EEOC Retiree Medical Exemption Invalidated

Friday, July 1, 2005 - 01:00

A recent decision by a federal district court in Pennsylvania, which has the effect of invalidating an exemption implemented by the Equal Employment Opportunity Commission (the "EEOC"), will likely have the effect of causing employers to drastically revamp and/or curtail their retiree medical programs.

By way of background, in 2000, the Third Circuit Court of Appeals issued a decision in a matter brought by a class of retirees over the age of 64 (the "Retirees") against their prior employer, the County of Erie, Pennsylvania (the "County"). The Retirees had claimed that the County's retiree medical program (the "Program") violated the Age Discrimination in Employment Act ("ADEA"). The Program, as is the case with most employer-provided retiree medical programs, was integrated with Medicare. In simple terms, the Program provided a broad retiree medical program for retirees between the age of 55 and 64, which operated much the same way in which the County's medical program for active employees operated. Upon a retiree's becoming eligible for Medicare, however, the Program changed. Medicare eligible retirees could continue to participate in the Program only on a limited basis; that is, if a retiree was eligible for Medicare, then he or she could participate in a health maintenance organization (an "HMO") that specifically coordinated with Medicare (and Medicare Part B). Such retirees had to choose physicians and services that were associated with the HMO, all care had to be coordinated through a primary care physician, and they had to become covered by Medicare Part B. For retirees who were not Medicare eligible, the Program provided broader choices that included both an HMO and a point of service program.

The Retirees claimed that the benefits provided to those who were Medicare-eligible were more limited than the benefits provided to the non-eligible retirees. They claimed that the reduction in benefits was based upon age (as Medicare is generally available at age 65), and that the Program therefore violated the ADEA.

The Third Circuit agreed with the Retirees. According to the Court, an employer could justify differing levels of benefits to Medicare-eligible and non-eligible retirees only if an EEOC "equal benefit or equal cost" safe harbor rule were satisfied. Under the Program, the equal cost standard clearly could not be met, as the Medicare-eligible group of Retirees received coverage that cost less than that provided to the non-eligible group, due to the fact that Medicare was providing a substantial portion of the medical benefits that the older Retirees were consuming. Under the "equal benefit" prong, the County would have had to prove that the benefits provided to the Retirees under the Program and Medicare were equal to or better than those benefits provided to the younger retirees. Due to the manner in which Medicare and the Medicare-supplement HMO operated, the County could not satisfy this test either.

Following the issuance of the Erie decision in 2000, the EEOC first acted to adopt the ruling in Erie as a part of its national policy, inserting the Erie Court's rules in its Compliance Manual. It also launched an aggressive effort to try to force employers into compliance with the Court's ruling. Many employers, however, decided that the only practical way for them to avoid liability under ADEA for their retiree medical programs was to cut back on the benefits provided to the group of retirees who were not Medicare-eligible. In other words, instead of increasing the coverage provided to the Medicare-eligible group, compliance was achieved by reducing the coverage provided to the younger retirees.

In response to the actions taken by employers after the Erie decision, and a strong lobbying campaign, in 2001 the EEOC reversed its prior course in order to try to prevent more erosion of employer-provided retiree medical coverage. The EEOC removed the Erie position from its Compliance Manual, and then implemented an exemption to the ADEA for employer-provided retiree medical programs. Under the exemption, the EEOC provided that it is not a violation of the ADEA if retiree medical benefits are altered, reduced or eliminated when a retiree becomes eligible for Medicare. It also announced that it would no longer pursue ADEA cases involving retirees and health care benefits.

In response to the EEOC's reversal of its position on Erie, the American Association of Retired Persons (the "AARP") filed suit against the EEOC in order to attempt to stop the implementation of the EEOC's ADEA exemption rules for retiree medical programs. At the end of March 2005, the United States District Court for the Eastern District of Pennsylvania granted summary judgment in favor of the AARP. In the AARP decision, the Court stated that the EEOC has persuasively argued that its Erie exemption was necessary for the marketplace, as employers will reduce or eliminate health benefits for all retirees, no matter what their age, if the Erie ruling was left standing. The Court noted that retiree medical coverage is very expensive and becoming more expensive over time, and that EEOC exemption helped employers to provide greater benefits for younger retirees, leaving the older retirees to rely primarily upon Medicare for their retiree medical coverage. The EEOC exemption was supported by labor unions, the health insurance industry, and employer groups. The Court wrote, however, that the Third Circuit Court of Appeals had already ruled that allowing employers to give older retirees a level of health benefits that is inferior to the level of health benefits given to younger retirees is illegal under the ADEA.

The District Court, which is in the Third Circuit, noted that the United States Supreme Court has previously written that the judiciary is the final authority on issues of statutory construction, and that the courts must reject administrative constructions which are contrary to clear congressional intent. In looking at the language of the ADEA, which makes it unlawful for an employer to "discriminate against any individual with respect to his compensation, terms, conditions or privileges of employment because of such individual's age," the District Court noted that the Third Circuit had determined that Congress had intended for the ADEA to prohibit the practice of coordinating employer-provided retiree health benefits with Medicare eligibility unless the employer could meet the equal cost or equal benefit defense. The District Court also noted that the Third Circuit had determined in Erie that "eligibility for Medicare" is an "age-based" factor, and thus clearly within the scope of the ADEA's prohibition.

The EEOC had also argued that under the ADEA it had the authority to exempt otherwise prohibited conduct from the ADEA, as long as the exemption is reasonable and necessary, and proper in the public interest. The District Court ruled, however, that the EEOC's authority to issue rules is limited. The EEOC does not have the authority, the court ruled, to overrule a specific determination by the courts (specifically, in this case, the Third Circuit's ruling) as to the clear meaning of a statutory provision.

Accordingly, the EEOC's exemption for retiree medical programs that coordinate with Medicare is invalid, and the Third Circuit's original decision in Erie is in full force and effect, at least in the Third Circuit. The EEOC has filed an appeal of the District Court's ruling, but a decision in that appeal is not expected for at least one year.

In the meantime, at least one Congressional committee has started to hold hearings, looking into the issue of whether legislation should be passed that would overrule the Erie decision. It is not at all clear, however, whether Congress will be able to pass such a bill, given the reality that the AARP will likely object to the bill. Retirees tend to be active voters, and the AARP is generally perceived to be a strong voice for retirees. Fear of committing political suicide may prevent members of Congress from actively supporting such a bill.

In the meantime, it is unclear what employers should do. It is likely that similar claims will be pursued by retirees outside the Third Circuit. At least for now, the EEOC has not reinserted the Erie decision's ruling in its Compliance Manual. It is likely, however, that many employers, both inside and outside of the Third Circuit, will re-read the Erie decision, and assess their potential liability under the ADEA. Given that retiree medical programs are increasingly expensive benefits, and that the liability for such programs are shown on the employers' balance sheets, it is reasonable to assume that many employers may choose to reduce their overall level of retiree medical benefits to all retirees generally, or to terminate their retiree medical programs entirely, in order to avoid the potential for ADEA liability. Such employers, when challenged by their retirees, will be able to point to Erie as justification for scaling back their programs.

David P. Doyle practices in the Labor, Employment & Benefits Department at Pitney Hardin LLP, where he is a partner. This article represents only the author's views and does not necessarily reflect the view of Pitney Hardin or any of its clients. Questions concerning the article or Pitney Hardin's practice may be directed to Mr. Doyle at (973) 966-6300.

Please email the author at ddoyle@daypitney.com with questions about this article.