Summary

Since World War II, some employers have voluntarily sponsored postretirement health plans as a benefit to their employees. According to government sources, these health plans constitute the primary source of health coverage for retirees aged 55 to 64 and supplemental coverage for nearly one third of retirees aged 65 or older with Medicare coverage. However, with costs already amounting to hundreds of millions of dollars for large employers and the baby boom generation nearing retirement age, employers are taking actions to control the costs of providing these benefits. In response to concerns that government contractors may be receiving underserved financial benefits by reducing retiree health benefits that were paid for under government contracts, we reviewed (1) what changes, if any, government contractors had made to their retiree health benefit plans and (2) the extent to which government agencies oversee retiree health benefit costs.

Each of the three contractors we reviewed had adopted various strategies to control retiree health benefit costs, including restricting eligibility; increasing premiums, deductibles and copayments; and limiting future commitments. These actions are consistent with national trend data reflected in the Mercer and Kaiser/HRET surveys. These surveys show decreases in the percentage of large employers offering retiree health benefits and suggest that the erosion of such benefits will likely continue. For example, the most recent Kaiser/HRET survey, issued in 2002, reported that about one-third of large employers offer retiree health benefits--compared to almost half in 1991. The surveys' data do not distinguish between government contractors and those whose business base is nonfederal in nature. DCMA and DCAA closely monitored postretirement health benefits to ensure charges to the government were made in compliance with federal regulations. As part of their oversight efforts, the two agencies performed risk assessments and conducted regular reviews of the contractors' actual and projected postretirement health benefits costs and the assumptions underlying future cost projections. For the 2 years covered in our review, neither DCAA nor DCMA found any significant problems with the contractors' actual or projected postretirement health benefits costs. For example, DCAA took no exceptions to the projected costs reflected in the contractors' pricing proposals and took exception to less than 1 percent of the $756 million in postretirement health benefits costs incurred by the contractors over the 2-year period.