either capped directly or capped by limiting the claims on which coinsurance is paid (Table 3). With the latter, when "covered expenses" reach a certain threshold, the plan covers additional care in full. Covered expenses normally encompass all services covered under a policy; however, special day or visit limits and dollar allowances for particular categories still apply. For example, suppose a policy specifies a stop-loss of $2,000 on covered expenses and allows for 60 home care visits, and that the holder of this policy receives 65 home care visits, at a cost of $100 per visit. What expenses is she

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about one in five persons are in plans that require hospital preadmission certification, a form of utilization review, and few are in plans that contain a disincentive for weekend admissions. Extended care facility (ECF) coverage is fairly common (73.6% and 81.8% of private and public plan enrollees, respectively), and the coverage is almost always more generous than under Medicare. Prior hospital stay rules are typically absent, and where they are not, usually only 1 or 2 days are required. Broadly speaking, ECF care tends to be covered akin to hospital care, except that a special days limit often applies — usually 100 per year or 60 per illness or confinement (120-day limits were also fairly common). Among persons in two-part plans, that is, plans with a "basic" component in addition to major medical, ECF care is usually covered under basic benefits with no cost sharing. Among persons in freestanding major medical plans, ECF care tends to be included under the broad list of services for which one annual deductible and 20% copay above that apply, and for which the out-of-pocket expense limits apply. Less common ways of covering an ECF stay are to cap the plan's dollar reimbursement for it, either per day or per confinement (about 9% of persons have this arrangement), or to fully pay for all ECF care without any day limits (about 10%). Unfortunately, an important aspect of coverage not reported on the EBS is the plan's criteria for establishing exactly what constitutes ECF care. Medicare uses extremely strict standards to determine need for skilled nursing care, the only type of ECF care it pays for. If Medicare criteria are narrower than the criteria in employers' plans, then extended care is probably more accessible for these dually covered beneficiaries. Since employers' retiree plans are also usually the same plans that cover current workers, it is highly doubtful that they require stays to be Medicare-certified, unlike most individually purchased supplements (Rice & McCall, 1985). Even if retiree plans are using less stringent SNFneed criteria, and we cannot be not sure that they are, ECF benefits are not long-term care (LTC) insurance nor are they a good substitute for LTC insurance. Employers' ECF benefits generally do not cover intermediate nursing care or custodial care, although most long-term care falls into these two categories. Day limits under employer ECF coverage also fall far short of the average length of nursing home stays (e.g., 401 days in 1985 [Hing, Sekscenski, & Strahan, 1989]). LTC insurance, on the other hand, usually covers intermediate and custodial care, although restrictions often apply, and the policies often make allowances for much longer stays (Wiener, Ehrenworth, & Spence, 1987). Home health care benefits are a recent addition to retiree plans, more than twice as common now than in 1981. About two-thirds of private plan enrollees have such coverage, as do four-fifths of public plan enrollees. As shown in Table 2, home health care benefits tend to be more generous than ECF benefits. Fewer persons are in plans that place day limits on home care, but those who are face typical limits of

Table 3. Provisions Governing Physician Visits in Postretirement Health Insurance Plans'

% of insureds with trait in: Characteristics of benefits

State and local public plans in 1987

94.3% 59.4 8.8 85.5 5.1 80.5 73.9 7.2 36.1 30.7 $138.51 $310.68 79.9 9.7 68.8 1.3 74.4 78.4

99.8% 46.8 17.8 82.0 b b

59.7 7.9 30.2 21.6 $133.19 $356.20 54.5 8.8 45.4 0.3 64.8 78.5

"Data for 1986 and 1987 describe the provisions covering 11,060,899 and 7,017,546 workers, respectively, promised retiree coverage beyond age 65. Retiree coverage for these persons is identical to current workers' coverage. b Data on this item unavailable for this year, includes those persons with fully paid, unlimited visit coverage.

liable for under the policy? She is responsible for any copays required on the first 20 visits plus the full cost of visits 61-65. Thus, the stop-loss provision will qap her out-of-pocket expenses, but only until the allowance on visits expires. At that point (60 visits) her coverage ceases. Seventy-four percent of private sector enrollees and 65% of public plan enrollees have a "catastrophic expenses" provision of one of these two varieties. Among those with a ceiling on out-ofpocket outlays, about half have annual limits of $500 or less and very few have limits as high as $2,000, the cap that Medicare would have had under the nowdead 1988 Catastrophic Coverage Act. Claims limits, the second type, tend to be in the $2,000-$6,000 range and only rarely are they more than $10,000. Non-Medicare-Covered Services Covered by Retiree Plans. — Data from the 1987 National Medical Expenditure Survey show that persons over age 65 with any prescription drug expenditures spent $304 on average in that year on prescription drugs (Congressional Budget Office, 1989a). For beneficiaries with retiree health insurance, these expenses are covered largely by their supplements. Over 98% of private plan enrollees and just over 90% of public plan enrollees have coverage for outpatient prescription drugs (Table 4). Usually drug expenses are treated like physician care, covered under major medical and counted toward the same deductible and coinsurance provisions. If not treated this way, the plan requires that a small deductible per prescription be paid, $2.82 on average among EBS retiree plan enrollees. Among persons with drug coverage, close to one-quarter in the private sector and two-fifths in the public sector are in plans that apply a Vol. 32, No. 5,1992

deductible-per-prescription rule. Surprisingly, only about 6% are in plans that offer more generous coverage if a generic brand is ordered. Private duty nursing care, when ordered by a physician, is also covered for most retirees (93.4% and 97.8% among private and public plan enrollees, respectively). Among public plan retirees a substantial number (30.3%) have this expense fully paid. Chemical dependency coverage is now routine in retiree plans. Roughly 73% and 88% of private and public plan enrollees have coverage for alcohol treatment, and 70% and 86% have coverage for drug abuse treatment, respectively. Among public plan enrollees, chemical dependency benefits normally include inpatient detoxification and rehabilitation (more than 9 in 10), as well as outpatient rehabilitation at a substance abuse facility (more than 8 in 10). Limits to such coverage, however, are common. Only about one in four enrollees have coverage for a chemical dependency comparable to what they have for other illnesses. The rest have benefits that apply claims against the plans mental health limits or that entail separate restrictions such as limits on inpatient days and outpatient treatments. The 1986 EBS lacks detail on the nature of chemical dependency benefits in private sector plans. Other non-Medicare-covered services sometimes covered in retiree plans include visits to a clinical psychologist (for 52.9% of private enrollees), physical exams (for 17.7% and 40.7% of private and public plan enrollees), hearing care (20.3% and 26.5%), routine dental work (26.9% and 13.3%), periodontal care (26.6% and 9.7%), eye exams (30.3% and 22.5%), and eyeglasses (14.3% and 10.1%). Since most of these services are complementary to physician visits, the firm's deductibles probably would already be satis-

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Total with physician visit coverage Second surgical opinion program Fully paid, unlimited visit coverage Cost sharing or limits of some sort apply Visit coverage only under basic benefits Coverage under major medical Annual flat-dollar deductible applies Less than $75 per person $75-$100 per person More than $100 per person Mean individual deductible Mean family deductible Coinsurance required for visits Plan pays more than 80% above deductible Plan pays 80% above deductible Plan pays less than 80% above deductible Beneficiary out-of-pocket expense limit0 Maximum benefits $250,000 or morec

Medium and large private plans in 1986

Table 4. Provisions Governing Non-Medicare-Covered Services in Postretirement Health Insurance Plans' % of insureds with trait in: Medium and large private plans in 1986

State and local private plans in 1987

Outpatient prescription drug coverage All prescriptions fully paid Cost sharing or limits apply Deductible per prescription Usual overall cost sharing rules apply Usual major medical provisions apply Covered under basic with cost sharing Generic drugs covered more generously

98.2% 3.3 94.9 22.6

90.7% 3.1 87.6 36.8 48.5

Private duty nursing care coverage Fully paid without cost sharing Cost sharing or limits apply

93.4% 10.5 82.9

97.8% 30.3 67.5

72.8

87.5 81.6 73.2 86.4 80.2 67.4

Characteristics of benefits

b

69.7 21.7 5.7

b b

69.9 b b

Miscellaneous coverages Eye exam Eyeglasses Hearing care Routine dental care Periodontal care Physical exams Clinical psychologists0 a

Data beyond b Data c Prior

30.3 14.3 20.3 26.9 26.6 17.7

b b

22.5 10.1 26.5 13.3 9.7 40.7

52.9

for 1986 and 1987 describe the provisions covering 11,060,899 and 7,017,546 workers, respectively, promised retiree coverage age 65. Retiree coverage for these persons is identical to current workers' coverage. on this item unavailable for this year. to July 1,1990 Medicare's coverage of psychologists' services was so limited that we treat it as a noncovered service.

fied by the time any of them were used. Thus, the limitations on use suggested by the benefit coordination provisions and employers' deductible levels generally would not apply.

$135, is almost certainly met by the time of admission. If so, the supplement covers 80% of Medicare's deductible, leaving a meager $108 as the average copay required for hospital care — a trivial amount compared with Medicare's $540 intended deductible (in 1988). The vast majority of retiree plan enrollees thus face either minimal or no cost sharing for inpatient care. Nearly all dually covered retirees can also have private nursing care in the hospital paid for if physician-requested.

Medicare Augmentation with Retiree Supplemental Coverage A broad characterization of the "total insurance" of retiree plan participants can now be made by overlaying a typical retiree package onto Medicare's benefits and assuming the two are coordinated with the carve-out method. The emerging picture of coverage will be a "lower bound" description of total insurance, because carve-out, more than any other coordination method, preserves some beneficiary cost sharing. We take Medicares benefits to be those applicable in calendar year 1988 and supplemental benefits to be the (weighted) composite of the 1986 and 1987 plan provisions examined above. Based on the content of supplements described above, about 7 in 10 beneficiaries with retiree coverage likely face no front-end cost sharing for a hospital stay. Of the 30% who do, most have a free-standing major medical supplement with a single annual deductible and coinsurance, which apply to all care. A hospital stay, however, is typically preceded by physician visits, so the average private plan deductible,

Medicare-certified skilled nursing facility (SNF) care that follows a hospitalization is covered for up to 100 days but subject to a $67.50 daily copay (oneeighth the hospital deductible) for days 21 through 100. Beneficiaries with a basic component in their supplement would likely have these copays paid in full since SNF care is usually treated like hospital care in such plans. Coverage would be much less generous for those with a free-standing major medical supplement — assuming the employees deductible was already met, the secondary plan would pick up a part of Medicare's copay only if SNF charges exceeded $338 per day (since they pay 80% of total charges). However, since Medicare's "need standards" for care are so strict, an extended care stay, though not covered by Medicare, could nonetheless be covered by the employer's plan (having applied 700

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Chemical dependency coverage Alcoholism treatments covered Inpatient benefits for detoxification & rehabilitation Outpatient benefits in substance abuse facility Drug abuse treatments covered Inpatient benefits for detoxification & rehabilitation Outpatient benefits in substance abuse facility

b

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Part-B under the Act would have done nothing for most beneficiaries who have supplemental coverage through a former employer. Discussion

Our examination of postretirement coverage in 1986 and 1987 shows that the extra benefits it provides to Medicare enrollees come in seven areas: 1) elimination of most hospital cost sharing; 2) lower overall out-of-pocket expense limits; 3) quite possibly more relaxed eligibility standards for ECF and home care benefits; 4) coverage for most Part-B balance bills; 5) far more generous prescription drug coverage; 6) chemical dependency treatment coverage for care in substance abuse facilities; and 7) occasional coverage for psychologists' services, physical exams, and routine eye, hearing, and dental care. These extra benefits differ markedly from those garnered from medigap supplements. The latter, while providing more complete front-end insurance for Medicare-covered services, typically do not cover expenses left uninsured by Medicare. The last three areas above, in contrast, are extra care categories covered in retiree plans. Medigap supplements also tend to stipulate Medicare-equivalent criteria for coverage entitlement, for example, ECF copays are only paid if a stay is Medicare-certified, Part-B copays are paid only on Medicare-allowed payments, and so on (Rice & McCall, 1985). Employer policies, on the other hand, use criteria consistent with those applied to current workers. Thus, the extras obtained through 3) and 4) are more likely to be absent in medigap policies. Another sharp distinction is that retiree plans, because they most often use carve-out coordination, tend to preserve at least some of Medicare's costsharing provisions. Medigap policies are designed to eliminate the deductibles and coinsurance present under Medicare, hence they provide clear price incentives for the elderly to consume more covered health care services. The purchasing arrangements for retiree coverage and its cost also differ dramatically from those for medigap coverage. As we showed, the premium for retiree coverage is often paid in full by the former employer, and when an enrollee contribution is required, it is not much (only 28% of premium on average). In 1990 employers' total plan costs for retirees age 65 or older were approximately $1,000 per year (Hewitt Associates, 1990). This suggests that a typical retiree had to pay only $280 or so for employer coverage, well below the cost of medigap coverage, which probably would have cost between $800 and $1,200 per year per individual. In addition to being much cheaper, retiree coverage likely gives a higher return than medigap coverage on each premium dollar. The loss ratio (benefits paid divided by premiums collected) for employer coverage is about 95% in large firms (where most retiree coverage is found) (A.M. Best Company, 1987), whereas for medigap coverage it is closer to 70% (General Accounting

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possibly more lenient standards). In this case, the retiree's plan pays 80% or more of expenses. To be eligible, about a third of retirees must satisfy a 1- or 2day prior hospital stay rule, and any non-Medicarecertified stay is limited to 60 or 100 days, depending on the policy. As with hospital care, private duty nursing is largely covered in an ECF if physicianrequested. Further, given the stop-loss features of supplements, most dually covered retirees likely face little cost sharing for posthospital SNF care, but SNF day allowances under employer plans still apply. The beneficiary would effectively have Medicare-only coverage for any SNF days beyond those allowed in the employer plan. Medicare-certified home health care is fully paid, of course, but, as with SNF stays, the Medicare need standards are extremely stringent, making it sometimes difficult to qualify for benefits. About 70% of retirees are covered for supplement-paid home care based on different eligibility standards, certainly no more and possibly less stringent than Medicare's. Provided they qualify, home visits are fully paid (for about 25% of retirees) or paid at 80% (for the other 45%). Often coverage ends beyond home visit day 60 or 100. For the services provided by physicians, outpatient clinics, and clinical laboratories, four-fifths of retirees are responsible for a $75 annual deductible and 20% copays above that, as with Medicare-only coverage (in 1988). Only one-fifth face either no out-of-pocket costs or a lower deductible (e.g., $50). Thus, Medicare's two cost-sharing provisions for the services it covers under Part-B are largely preserved for dually covered beneficiaries. Finding a physician who accepts Medicare assignment, however, is likely far less of a concern for this group since their supplements cover 80% of most balance bills left by Medicare. Prescriptions are also very generously covered. Retirees pay either a small deductible per prescription (28% of enrollees) or a 20% copay (67% of enrollees) after meeting the supplement's deductible, averaging $135. (Physician visits and other care expenses would count toward meeting this umbrella deductible.) Roughly half of dually covered beneficiaries are also covered for visits to a psychologist, and about one-quarter or fewer have coverage for routine physicals, eye exams, eyeglasses, hearing care, and dental care. Chemical dependency treatments are covered for about three-quarters of plan enrollees. This includes inpatient detoxification, rehabilitation, and outpatient care at a substance abuse facility. Day or dollar limits for such treatments apply in most cases. For roughly half of covered retirees, full coverage begins once out-of-pocket costs for all supplementcovered services reach $500-$700, well below the cap of $1,340 that the Catastrophic Coverage Act would have prescribed for Part-B services alone. Another 20% have stop-loss limits at levels higher than $700 but still less than the Medicare catastrophic cap. Only 30% of dually covered persons are without protection from catastrophic expenses. Thus, as with the expansion of Part-A benefits, the expansion of

702

Medicare surtax as well, had the Act stayed intact, compared with only 35% among elderly without employment-based coverage (Congressional Budget Office, 1989b). Thus, the tax was to be disproportionately shouldered by those who had nothing to gain from the expanded benefits. In considering any future Medicare reforms, we urge researchers and policy analysts to pay close attention to employer supplements. Any increase in Medicare will only benefit those whose "total insurance" is now lacking in that particular area. Similarly, any cutback in Medicare will only be felt by those whose total insurance is reduced. If total insurance is unchanged, then an expansion or contraction in Medicare merely reallocates existing costs among insurers. Expanding Medicare shifts costs from retiree plans onto the government, whereas reducing Medicare causes the reverse. By virtue of their design, cost-shifting of this sort for medigap plans is much less pronounced. The Catastrophic Coverage Act, for example, would have provided a windfall for employers by shifting payments (mostly for prescription drugs and stop-loss protection) onto Medicare. If Medicare is to add a new coverage, persons with supplements that already contain such coverage almost surely will protest the addition if it is to be financed intragenerationally. This is clearly the case for most persons with employer-sponsored coverage since they have their supplements paid for life. It will also be the case for persons with medigap coverage if their policy costs less than what they would pay for expanding Medicare. In light of these realities, a more targeted approach to benefit expansion may be warranted. References A. Foster Higgins, Inc. (1990). Health Care Benefits Survey 1989: Retiree health care. Princeton, NJ: Author. A.M. Best Company. (1987). Best's aggregates & averages: Property and casualty. Oldwick, NJ: Author. Brown, R., & Langwell, K. (1988). Enrollment patterns in Medicare HMOS: Implications for access to care. In R. Scheffler & L. Rossiter (Eds.), Advances in health economics and health services research, Vol. 9. Greenwich, CT: JAI. Bureau of Labor Statistics. (1982). Employee benefits in medium and large firms, 1981. BLS Bulletin #2140. Washington, DC: U.S. Government Printing Office. Bureau of Labor Statistics. (1987). Employee benefits in medium and large firms, 1986. BLS Bulletin #2281. Washington, DC: U.S. Government Printing Office. Bureau of Labor Statistics. (1988). Employee benefits in state and local governments, 1987. BLS Bulletin #2140. Washington, DC: U.S. Government Printing Office. Cafferata, G. (1984a). Private health insurance of the Medicare population. Data Preview 18. Washington, DC: National Center for Health Services Research. Cafferata, G. (1984b). Private health insurance of the Medicare population and the Baucus legislation. Medical Care, 23, 1086-1096. Chollet, D. (1989). Retiree health insurance benefits: Trends and issues. In Retiree health benefits: What is the promise? Washington, DC: Employee Benefit Research Institute. Congressional Budget Office. (1989a). Updated estimates of Medicare's Catastrophic Drug Insurance Program. Washington, DC: U.S. Government Printing Office. Congressional Budget Office. (1989b). Subsides under Medicare and the potential for disenrollment under a voluntary catastrophic program. Washington, DC: U.S. Government Printing Office. Consumer Reports. (1984). Medicare supplement insurance. 49, 347-356. de Lissovey, G., Kasper, J., Gabel, J., & Di Carlo, S. (1991). How firms are restructuring retiree health benefits: Results of a national survey. Inquiry, 21, 289-293. Employee Benefit Research Institute. (1991). Retiree health benefits: Issues

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Office, 1986). Because postretirement coverage is group-based and largely paid for by employers, it may also be less likely to suffer from adverse selection, when compared with medigap coverage. Since the latter is bought on an individual basis, the purchasers may a priori be more predisposed to use health services. Major differences exist between retiree and medigap supplements, not only pertaining to benefits, Medicare coordination, and premium payment, but possibly between the enrollees themselves because of the different purchasing arrangements. These distinctions show that these two supplement types should not be lumped together in analyses of secondary coverage. The recently released Financial Accounting Standards Board (FASB) guidelines for postretirement benefits have created a new awareness among employers of the costs of retiree health insurance (Siegel, 1990). The final guidelines recommend that, beginning with the fiscal year that starts after December 15, 1992, a firm's collective liabilities (both current and future) for retiree health benefits be recorded explicitly on its financial statement. However, according to recent surveys, only a minority of firms anticipate changing their current method for funding retiree insurance benefits, which is typically a "pay-as-you-go" system (A. Foster Higgins, Inc., 1990; de Lissovey et al., 1991). Rather, the FASB changes appear to have motivated many firms to take stock of their retiree insurance commitments, to begin to measure the costs of promised benefits, and to consider how best to manage these obligations. In recent surveys (two conducted in 1989, the other in 1990), some firms have reported that they recently modified their retiree insurance benefits or were considering doing so by 1991 (A. Foster Higgins, Inc., 1990; de Lissovey et al., 1991; Hewitt Associates, 1990). However, they clearly had not dropped the fringe benefit nor were they planning to. Changes included raising retirees' premium contributions (15% had done this in 1989 and 13% were considering doing so by 1991), increasing the deductible (12% and 6%, respectively), reducing benefits within the plan (9% and 5%), increasing benefits with the plan (5% and 1%), moving to a defined contribution benefit (0% and 5%), or terminating the benefit altogether (0% and 1%, respectively) (A. Foster Higgins, Inc., 1990). Some narrowing of benefits may indeed be underway, in which case our description of coverage may slightly overstate the generosity of today's benefits. Our findings provide some insight into why the 1988 Catastrophic Coverage Act failed, and they point out the health policy pitfalls of failing to appreciate the difference between medigap and employer retiree coverage. Elderly persons with an employer postretirement supplement already had virtually all of the benefits offered through the act. Mammography screening was perhaps the only exception. For them, the act increased Part-B premiums without any increase in their total insurance coverage. Also, because of the relative affluence of these elderly, many (60%) were due to pay the new income-tax-based

of structure, financing, and coverage. EBRI Issue Brief, No. 112. Washington, DC: Author. Cabel,)., Jajich-Toth, C , de Lissovey, C , Rice, T., & Cohen, H. (1988). The changing world of group health insurance. Health Affairs, 7, 48-65. General Accounting Office. (1986). Medigap insurance. Report #CAO/ HRD-87-8. Washington, DC: U.S. Government Printing Office. Hewitt Associates. (1990). 1990 survey of retiree medical benefits. Lincolnshire, IL: Author. Hing, E., Sekscenski, G., & Strahan, G. (1989). The National Nursing Home Survey: 1985 Summary for the United States. Vital and Health Statistics. Series 13, No. 97. DHHS Pub. No. PHS-89-1758. Washington, DC: U.S. Government Printing Office. Holahan,)., & Zuckerman, S. (1989). Medicare mandatory assignment: An unnecessary risk? Health Affairs, 8, 65-79. Jensen, G., & Morrisey, M. (1992). Health insurance coverage of the Medicare elderly. In ). Turner & W. Wiatroski (Eds.), Trends in health benefits. Washington, DC: Department of Labor. Jensen, G., Morrisey, M., & Marcus, J. (1987). Cost sharing and the changing pattern of employer-sponsored health benefits. The Millbank Quarterly, 65, 521-550. McCall, N., Rice,T., Boismier,)., & West, R. (1991). Private health insurance and medical care utilization: Evidence from the Medicare population. Inquiry, 28, 276-287. Monheit, A., & Schur, C. (1989). Health insurance coverage of retired persons. National Medical Expenditure Survey Research Findings 2, DHHS Publication No. PHS-89-3444. National Center for Health Services

Research and Health Care Technology Assessment. Rockville, M D : Public Health Service. Morrisey, M. (1992). Compensating differentials: Taxing the uninsured. In R. Helms (Ed.), American Health Policy: Critical issues for reform. Washington, DC: AEI Press. Morrisey, M., Jensen, G., & Henderlite, S. (1990). Employer-sponsored health insurance for retired Americans. Health Affairs, 9, 57-73. Rice, T., & McCall, N. (1985). The extent of ownership and the characteristics of Medicare supplemental policies. Inquiry, 22, 188-200. Scheffler, R. (1988). An analysis of "Medigap" enrollment: Assessment of current status and policy initiatives. In M. Pauly & W. Kissick (Eds.), Lessons from the first twenty years of Medicare. Philadelphia: University of Pennsylvania Press. Schmidt, P. (1989). Retiree health benefits: An illusionary promise? In Retiree health benefits: What is the promise? Washington, DC: Employee Benefit Research Institute. Siegl, J. (1990). The FASB exposure draft: Issues and implications. In D. Disney (Ed.), The sourcebook of postretirement health care benefits, 1990 supplement. Greenvale, NY: Panel. Short, P., & Monheit, A. (1988). Employers and Medicare as partners in financing health care for the elderly. In M. Pauly & W. Kissick (Eds.), Lessons from the first twenty years of Medicare. Philadelphia: University of Pennsylvania Press. Wiener, J., Ehrenworth, D., & Spence, D. (1987). Private long-term care insurance: Cost, coverage, and restrictions. The Gerontologist, 27, 487493.

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