Retiree Medical Not Restricted by Medicare Secondary Payer Rules
This article should interest employers who are offering or thinking about offering retiree medical coverage and should especially interest local governmental entities that are required to offer retiree medical coverage under state law. A federal court case decided on March 21, 2019, highlights the interplay between retiree medical requirements and the Medicare Secondary Payer Rules (MSPR). In River City Fraternal Order of Police Lodge 614, Inc. v. Kentucky Retirement Systems, No. 3:17-cv-00102-WOB, 2019 WL 1301968 (E.D. Ky. Mar. 21, 2019), governmental retirees’ access to free retiree medical coverage was terminated as retirees became Medicare eligible due to age.
Application to Others
Numerous states require the provision of retiree medical coverage to some extent. In Florida, for example, governmental entities must offer certain former employees with retiree medical coverage at a cost no greater than what active employees pay. Our understanding is that many Florida entities interpret the applicable requirements as allowing them to increase the cost paid by Medicare-eligible retirees, and this often causes Medicare-eligible retirees to opt out of the retiree medical plan, using Medicare as the primary provider. Nongovernmental entities generally do not have a state law obligation to provide retiree medical coverage, offering more flexibility in its administration.
River City Police v. Kentucky
Retirees sued the retirement system, arguing that the retirement system’s decision to terminate coverage at Medicare age violated the MSPR prohibition against taking Medicare eligibility into account. The retirement board responded that the MSPR required termination of the retirees’ coverage because MSPR prohibits the state from offering coverage that was secondary to Medicare.
The court specifically found the retirement system’s defense to be “without merit” because there is no MSPR prohibition against providing coverage that is secondary to Medicare under these circumstances. It also dismissed the union’s MSPR claim on the basis that the prohibition against taking Medical eligibility into account only applied to active employee coverage and not retiree coverage. In the end, the union (on behalf of retirees) won this case on state law grounds, with the court determining that since the Kentucky requirement to provide retiree medical coverage did not conflict with the MSPR, terminating coverage on that basis violated state law.
This is a comforting reminder that the MSPR prohibition against taking eligibility into account generally does not apply to retiree medical coverage. This is why nongovernmental entities have significant flexibility with plan design, and governmental entities with state law retiree coverage requirements generally do not need to go beyond satisfying those requirements. Retiree medical coverage can be a significant cost, so those looking to reduce those costs can assess the minimum requirements outlined in state law or applicable contracts, and be more likely to make reductions without violating MSPR.
The court dismissed the pension board’s interpretation of the MSPR, and I must admit that it seems that if the pension board’s attorneys were able to keep a straight face when making those arguments, then they are better actors than I am! As plan administrator, the board likely had authority to render interpretations, but that authority generally focuses on interpretations of plan documents and not applicable law. Although the court did not discuss this aspect, we can assume that plan administrators must interpret applicable law correctly and are not entitled to deference for those interpretations. The court did note that the plan administrator’s interpretation was “self-serving,” meaning that it clearly benefited the retirement system. There is a legal precedent that courts should more heavily scrutinize plan administrator interpretations when there might be a conflict of interest, but the court did not expand on this aspect. In many states like Florida, employee representatives are often required to serve on the board, and it would have been interesting to read about a conflict of interest assessment with respect to a board that has both employer and employee representatives.
Note that the MSPR, like many employee benefit requirements, are extremely complex and this case focused exclusively on Medicare eligibility based on age. The MSPR for those who are eligible due to disability are generally the same or similar, but the rules applicable to those who are eligible for Medicare due to end-stage renal disease are different, and a separate assessment would be necessary.