Commission to Allow Insurance Cuts for Retired Employees

April 23, 2004

By ROBERT PEAR

WASHINGTON, April 22 - The Equal Employment Opportunity

Commission voted Thursday to allow employers to reduce or

eliminate health benefits for retirees when they become

eligible for Medicare at age 65.

The agency approved a final rule saying that such cuts do

not violate the civil rights law banning age

discrimination. The vote was 3 to 1, with Republicans

lining up in favor of the rule and a Democrat opposing it.

Employers and some labor unions supported the change,

saying it would help preserve coverage for early retirees.

But AARP, which represents millions of Americans age 50 and

older, strenuously objected.

The new rule creates a potentially explosive political

issue, because it will create anxiety for many of the 12

million Medicare beneficiaries who also receive health

benefits from their former employers.

"We are aware of the anxieties and misperceptions that have

taken root," said Cari M. Dominguez, chairwoman of the

commission, which was deluged with letters opposing the

rule from more than 50,000 AARP members.

Employer-sponsored health plans help retirees pay medical

expenses not covered by Medicare. Those expenses could

include co-payments and deductibles, the catastrophic costs

of severe illness and the cost of preventive care and

prescription drugs, beyond what Medicare might pay.

Debate over the rule highlights the tradeoffs employers

make as they decide what benefits, if any, to provide

workers and retirees at a time when health care is gobbling

up a growing share of total compensation.

The rule creates an explicit exemption to the Age

Discrimination in Employment Act of 1967. In practice, it

allows employers to reduce health benefits for retirees

when they become eligible for Medicare at the age of 65.

A federal appeals court ruled in 2000 that such age-based

distinctions were unlawful.

No law requires employers to provide health benefits to

workers or retirees. Employers can legally provide benefits

to active workers and not to retirees. Courts have said

that if an employer provides benefits, it cannot

discriminate among retirees on the basis of age.

But the commission said that under the age discrimination

act it had authority to make "reasonable exemptions" to the

law in the public interest. The law does not define

"reasonable."

Leslie E. Silverman, a member of the commission, said the

appeals court decision had confronted employers with an

all-or-nothing choice: "Give all of your retirees the exact

same benefits, which is incredibly difficult, or eliminate

your retiree health benefits altogether."

Several commission members said that employers were more

likely to continue providing health benefits to retirees

under 65 if they were allowed to reduce or eliminate

benefits for those 65 and older.

A preamble to the final rule says it "is not intended to

encourage employers to eliminate any retiree health

benefits they may currently provide."

But Michele Pollak, a lawyer at AARP, said that might well

occur.

"This rule will allow employers to reduce or eliminate

retiree health benefits for anyone over the age of 65," Ms.

Pollak said. "More than 12 million Medicare beneficiaries

currently receive retiree health benefits from employers

and could potentially be affected."

Ms. Pollak said the commission did not have authority to

create such an exemption. Ms. Dominguez insisted that it

did, though she said the power was rarely used.

Paul W. Dennett, vice president of the American Benefits

Council, a trade group for large employers, welcomed the

rule, saying, "It removes a cloud that has been hanging

over retiree health coverage since the court decision in

2000."

The American Federation of Teachers and the National

Education Association also supported the rule. School

employees often retire early and rely on employer-provided

health benefits until they become eligible for Medicare.

Alfred Campos, a lobbyist for the National Education

Association, praised the rule, saying, "It will encourage

school districts to continue providing health insurance to

retired teachers under 65."

Stuart J. Ishimaru, who cast the only no vote, said: "I

came to the commission as a civil rights lawyer. Before

making an exemption to a major civil rights law, you need a

compelling reason, which I have not seen."

The proper role of the commission, Mr. Ishimaru said, is

not to make health policy, but to protect people from

discrimination.

The rule is subject to comment by other federal agencies,

and it will be reviewed by the Office of Management and

Budget. But it is within the jurisdiction of the employment

commission and is expected to stand.

The rule reverses a position that the commission took in

the court case and in a national policy statement issued in

October 2000.

Under the rule, employers can coordinate retiree health

benefits with Medicare.

"For example," the commission said, "in order to ensure

that all retirees have access to some health care coverage,

employers and unions may provide retiree health coverage to

only those retirees who are not yet eligible for Medicare.

They also may supplement a retiree's Medicare coverage

without having to demonstrate that the coverage is

identical to that of non-Medicare eligible retirees."

Opponents could challenge the rule in court. AARP said it

would "explore a range of different steps, including

litigation," to block the rule if it is not changed.

Congress considered the issue in debating Medicare

legislation last year. The Senate version of the Medicare

bill included a provision similar to the commission's rule,

but it was dropped from the measure ultimately signed by

President Bush.

AARP insisted on elimination of that provision before it

announced its support for the bill in November. That

endorsement played a critical role in passage of the

measure.

In recent years, many employers have reduced health

benefits for retirees, in part because of soaring health

costs.

Employers said that uncertainty caused by the court

decision, involving retired government workers in Erie

County, Pa., would accelerate the erosion of retiree health

benefits if the commission did not take action.