Cutting Retiree Healthcare Costs, Without Cutting Out Retirees

In the manufacturing sector, the percentage of employer compensation spent on retiree benefits has dropped 40% in last ten years.

Large employers in the manufacturing industry have a long tradition of offering generous benefits, including pensions, 401(k) plans, and health care to their retirees. Part of the rationale was to attract and retain the best and most hard-working people with the promise of a comfortable life in their post-employment years.

In recent decades, manufacturers have struggled with the rising cost of benefits for retirees. According to a 2009 study by Towers Watson, in 1998 10.8% of employer compensation expenses in the manufacturing sector were spent on retiree benefits. Ten years later, that number had dropped to just 6.4% -- a decrease of 40.8%.

The problem of continued decreases in employer paid retirement benefits hit a new level on January 1, 2011 when the oldest baby boomers start turning 65 years old. According to Pew Research Center population projections, roughly 10,000 boomers will turn 65 every day -- for the next 19 years. By 2030, when the last boomer turns 65, 18% of the U.S. population will be 65 years and older, up from 13% today.

Even before boomers started hitting retirement age, a growing number of employers in all sectors were seeking relief from the rising cost of retiree health benefits by discontinuing them altogether. However, eliminating this optional retirement perk can be costly. Companies that do away with retirement health care altogether can face a public relations backlash, issues in labor negotiations (this year and in contract renewal years), and worst of all -- increased distrust from current employees.

Despite the multiple negative trends, there is a major new development that is positive. Hundreds of small, mid-size and large employers have found a way to cut the cost without cutting out retirees -- or even cutting the retirees' benefits. These employers are using a new retiree health care coverage approach called a Medicare exchange. A Medicare exchange allows employers to end their "one size fits all" legacy group Medicare supplement plans and transition retirees 65 years and older to individual Medicare supplemental plans. Employers provide tax free dollars to allow retirees to buy private Medicare insurance plans that pay for medical, hospital and pharmacy costs not covered by basic Medicare. In effect, these employers have gotten out of the "group retiree coverage" business and now provide tax-free dollars plus a private exchange to enable individual Medicare plan selection and enrollment for all retirees.

Prior to the passage of the Patient Protection and Affordable Care Act (PPACA), few people had heard of health insurance exchanges. However, Medicare exchanges have been in existence since 2006 when first used by the Chrysler Corporation to provide defined contribution supplemental Medicare coverage to 19,000 salaried retirees. This started a rush of employers who have moved to a Medicare exchange over the past four years. It is estimated that these employers have saved a combined $1 billion in cash without cutting Medicare benefit levels. In short, Medicare exchanges allow employers to continue financial support of retiree health benefits. Here's how:

Most employers who use private Medicare exchanges establish health reimbursement arrangements (HRAs) and fund them with a fixed dollar amount each year. This lets them provide health benefits to retirees while managing costs, and it empowers retirees to purchase the private Medicare plans that are right for them at a price they can afford.

This solution works for two reasons: One, private Medicare plans -- just like Medicare -- are guaranteed issue, which means that no one who is eligible for Medicare can be denied coverage. Two, standardized plan design makes evaluating plans easier by enabling side by side comparisons, forcing insurance companies to compete on price, features and service.

Still, evaluating and choosing health insurance plans can pose a challenge for retirees. This is especially true for retirees who have been covered by their employer's legacy group plan and have never had the benefits -- or the responsibilities -- of choice and control over their health coverage. That's why a well-run health insurance exchange must be more than a self-service website.

For starters, exchanges must offer choice, with many plans from many carriers. But carriers admitted to the exchange must be screened carefully, held to high standards of service and their performance monitored over time. Carriers that fail to live up to service standards must be ejected from the exchange.

Next, exchanges also must offer powerful decision-support tools that empower anyone to compare plans side-by-side quickly and easily. In some markets, retirees may have a dozen or more choices of plans from different carriers, and retirees must be able to see what each plan offers and how much it costs compared to the others.

Then, many retirees are more comfortable with in-person guidance in addition to or even instead of online tools. So, exchanges must provide licensed advisors who are available by phone to help retirees assess their coverage needs and choose the right plans.

As evidence of the importance of in-person guidance, in a January 2011 survey of 472 retirees who renewed or purchased plans in the Extend Health exchange during the 2010 annual enrollment period, just 15% said they prefer to evaluate private Medicare plans online on their own. In contrast, 26% said they prefer to do so only with help on the phone from an advisor, while 59% said they prefer "a little of both."

Of course, there are other resources for helping retirees navigate Medicare and private Medicare plans:

  • The official U.S. government site for Medicare is medicare.gov. States also offer assistance and the State Health Insurance Assistance Program sponsors a locator tool at shiptalk.org that can help seniors find the right program in their home state. Both are free.
  • A handful of for-profit advisory services have emerged in recent years offering information about basic Medicare and private Medicare plans. Some offer the ability to enroll in plans; others just offer advice for a fee.
  • Independent agents and brokers representing private Medicare plans usually can be counted on to deliver high-quality personalized service. However, they may represent a small number of insurance carriers and plans, which limits choice. You also need to watch out for carrier bias -- some agents get paid to steer business to a subset of carriers in order to win incentive vacations, etc.
  • Insurance company sales representatives are good sources of information about the plans their companies offer, but only sell plans from their own company, which further narrows choice.

One of the most interesting features to large employers using private Medicare exchanges is that in addition to establishing state-run exchanges, the PPACA also extends the guaranteed issue and standardized plan design attributes of Medicare to all Americans purchasing private individual health care plans. So while today, private Medicare exchanges offer employers a solution to the high cost of health benefits for their Medicare-eligible retirees, it won't be long before exchanges could provide employers similar relief for retirees of any age and even their active workers.

Bryce Williams is CEO of Extend Health, Inc., which operates the largest private Medicare exchange in the country.

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