After the recent decision of the Third Circuit, Erie County Retirees Assoc. v. County of Erie, 220 F.3d 193 (2000), employers that offer medical benefits to their retirees would be wise to reexamine the terms of their plans. In Erie County, the Third Circuit held that an employer may be discriminating on the basis of age when it offers Medicare-eligible retirees health care insurance coverage that is inferior to the coverage offered to retirees who are not eligible for Medicare, in violation of the Age Discrimination in Employment Act ("ADEA").
Faced with increasing health insurance costs, the employer in Erie County, a county government, selected two different plans for its retirees. Medicare-eligible retirees were required to accept a coordinated health care plan provided through a health maintenance organization ("HMO"), and a contract with Medicare. The county placed retirees who were not Medicare-eligible into a "point of service" plan that combined the features of an HMO with those of a traditional indemnity plan. The plan for the Medicare-eligible retirees was inferior to the plan for the retirees who were not Medicare-eligible because under the plan for the Medicare-eligible retirees, a participant was required to select a Primary Care Physician ("PCP") from a list of physicians in the plan network, and coverage was available only for services provided or authorized by the PCP.
A group of Medicare-eligible retirees filed suit against the county, claiming that the county had violated the ADEA by adopting a facially discriminatory health insurance program. The county, in reply, argued that the program was justified under the "safe harbor" provision of the ADEA, which shields an employer from liability for what would otherwise be a discriminatory benefit program when the program either provides equal benefits to older and younger workers, or incurs the same costs on behalf of older and younger workers.
While the Third Circuit did not ultimately determine whether the county was entitled to the protections of the safe harbor, the Third Circuit did provide guidance on proper application of the safe harbor provision in the retiree benefits context. Under the logic of the court in Erie County, an employer that wishes to take advantage of the safe harbor provision and offer health care benefits which take into consideration an employee’s eligibility for Medicare should first determine whether the plan will satisfy the "equal benefit" prong of the statutory safe harbor. To satisfy this prong, Medicare-eligible participants must receive an equal benefit (taking into account both Medicare-provided and employer-provided benefits) as the participants who are not Medicare-eligible. If the employer cannot satisfy the "equal benefit" prong, the employer may still qualify for the protections of the statutory safe harbor if the employer spends at least the same amount of money to provide benefits to Medicare-eligible employees as it does to provide benefits to its employees who are not eligible for Medicare. In calculating its costs under this "equal cost" prong of the safe harbor, the employer may not include any costs incurred by Medicare on behalf of it participants.
In providing this guidance, the Third Circuit expressly recognized that it may have eliminated the possibility of an employer satisfying the "equal cost" prong of the safe harbor in situations where an employer provides different plans for its participants based on an individual participant’s eligibility for Medicare, speculating that employers whose retirees have Medicare coverage will be able to shift a large portion of the cost of health care coverage to Medicare. Accordingly, in the wake of the Erie County decision, employers who wish to provide different benefits to their plan participants, based on the participant’s eligibility for Medicare, must carefully evaluate whether they are entitled to invoke the provisions of the statutory safe harbor. Consultation with an attorney who is experienced in the field of employee benefits may be necessary to ensure that an employer can provide health benefits in a cost-effective manner that also meets the requirements of the law.
After the recent decision of the Third Circuit, Erie County Retirees Assoc. v. County of Erie, 220 F.3d 193 (2000), employers that offer medical benefits to their retirees would be wise to reexamine the terms of their plans. In Erie County, the Third Circuit held that an employer may be discriminating on the basis of age when it offers Medicare-eligible retirees health care insurance coverage that is inferior to the coverage offered to retirees who are not eligible for Medicare, in violation of the Age Discrimination in Employment Act ("ADEA").
Faced with increasing health insurance costs, the employer in Erie County, a county government, selected two different plans for its retirees. Medicare-eligible retirees were required to accept a coordinated health care plan provided through a health maintenance organization ("HMO"), and a contract with Medicare. The county placed retirees who were not Medicare-eligible into a "point of service" plan that combined the features of an HMO with those of a traditional indemnity plan. The plan for the Medicare-eligible retirees was inferior to the plan for the retirees who were not Medicare-eligible because under the plan for the Medicare-eligible retirees, a participant was required to select a Primary Care Physician ("PCP") from a list of physicians in the plan network, and coverage was available only for services provided or authorized by the PCP.
A group of Medicare-eligible retirees filed suit against the county, claiming that the county had violated the ADEA by adopting a facially discriminatory health insurance program. The county, in reply, argued that the program was justified under the "safe harbor" provision of the ADEA, which shields an employer from liability for what would otherwise be a discriminatory benefit program when the program either provides equal benefits to older and younger workers, or incurs the same costs on behalf of older and younger workers.
While the Third Circuit did not ultimately determine whether the county was entitled to the protections of the safe harbor, the Third Circuit did provide guidance on proper application of the safe harbor provision in the retiree benefits context. Under the logic of the court in Erie County, an employer that wishes to take advantage of the safe harbor provision and offer health care benefits which take into consideration an employee’s eligibility for Medicare should first determine whether the plan will satisfy the "equal benefit" prong of the statutory safe harbor. To satisfy this prong, Medicare-eligible participants must receive an equal benefit (taking into account both Medicare-provided and employer-provided benefits) as the participants who are not Medicare-eligible. If the employer cannot satisfy the "equal benefit" prong, the employer may still qualify for the protections of the statutory safe harbor if the employer spends at least the same amount of money to provide benefits to Medicare-eligible employees as it does to provide benefits to its employees who are not eligible for Medicare. In calculating its costs under this "equal cost" prong of the safe harbor, the employer may not include any costs incurred by Medicare on behalf of it participants.
In providing this guidance, the Third Circuit expressly recognized that it may have eliminated the possibility of an employer satisfying the "equal cost" prong of the safe harbor in situations where an employer provides different plans for its participants based on an individual participant’s eligibility for Medicare, speculating that employers whose retirees have Medicare coverage will be able to shift a large portion of the cost of health care coverage to Medicare. Accordingly, in the wake of the Erie County decision, employers who wish to provide different benefits to their plan participants, based on the participant’s eligibility for Medicare, must carefully evaluate whether they are entitled to invoke the provisions of the statutory safe harbor. Consultation with an attorney who is experienced in the field of employee benefits may be necessary to ensure that an employer can provide health benefits in a cost-effective manner that also meets the requirements of the law.
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