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Employers can be sued for age discrimination if they modify benefits to retirees to give lesser benefits to those who are 65 or older and therefore eligible for Medicare, a federal appeals court has ruled. In Erie County Retirees Association v. The County of Erie, the 3rd U.S. Circuit Court of Appeals rejected an argument that such a claim is barred by the U.S. Supreme Court’s 1993 decision in Hazen Paper Co. v. Biggins. In Hazen Paper, the high court held that a 62-year-old worker could not sue for disparate treatment under the Age Discrimination in Employment Act simply because he was terminated a few weeks shy of attaining the 10 years of service he needed for his pension benefits to vest. The court stated in Hazen Paper that “there is no disparate treatment under the ADEA when the factor motivating the employer is some feature other than the employee’s age.” When the employer’s decision is “wholly motivated by factors other than age,” the court said, “problem of inaccurate and stigmatizing stereotypes disappears. This is true even if the motivating factor is correlated with age.” Since age and years of service are “analytically distinct,” the court said, “it is incorrect to say that a decision based on years of service is necessarily ‘age based.’” But the 3rd Circuit found that the Erie County, Pa., retirees’ claims were distinguishable from those of the plaintiffs in Hazen Paper because “Medicare eligibility does not merely correlate with age. Rather . . . Medicare eligibility follows ineluctably upon attaining age 65. Thus, Medicare status is a direct proxy for age.” Writing for the court, Senior U.S. Circuit Judge Morton I. Greenberg said the retirees did not need proof of any age-related intent. “The fact that there is no reason to believe that the county possessed a malevolent motive or acted on the basis of hostile age-based stereotypes is irrelevant,” Greenberg wrote. “The Supreme Court has indicated that a policy explicitly based on a prohibited factor — such as sex or age — is illegal regardless of the underlying motive.” Lawyers for the county argued that the county never had the option of offering the same benefits package to Medicare-eligible retirees because the underwriting criteria adopted by Highmark Blue Cross/Blue Shield disqualified Medicare-eligible retirees from enrollment. But Greenberg said, “The Supreme Court has indicated that an employer cannot avoid responsibility for a facially discriminatory benefit plan simply because the discrimination arises from the criteria imposed by outside entities with whom the employer has contracted to participate in providing the benefit.” As a result, Greenberg said, the Erie retirees proved that the county has treated them differently from other retirees with respect to their “compensation, terms, conditions, or privileges of employment, because of . . . age.” Greenberg said the county must be held liable under the ADEA unless it can prove that it is entitled to one of the “safe harbor” provisions of the law. But on that score, Greenberg also found that only one of the safe harbors is open to the county — the provision that excludes liability where the decision was made to ensure that the costs of all benefits to workers are equal. “We believe it makes good sense and furthers Congress’ intent to apply the equal benefit or equal cost principle in this case,” Greenberg wrote. The safe harbor provision, he said, “undoubtedly applies when an employer makes an age-based distinction in benefits for active employees.” Greenberg found that the rule “strikes a fair middle ground between the interests of the employer and the interests of older retirees.” In order to take advantage of the safe harbor, he said, “an employer need not provide equal benefits to older and younger retirees, and it need not spend more on behalf of older retirees. It merely must spend equally.” In that way, Greenberg said, “the rule avoids overburdening employers to such an extent that they will be tempted to throw up their hands and eliminate benefits for all retirees.” The suit focuses on a series of decisions made by Erie County about its health care coverage for retirees. In 1987, the county began utilizing Blue Cross/Blue Shield of Western Pennsylvania, now known as Highmark Blue Cross/Blue Shield. It classified employees and retirees into three main coverage groups: one for current employees, one for Medicare-eligible retirees, and one for retirees not eligible for Medicare. In November 1997, pressure to reduce costs was enhanced when Highmark announced that it would increase the county’s premiums for medical insurance coverage by an average of 48 percent. Retirees who were old enough to eligible for Medicare were given “SecurityBlue,” a plan available only to those who have Medicare Part B Medical Insurance. The plan differed from a traditional indemnity plan primarily in that the health care needs of each member are coordinated by his or her primary care physician. Some degree of individual choice is lost under the plan because coverage is available only for services provided or authorized by the insured’s primary doctor. But the county chose “SelectBlue” for its former employees who were not Medicare-eligible and therefore not eligible for SecurityBlue. The SelectBlue Plan differs from SecurityBlue in that it is a hybrid “point-of-service” plan which combines the features of an HMO with those of a traditional indemnity plan. Under SelectBlue an insured can, for any health care incident, select either the HMO option or the traditional indemnity option. The older retirees claimed in the suit that SecurityBlue provides inferior coverage as compared to SelectBlue and the traditional indemnity coverage previously available to them. The suit alleged that the county violated the ADEA by discriminatorily placing members of the plaintiff class into SecurityBlue on the basis of their having attained age 65. The county argued that it based its decision to place Medicare-eligible retirees in SecurityBlue not on age but on three age-neutral factors — active versus inactive employment status; cost; and availability of plans. U.S. District Judge Sean J. McLaughlin held that the county was entitled to a partial summary judgment because “the ADEA clearly was not intended to apply to retirees, like the plaintiffs here, who premise their complaint on alleged disparities in their retirement health benefits based on Medicare-eligibility.” But Greenberg found that McLaughlin “simply recognized an additional safe harbor for an employer who treats its Medicare-eligible retirees less favorably with respect to health benefits than other retirees — a safe harbor which does not require the employer to satisfy the equal benefit or equal cost standard.” In a significant threshold ruling, Greenberg found that such retirees are entitled to sue under the ADEA even though they are no longer “employees.” “We believe that the ordinary meaning of the term ‘employee benefit’ should be understood to encompass health coverage and other benefits which a retired person receives from his or her former employer,” Greenberg wrote. Greenberg said the Supreme Court’s decision in Robinson v. Shell Oil Co. supported his ruling by holding that “former employees” can bring retaliation claims for conduct that occurs after they leave the job. “Robinson indicates that an employer’s adverse actions taken against someone who has ceased actively working for that employer may constitute discrimination against an ‘employee.’ By analogy, an employer who treats retirees differently with respect to their health coverage because of their age may have engaged in discrimination with respect to ‘employee benefits,’” Greenberg wrote.

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