Medigap

Although they have received almost no attention from policymakers, even more common than individually purchased Medigap policies is coverage provided by employers and former employers. Typically, retirees with this coverage enjoy the same benefits as active workers in a firm, and they pay less in premiums and cost-sharing requirements than do owners of Medigap policies. For example, in 1997, the average premium paid by those with employer coverage was $712 annually, compared with $1,249 for those with Medigap. In spite of their paying lower premiums, those with employer-sponsored policies tend to be better off economically, and they receive more in benefits. The primary example is in the area of prescription drug costs, where 72 percent of those with employer-sponsored coverage have such coverage, versus only 25 percent of those with Medigap.

The trend in employer-sponsored coverage for retirees is for fewer firms to promise these benefits, and when they are offered, there are more eligibility restrictions and higher costs for the retiree. Most notable is the decline in firms offering coverage. One study reports that among large employers, just 31 percent of Medicare-eligible retirees were offered health benefits from their former employer in 1997, compared to more than 50 percent in 1988. Another finds that in 1998, 40 percent of large employers offered such benefits, down from 67 percent in 1984. These changes stem from many factors, but were sparked by the Statement of Financial Accounting Standards No. 106, which was adopted by the Financial Accounting Standards Board (FASB) in 1992. This rule requires employers "to treat obligations for present and future retiree health benefits on an accrual rather than a pay-as-you go basis." This means that the anticipated costs of future retiree benefit payouts have to be accounted for in current financial statements.

Employer-sponsored coverage, when it is offered, has several advantages over individually-purchased Medigap policies: employers share in the cost; these employers may be more effective than an individual in purchasing good coverage; and it is likely to be cheaper than individual coverage, irrespective of any subsidization by the employer, because insurers are less at risk when they insure a large pool of employees. But, like Medigap, there are problems as well, including the potential for high utilization of services and the resulting costs. The main problem, however, is the lack of security of these benefits, which are almost always subject to the Employee Retirement and Income Security Act (ERISA). Although ERISA provides various protections for pension benefits, little protection is required of health benefits.