RETIREE HEALTH CARE COVERAGE
AND THE AGE DISCRIMINATION IN EMPLOYMENT ACT:
ISSUES RAISED BY THE ERIE COUNTY CASE

In August 2000, the U.S. Court of Appeals for the Third Circuit decided the Erie Country Retirees Ass'n. v. County of Erie, Pa. case (220 F. 3d 193 (3d Cir. 2000)). The Court of Appeals held that the Age Discrimination in Employment Act (ADEA) applies to retirees, not just active employees, and that a distinction based on Medicare-eligibility was an age-based distinction. Specifically, the court ruled that it is a violation of the ADEA for a plan sponsor to provide lower health coverage to Medicare-eligible retirees than it provides to retirees who are not yet eligible for Medicare, because Medicare-eligible retirees are, by definition, age 65.

In comparing the health coverage made available to retirees in the two age groups, the court held that the benefits provided by Medicare can be taken into account. By contrast, the court held that the employer could not take Medicare's costs into account for purposes of the alternative ADEA rule, which permits plans to provide lower benefits to older employees if the cost is the same. The appeals court sent the case back to the trial court to determine whether there was discrimination in the case before it (i.e., whether the health coverage that Erie County provided to retirees younger than 65 was in fact better than the coverage it provided to older retirees).

In an April 2001 decision, the trial court in Erie County answered the question left open by the Third Circuit, and determined that the coverage provided to the Medicare-eligible retirees was inferior to what the younger retirees received. This conclusion was based on three factors:

• The older retirees paid their own Medicare Part B premiums, at $50 per month; the younger retirees' monthly contribution was only $12 per month. Looking strictly at what the employer spent to cover the two groups, the older retirees paid a greater share of their monthly cost than the younger employees.
• The older retirees had a $10 co-payment for prescription drugs and were limited to a formulary, while the younger retirees had a $2 prescription-drug copayment limitation to specified drugs. The court held that restricting drug coverage based on a formulary was not, by itself, discriminatory, but taking the higher copayment into account the older retirees' drug coverage was inferior to the younger retirees' coverage.
• The older retirees were in a Medicare+Choice health maintenance organization (HMO), and the younger retirees were in a point-of-service (POS) plan. Giving the younger retirees a choice between an HMO and an indemnity-type plan while providing only an HMO for the older retirees was, in the court's view, discriminatory. Notably, the trial court held that it would not be discriminatory to put the older retirees into an HMO and the younger retirees in an indemnity program. He noted that approach had its pros and cons so it could not be said, based on objective factors, that one was superior to the other. It was the fact that the younger retirees were given a choice and the older group was not that led to the finding of discrimination.

Legal Impact of the Court Decisions

For now, Erie County is only law in the Third Circuit (Delaware, New Jersey and Pennsylvania). The trial court's comparative analysis of the benefits in that case will be precedent in western Pennsylvania, in the area of that court's jurisdiction. Other ways of comparing benefits will doubtless be suggested in other cases.

Some employers or plan sponsors will, doubtless, continue to contest the basic premise, either in the Third Circuit or elsewhere in the country. Few practitioners believe that the basic legal questions are settled. On the other hand, plan sponsors -- at least in the Third Circuit -- will need to be prepared to go to court if they want to disregard the appeals court decision that the ADEA applies to retiree health benefits.

A suit to enforce the ADEA may be brought in the judicial district in which the defendants reside, where a defendant can be found, or where a substantial part of the events or omissions giving rise to the claim occurred. On this last basis -- where did the discrimination take place -- it may be possible that a retiree living in one of the states in the Third Circuit and receiving health coverage there could sue there, even if the employer does not operate there. However, questions of federal jurisdiction and venue -- where trials may take place -- are highly technical and should always be referred to an attorney.

Enforcement

The EEOC has revised its enforcement manual to reflect the appeals court decision. Therefore, when the agency's field offices around the country receive complaints from older retirees that their health coverage is less generous than what younger retirees get, the investigators will be operating on the assumption that age-based discrimination between groups of retirees is illegal. To our knowledge the EEOC has not taken an official position on how the comparison between older and younger retirees' benefits should be made. We do know that they are negotiating settlements with a number of school districts that pay age-based severance and retiree health allowances to teachers who retire early, with the highest amounts available to those who retire at the youngest ages.

Possible Ways to Compare Coverage

The EEOC's 1978 regulations state that an employer may comply with the ADEA either by providing equal benefits to people of all ages or by paying an equal amount, or an equal share of the cost, for all of them even if this results in lower benefits for the older people because their coverage is inherently more expensive. The regulations also state that, in determining whether benefits are equal, the employer can take into account government-provided benefits such as Medicare. In the Erie County case, however, the court held that if the test is based on equal cost, only what the employer actually spends can be taken into account, not what Medicare spends.

If, in a given case, the coverage provided by a plan for the younger and older retirees is the same except that Medicare is primary for the older retirees there is no issue. That would also be true if the employer provides a cash reimbursement allowance that is the same for all retirees regardless of their age (even if it varies based on their years of service). Where there are any differences in the benefits, however, some type of comparison will be necessary to evaluate the differences to see whether the older retirees' coverage is inferior.

The trial court in Erie County made the comparison by looking at what the judge called objective factors, such as the size of the co-payment on prescription drugs or the share of the premium paid by the employee. He did not otherwise compare the benefit packages available to the two groups, probably because they were substantially similar in other regards. It is not really possible to predict how a benefits-based comparison would turn out in other situations where the benefit packages are different, such as where the older retirees have Medicare with reimbursement for the Part B premium and the younger retirees are in the plan for active employees. However, if the younger retirees have an important benefit that is not available to the older ones, such as prescription drug coverage, that could be problematic.

• Value-Based Benefits Testing A different way to compare benefits packages would be to look at their values, not just at the benefit characteristics on their face. There are underwriting tools used to evaluate different benefit features for plan design and cost estimation, which might be used for this purpose. Similarly, the government sets a buy-in rate for Medicare, for people who do not have enough service in Social Security-covered employment to qualify for it. Those rates might be used as an indicator of the value of Medicare coverage, when comparing it to, say, a fixed-dollar reimbursement allowance provided to younger retirees.
  
  Neither the courts nor the EEOC have expressed a view on whether a value-based approach is feasible under the ADEA rules or, if so, how it should be carried out. Nor do we know whether the established value of Medicare would be higher or lower than the value of employer-paid coverage typically provided for pre-Medicare retirees. However, since the Medicare package of benefits is different from coverage that is available to people in other age groups (except where it is provided through an HMO), it seems evident that some mechanism for making the different benefit packages comparable is necessary if employers are to be allowed to take credit for Medicare, as the regulations clearly allow them to do.

  Until the issues are clarified, it will be up to each client's individual counsel to decide whether this a fruitful path to explore.

• Retiree Coverage that Stops at Age 65 Arguably it should be possible to justify a retiree benefit program under which the employer-subsidized portion stops at age 65. That is because the employer is still entitled to take credit for the coverage provided by Medicare, regardless of how much or how little additional coverage the employer-funded plan provides. If the test for discrimination is based on a comparative valuation, this should be feasible. For example, suppose the employer provides a $250 monthly allowance for early retirees and nothing for Medicare enrollees. If the value of Medicare is at least $250 a month, the plan is not discriminatory. Again, this analysis works only if the courts ultimately accept the idea of testing the benefits based on a comparative valuation.

Next Steps

In March 2001, the U.S. Supreme Court declined to review the appeals court decision in Erie County, on the question whether the ADEA applies to retiree benefits. If similar suits are brought elsewhere, there may be differences of opinion among the appeals courts that could prompt a resolution by the Supreme Court, unless Congress acts to clarify the issue in the interim. In the meantime, plan sponsors should rely on their attorneys for advice about the compliance implications of the design of their health and welfare funds' coverage for early retirees and Medicare-eligible retirees, in light of Erie County.

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