Retiree Medical Plans: What’s Happened to Lifetime Benefits?

Retirees who have medical coverage under both Medicare and an employer-sponsored plan basically double the complexity of navigating insurance policies – without doubling the amount of coverage. As a general rule, someone in this situation is first covered by Medicare, with any additional bills paid for under the group plan.

This means that even if the retiree’s former employer provides a generous medical plan, the retiree would still need to enroll in both Medicare Part A and Part B to receive full benefits from both plans. If not, the group plan may not cover medical bills acquired during any period in which he was eligible for Medicare but hadn’t applied for it.

The cost and coverage of group retiree health plans vary considerably based on what individual employers offer on their own or what worker unions negotiate. Some of these plans just provide “stop loss” coverage, which means they kick in only once the retiree’s annual out-of-pocket costs reach a maximum limit.

Private Insurance Coverage

There are no annual or lifetime limits on Medicare benefits such as surgeon’s fees or the charge for the stay in the hospital, as long as the healthcare services utilized are actually covered by Medicare and deemed medically necessary. There are, though some restrictions on certain benefits such as limits on the number of hospital days per illness and limits on rehabilitation services. Employer-provided retiree plans may also have limits on some benefits.

There is no law or regulation that requires private-sector employers to offer retiree medical benefits, nor to prevent them from limiting coverage when a health plan is offered. Furthermore, employers that do offer retiree health benefits can impose lifetime benefit limits, even on coverage offered to former workers long after the plan was issued. The only exception is if the plan documents include specific language that promises lifetime benefits and does not include more flexible language that allows the employer to make plan changes at any time. 

Obamacare

As of 2009, more than half of Americans covered by an employer-sponsored health plan were subject to a cap in medical benefits. According to the Kaiser Family Foundation, nearly a third of group plans were subject to a $2 million cap in lifetime benefits and another 20 percent were capped at $1 million.

That all changed in 2010, with the passage of the Patient Protection and Affordable Care Act (PPACA). Colloquially dubbed “Obamacare”, the new health reform legislation amended the previous Public Health Service Act (PHSA) to ban lifetime limits on group and individual health insurance plans going forward.

ERISA Rules 

The Employee Retirement Income Security Act of 1974 (ERISA), which is the federal law that sets minimum standards for the majority of private sector retirement and health plans, also  incorporated the new provisions of the PHSA. However, ERISA made an exception in Section 732 for certain retiree-only medical plans. This gave employers the opportunity to save money by limiting lifetime healthcare benefits in retiree medical plans, which then resulted in a variety of lawsuits.

Retired workers believed that their retirement plan was like their pension, with guaranteed benefits for life. After much legal wrangling, in 2017 a federal appeals court gave a final ruling that the PPACA’s prohibition of lifetime benefit maximums does not apply to retiree-only group health plans.

However, there continues to be ambiguity based on the legal interpretation of retiree health plans. ERISA requires that plan documents be written in plain English so that the average participant can fully understand the benefits. In some cases, the plan clearly promised lifetime benefits with no monetary cap, but elsewhere in the document there was disclosure language stating that the plan sponsor had the right to change the terms of the plan at anytime in the future.

In cases where this inconsistent language is positioned or written in a way that a court may  determine to be unclear or inadequate as required by ERISA, the plan may be held liable for the full scope of benefits for the life of the beneficiary. 

Legal Documentation

It is important for participants of an employer-provided retiree health plan to carefully review their plan documents to understand the benefits. A detailed scope should be included in the  Summary Plan Description (SPD), which employers are required to provide within 90 days after a participant joins the plan. The SPD that was in effect when an employee retired is considered the controlling document from that point forward.

If the SPD (or other controlling plan document) contains clearly stated language that the sponsoring employer has reserved the right to change the terms of the plan, retirees may lose coverage – including unlimited lifelong benefits – at any time during retirement. On the other hand, if the plan document clearly states that participants will have specific health care benefits for a specified period of time or for life, and does not include language that reserves the right to change plan benefits in the future, then the coverage is absolute from a legal perspective.

The disclosure language that would allow for future amendments would read as something to this effect: “The company reserves the right to modify, revoke, suspend, terminate or change the program, in whole or in part, at any time.”

It is important to note that, in addition to the SPD, there may be other formal documents related to health plan benefits as dictated by a collective bargaining agreement or an insurance contract.

Ancillary Materials

Be aware that lawsuits filed on behalf of retiree beneficiaries have successfully strengthened arguments for continued coverage by presenting other materials produced by employers that detailed promised benefits. For example, any correspondence furnished by the employer, including letters, brochures, medical plan booklets, employee handbooks and even notes taken during benefit meetings, may be submitted as evidence of the employer’s original intent.

These types of informal communications have been particularly influential in court cases in which the language in plan documents and/or the SPD was ambiguous.

Lessons Learned

For plan beneficiaries, the takeaway from court rulings in recent years is clear: Read and retain all plan documents as well as any other materials provided that specifically detail plan benefits both now and in the future. For retiree-only medical plan sponsors, be clear and consistent in plan documents and provide flexible language in case the organization is unable to fulfill its obligations in the future.

Ultimately, it is important for an organization – in concert with a labor union if applicable – to work carefully to develop a sustainable, long-term healthcare plan for retirees.

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