For nearly 25 years since the Sixth Circuit's 1983 decision in UAW v. Yard-Man, federal trial courts in Michigan and other Sixth Circuit states have routinely held that collectively bargained retiree health care benefits are “vested” under contract language that would be read differently in virtually every other Circuit.  A finding of "vesting" means that retiree health care benefits, often negotiated decades ago when health care was far simpler and less expensive, are deemed unalterable, preventing coverage from being discontinued or materially changed.  Such a finding may commit the employer-sponsor to future costs for retiree health care that often amount to hundreds of millions of dollars and, in the case of the auto companies, billions of dollars.

In their zeal to find vesting, courts within the Sixth Circuit have said, for instance, that language merely identifying a pensioner as potentially "eligible" for retiree health care means that the benefit “vested” because this conceptually "ties" the health care benefit to the pension which vests by operation of law when a pension plan’s service requirements are met.  This rationale has been applied notwithstanding that a pensioner, by definition, would have to be "eligible" for such a benefit in order to have any claim to it – even if that benefit were not vested but terminable.

This state of the law has prompted many employers to attempt to improve the efficiency of their bargained health care plans by introducing modest cost-saving measures – for example, requiring participation in managed health care, reasonable deductibles and co-pays, and mail-ordering common maintenance drugs.  So far, such changes typically have come about as a result of negotiations between the union and the employer, sometimes with a court's blessing in a consent judgment.

The Sixth Circuit has yet to address the critical question of whether a so-called vested health care benefit can be modified through the employer’s unilateral imposition of sensible plan design changes, some of which were not even available as an option when the underlying obligation was first negotiated.  This Fall, in Prater v Ohio Education Ass’n, a Sixth Circuit panel noted that an array of “perplexing questions” remain unanswered in Sixth Circuit law, stating: 

What exactly are lifetime healthcare benefits?  Does a promise of lifetime benefits mean that they cannot be reduced over the life of a retiree?  What if the employer reduces health benefits for active employees or increases the cost of those benefits to active employees?  What if the employer increases some health benefits for active employees but reduces others?  Must the retiree take the bitter with the sweet?  Or is it a ratchet – with only the improvements in health benefits available to the retiree but with no compulsion to take any reduction?

The Prater panel commented that these questions could be sidestepped in the case before it, but signaled that they could not be avoided indefinitely.  Employers can only hope that the court will use future opportunities to adopt a common-sense, flexible view of the concept of vesting.

The Seventh Circuit recently adopted just such an approach in a retiree health care case, Zielinski v. Pabst Brewing Company.  Although the underlying benefit was held to have “vested,” the court explained that "[t]he most sensible interpretation" of the agreement creating the right to the benefit would obligate the company to provide prescription-drug benefits at a level "reasonably commensurate" in cost terms to the level originally negotiated.  To hold the employer to the literal terms of a plan negotiated in 1974, the court reasoned, "would give the retirees an insanely generous plan relative to today's norms,” rather than a plan that would provide them today’s cost equivalent.  Changes such as keeping the deductible proportional to the cost of the drug and adjusting benefit ceilings in proportion to increasing costs would be permissible as long as the overall benefit remained "reasonably commensurate" to that which was negotiated initially. 

The Seventh Circuit thus struck a sensible balance.  If retiree health care benefits are to be deemed vested, courts should recognize that the parties did not intend those benefits to be permanently unalterable in the midst of a health care environment that is constantly changing.  We hope that when the Sixth Circuit finally addresses these issues, it will recognize that its extraordinarily liberal approach to the vesting issue must at least be balanced by a common-sense rule that allows employers to modernize various features of negotiated retiree health care benefits.

Thomas G. Kienbaum

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