Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Lorraine Lewis


Testimony of Lorraine Lewis,
Executive Director, UMWA Health and Retirement Funds

Committee on Energy & Natural Resources
United States Senate

September 27, 2005

I am Lorraine Lewis, Executive Director of the UMWA Health and Retirement Funds.  On behalf of the Trustees of the UMWA Combined Benefit Fund, the UMWA 1992 Benefit Plan and the UMWA 1993 Benefit Plan, I am pleased to accept the Committee’s
invitation to testify today.

The Plans and the Populations They Serve.

The three plans are continuations of the health benefit plans that were first provided to coal miner retirees and their families pursuant to an agreement between the Mine Workers Union and the Federal government in 1946 when President Truman seized the nations’ coal mines to resolve a nationwide strike.  Retiree health care was continued through collective bargaining in the industry from that time until passage of the Coal Act in 1992 and beyond.  Historically, the Mine Workers have accepted lower wages and more modest pensions in exchange for more complete health care coverage.  See Coal Commission Report (The Secretary of Labor’s Advisory Commission on United Mine Workers of America Retiree Health Benefits, November 1990) pages 32-41, 48-50. The beneficiaries of the plans reside primarily in the coal fields of Appalachia and are generally at the lower end of the economic ladder.  For example, a coal miner’s widow typical of the beneficiaries of the Combined Benefit Fund receives a pension from the UMWA 1950 Pension Plan of $155 per month. 

According to the results of a 2004 study conducted by Mercer Human Resources Consulting, the beneficiary population served by the UMWA Funds bears a burden of illness 35% percent greater than the average for the general Medicare population.  On a series of biannual surveys conducted by the UMWA Funds, over 50% percent of the responding beneficiaries reported their health as “fair” or “poor” as distinguished from the other available categories of “excellent,” “very good,” or “good.”  The GAO Report, “Retired Coal Miners Health Benefit Funds Financial Challenges Continue” of April 2002 (page 18) reached a similar conclusion.

Managed Care and Cost Containment Programs.

Over a number of years, the plans have developed aggressive, successful managed care and cost containment programs.  The Mercer study reported that the cost of health care for the plans was significantly less, by seven percent, than the level to be expected for the burden of illness found in the population.

These programs include contracts with hospitals and other providers to pay at Medicare levels for the plans’ Medicare and non-Medicare eligible beneficiaries and the establishment of a network of durable medical equipment providers with bargained lower costs.  Costs in the plans’ prescription drug benefit programs are managed by use of co-pay incentives to promote use of mail-order drugs, requirements for use of generics when available in the absence of medical necessity for brand name drugs, and a preferred product program encouraging use of less expensive therapeutic equivalents in important drug classes.  The plans also employ expert medical management teams to ensure the most effective courses of treatment, especially for beneficiaries with a high burden of chronic illness, and these services help to  reduce hospital admissions and save costs over the long term.  A more complete description of the UMWA Funds managed care and cost containment programs is found in Appendix A.  

ERISA Governed Health Care Plans.

All three of these health plans are employee welfare benefit plans within the meaning of the Employee Retirement Income Security Act of 1974 (“ERISA”).  As ERISA fiduciaries, the Trustees do not advocate any particular legislative proposal.  Since Congress first considered the Coal Industry Retiree Health Benefit Act of 1992, however, the Trustees have recognized all efforts by members of Congress to resolve the problems of continuing the promised health care for retired coal miners and their dependents as constructive, and, in the interest of the plans’ participants and beneficiaries, they have made staff available to respond to requests for information that might be relevant to these considerations. 

Each of the plans is a separate employee benefit plan under ERISA, each with its own population of beneficiaries, separate funding mechanism and plan of benefits, and each with its own board of trustees.  The Coal Act requires the Combined Fund Trustees, to the maximum extent feasible using available plan resources, to maintain the level of benefits provided by the predecessor plans in 1992, and the Act requires the 1992 Benefit Plan to guarantee this same level of benefits. 

Pursuant to the Taft Hartley Act, an equal number of trustees are appointed by the UMWA and by employers who support the plans.  While some individual trustees serve on more than one of the plans, the board of each plan is required by ERISA to use that plan’s assets in accordance with the written plan documents and exclusively for the plan’s beneficiaries.  Consistent with these requirements, however, these plans derive certain advantages from receiving joint administrative services pursuant to agreements with the UMWA 1974 Pension Trust for shared office space and staff services.

Contracts with Service Providers, Department of Labor and Medicare.

The three plans also pool their bargaining power to jointly enter into contracts with a medical claims processor, a pharmacy benefit manager, a medical management vendor, and a network of cooperating health care providers.  Significantly, the three plans also jointly contract with the Medicare program and with the Department of Labor’s Black Lung program to provide federally funded benefits to their beneficiaries.

Since 1990, the Funds’ health care plans’ contract with the Medicare program has taken the form of a demonstration project under which the Funds have received capitation payments in exchange for providing Medicare Part B benefits to Medicare eligible beneficiaries.  Since 1997, the demonstration contract has included a risk sharing arrangement covering services delivered to eligible beneficiaries under Medicare Part A.  Beginning in 2001, as part of the continuing demonstration project under contract with the Medicare program, the Funds have conducted a prescription drug demonstration under which the UMWA Funds three health plans operate a pilot program designed to help physicians improve the quality and effectiveness of prescription drug therapy provided to elderly chronically ill beneficiaries who receive their care under fee-for-service arrangements.  In exchange, the Centers for Medicare and Medicaid Services (“CMS”) pays a portion of the cost of providing prescription drugs to Medicare eligible beneficiaries under the UMWA Funds’ plans of benefits.  The plans have applied for renewal of the demonstration project and on September 20, 2005, CMS announced that the demonstration would be extended to September 30, 2007.  While some terms remain to be worked out with CMS, the figures in Appendix B take this renewal of the prescription drug demonstration into account.

The Combined Benefit Fund.

The Coal Act directed the merger of two existing collectively bargained health benefit plans, the UMWA 1950 and 1974 Benefit Plans, to form the UMWA Combined Benefit Fund to cover only those beneficiaries already covered by those two plans on July 20, 1992.   This closed the Combined Fund population to new retirees.  This population was then approximately 108,000.  Reduced by mortality, this population is now approximately 37,000, composed of approximately 8,500 retired mine workers and 28,500 dependents, of whom approximately 22,000 are widows of mine workers.  Combined Fund beneficiaries are elderly, their median age is 81.  Their median household income, based on a survey done in 2000, was $17,076.  Approximately 94% of this population is Medicare-eligible.
The Coal Act requires the Combined Fund to have seven trustees. Two are appointed by the UMWA.  There are two management-appointed trustees, one appointed by the Bituminous Coal Operators Association (“BCOA”), and the other appointed by the three operators who, among those that did not sign the 1988 National Bituminous Coal Wage Agreement, have the largest number of beneficiaries assigned to them.  The three remaining “neutral” trustees are appointed by the other four. 

Under the Coal Act, the Social Security Administration (“SSA”) assigns Combined Fund beneficiaries to coal industry operators who signed Coal Wage Agreements with the UMWA and employed the retired miners who were, or whose widows were, primary beneficiaries of the 1950 or 1974 Benefit Plan at the time of the Coal Act’s enactment.  Assigned operators are required to pay premiums for each assigned beneficiary in accordance with a premium rate set by the SSA pursuant to a formula set out in the Act.  They also pay a proportionate share of death benefit premiums and of premiums for unassigned beneficiaries. 

Unassigned beneficiaries.

Unassigned beneficiaries are those whose employers have gone out of business.  There has been a steady shift within the Combined Fund’s population from assigned beneficiaries to unassigned beneficiaries as operators have ceased business activity, with this shift increasing due to recent steel industry bankruptcies and the Horizon Natural Resources bankruptcy.  In 2005 the average unassigned population has been approximately 16,700.

To avoid as much as possible the requirement that operators pay for expenses of beneficiaries who did not work for them, the Coal Act required that the beneficiaries themselves contribute $210 million from the UMWA 1950 Pension Plan, the plan that provided most of their pensions, primarily to cover unassigned beneficiaries’ expenses during the first three plan years of the Combined Fund’s operations.  Beginning October 1, 1995, the Coal Act and the corresponding 1992 amendments to the Surface Mining Control and Reclamation Act (“SMCRA”) provide for an annual transfer to the CBF of the interest earned by the Abandoned Mine Lands Reclamation Fund (“the AML Fund”) to cover unassigned expenses.  Transfers occur in years when fees are required to be paid to the AML Fund.  This requirement, set by the 1992 amendments to expire on September 30, 2004, has been extended, most recently to June 30, 2006 by this year’s Interior Department Appropriation Act.  The SMCRA also provides the Secretary of the Interior with rulemaking authority to establish additional fee requirements beyond the expiration date sufficient to continue the program of annual transfers to the Combined Benefit Fund. 

Financial difficulty and the risk of reducing benefits.

Since 1999, for two primary reasons, the Combined Fund has faced the prospect of deficits and the risk of reducing benefits.  First, the premium rate increases prescribed by the Coal Act have not kept pace with the increases in health care costs, especially the costs of prescription drugs and the increase in utilization of health care as the population ages toward the end of life.  Second, a long-running litigation between operators and the Social Security Administration and the Combined Fund Trustees regarding the Coal Act’s premium rate formula has reduced or threatened to reduce the premiums paid by assigned operators by ten percent.  To avoid the need for reducing benefits, Congress has on three occasions enacted special appropriations from interest earned by the AML Fund to be transferred to the Combined Fund.  The amounts of these appropriations were: in 1999, $68 million; in 2001, $53 million; and in 2003, $34 million. 

Most recently, on August 12, 2005, the U.S. District Court for Maryland ruled in favor of the operators in a phase of the ongoing premium rate litigation, requiring the Social Security Administration to re-establish lower rates for all operators.  The Trustees of the Combined Fund have appealed this decision to the Fourth Circuit.

Through July 31, 2005, the Combined Fund had received from assigned operators and related persons $72,544,000 in payment of premium differential assessments at rates set by the Social Security Commissioner pursuant to the Commissioner’s June 10, 2003, Premium Decision that has now been set aside by the Maryland District Court.  Based upon cash flow projections, the Funds’ Comptroller has calculated that, assuming return of this differential premium amount in the form of credits against the monthly premium obligations of assigned operators who made premium differential payments, and assuming an extension of the Combined Fund’s Medicare Prescription Drug Demonstration Project that has recently been announced, at an estimated funding level of $73,391,417 for plan year 2006 and $65,643,862 for plan year 2007, disbursements for medical benefits, death benefits and administrative costs will exceed cash on hand and receipts from income in the month of August 2007.  At that point, the Combined Fund will be in a “cash negative” position.  The Combined Fund Trustees have decided that, if such a cash negative position is reached, they must reduce benefits and they would be required to advise beneficiaries of such reductions some number of months in advance of such action.

Appendix B sets out projected total population and unassigned population, as well as projected year ending fund balances and annual deficits in the Combined Fund.

The 1992 Benefit Plan.

 The Coal Act requires that all coal industry operators who were providing single employer health plans pursuant to a Coal Wage Agreement with the UMWA at the time of the enactment must continue those plans in effect for retirees who retired before October 1, 1994.  The Coal Act also required the UMWA and BCOA to create the UMWA 1992 Benefit Plan.  The population covered by this plan includes: 1) those who would have been covered by the 1950 or 1974 Benefit Plan but were not covered by the Combined Fund because their eligibility was established after the cut-off date in 1992; and 2) those who were entitled under the Coal Act to continue receiving health benefits under a single employer health plan, but do not receive those benefits because of the employer’s failure to provide them.  Usually this is because the employer has gone out of business.

The median age of the 1992 Plans’ beneficiary population is 72.  This population’s median household income, based on a 2000 survey, was $19,800, and approximately 80% of the population is eligible for Medicare.

Orphan retirees and their health care costs.

The 1992 Plan is a continuation, mandated by statute, of the industry’s undertaking to provide health benefits to retirees known as “orphans,” those whose industry employers have gone out of business leaving the retiree and dependent family members without an employer to sponsor their benefits.  They correspond to the unassigned beneficiaries in the Combined Fund.  
Funding of 1992 Plan is through “per-beneficiary premiums” required to be paid by last signatory employers to whom retiree and beneficiaries may be attributed and by “prefunding premiums” paid by 1988 Agreement operators.  Because most of the Plan’s population cannot be attributed to any employer that is still in business, most of the Plan’s expenses are paid by the operators who pay prefunding premiums.  The prefunding premium cost is therefore equivalent to the cost of orphan retirees and beneficiaries in the 1992 Plan, and this is a cost paid by operators who did not employ any of the orphan miners in question.  The amount of prefunding premium paid by each 1988 Agreement operator is determined by the number of retiree beneficiaries the operator has covered by its single employer health plan mandated to be continued by section 9711 of the Coal Act.  (Hence the term “9711 plan.”)  In addition, operators who provide single employer 9711 plans must post security with the 1992 Plan to pay for three years of benefits in case the 1992 Plan must take over their obligation to provide benefits.

The 1992 Plan’s population was expected to grow as normal attrition of some industry employers occurred.  Unfortunately the orphan population of the 1992 Plan has jumped up dramatically since 2002, because of the major steel industry bankruptcies and the Horizon Natural Resources bankruptcy.  For 2002, the 1992 Plan’s average population over the year was 6,432; for 2005 the Plan’s average population is 11,392.  If there are no more substantial shifts of retiree populations to the 1992 Plan from failing operators, the population is expected to gradually decline through mortality.  The prefunding premium cost, the cost of orphan retiree health care, however, is expected to climb sharply because the security bond posted by a substantial failing steel industry operator will have been exhausted and because of the persistent rise in health care costs, especially the costs of prescription drugs.   Thus the orphan retiree health cost of the 1992 Plan is expected to rise from around $16 million this year to $26 million next year, reach approximately $60 million in the last three years of this decade and continue to rise thereafter.
Appendix B sets out the current and projected population and the current and projected costs of providing benefits to orphan in the 1992 Plan. 

The 1993 Benefit Plan.

Through collective bargaining the UMWA and BCOA have created the UMWA 1993 Benefit Plan to continue the industry’s undertaking to provide health care to orphan retirees, covering those who retired after the September 30, 1994 cut-off date for coverage under the 1992 Benefit Plan.  The plan has strict rules requiring that, before retirees and their dependents are eligible, their last signatory employer must have had an obligation to contribute to the 1993 Plan and actually have contributed.  Funding for the 1993 Plan has come from employers’ contributions based on hours worked in the mines, currently $0.50 per hour, and also from annual $2000 premiums, and in 2005 a separate one time $3000 premium. 

The 1993 Plan’s population has a median age of 59 and had a median household income of $19,056, based on a survey in 2000.  Approximately 38% of this population is Medicare eligible.

Escalating population and costs; the risk of reducing benefits.

Like the 1992 Plan, a moderate rate of growth in the population of the 1993 Plan was expected, and like the 1992 Plan, this expectation has been upset by recent bankruptcies in the steel industry and especially by the Horizon Natural Resources bankruptcy, causing the population to double, from less than 3,500 to approximately 7,000 in the last two years.

Because of this increased population and the increased health care costs, the 1993 Plan faces the risk of reducing benefits.  The Plan’s governing documents provide that, if at specified periodic valuations the value of the Plan’s net assets available for plan benefits fall below $2 million, the Trustees are required to reduce benefits sufficiently to achieve solvency by the end of the current Coal Wage Agreement, December 31, 2006.  Current actuarial projections indicate that this threshold may be reached in early 2006.
Appendix B sets out the projected population and the projected year ending balances and annual deficits for the 1993 Plan.


As ERISA plans, all three of the plans must be administered by boards of trustees who must comply with the fiduciary requirements of ERISA, including avoiding prohibited transactions, prudent asset management and administration for the exclusive benefit of participants and beneficiaries.  Trustees may be held personally liable for any breaches of these duties.  Each plan must submit an annual report to the Secretary of Labor (Form 5500), that must include the report of an independent auditor on the annual financial statement of the plan.

In addition to the requirement of an annual audited financial report, the three plans must submit an annual cost report to the Medicare program under the Medicare contract, and this report is also subject to an annual audit.

The Combined Fund is subject to an annual review by its independent auditors of its transactions with the Office of Surface Mining regarding transfers from the AML Fund, and this transfer program has also been audited by the Department of Interior’s Inspector General.

Finally, because of continuing interest by the Congress, the Government Accountability Office has conducted reviews on several occasions, most recently in 2002.

I would be pleased to respond to any questions the members may have.