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Managing Medicare's Costs

Minimizing costs in employer retiree plans

If you draw a graph line tracking the percentage of large employers who provide retiree healthcare coverage, it looks like a ski run. More than 20 years ago the line took an initial precipitous drop and then began a gradual decline – down two percentage points for a couple of years, up a percentage point the next. The slope of the decline can be seen in the Kaiser Family Foundation’s annual employer health benefits survey, which includes a chart (page 163) showing the percentage of large firms offering healthcare coverage to their retirees for each of the years since 1988.

In 1988, the first year of the survey, 66% of large firms provided health benefits for their retirees, but that number had been cut roughly in half by 2008. And in 2010, the Kaiser survey found that just 28% of large firms provided coverage for their retirees. Large firms were defined as companies with more than 200 workers. Meanwhile, smaller firms rarely offer retiree coverage – only 3% did so last year.

Grim as they are, the numbers understate the long-term decline in employer-provided retiree healthcare benefits. For one thing, the Kaiser survey reports that one quarter of the employers who offer healthcare coverage to retirees do so only for a small portion of retirement, i.e., the years before people turn 65 and become eligible for Medicare. And virtually all companies that provide retiree coverage have shifted costs to retirees by reducing benefits or by placing caps on their contributions. So if an employer has an annual 3% cap on its contribution to premiums when healthcare costs are rising 6%, retirees absorb the difference.

It’s likely that the erosion will continue, especially for non-federal plans (which were those surveyed by Kaiser). Starting in 2013, the new Health Reform law eliminates an employer tax credit for retiree prescription drug benefits, and most companies that lose the credit will pass on the incremental cost to their retirees. Following the passage of the Health Reform last year, the benefits consulting firm Towers-Watson questioned 650 mid-to senior-level benefits professionals at large firms. Among the findings: 43% of employers currently providing retiree medical benefits are planning to reduce or eliminate this coverage in the coming years.

Because they have increasing amounts of skin in the game, retirees with employer plans also have strong incentives to reduce their costs. For many of them, the best place to start is to choose the right type of plan from among the three or four plan options that most of them have.

People often remain in the same types of plans in retirement that they had when they were working. Those are likely to be PPO plans. The Kaiser survey found (page 68) that in large firms, 63% of current employees are enrolled in PPO plans. People prefer these plans not just because they can go out of network and still have coverage, but because they can self-refer to specialists.

Yet PPO plans are often retirees’ most expensive options, exceeded only occasionally by fee-for-service plans. Retiree PPO plans often have deductibles and premiums that are twice those of the employers’ HMO plans. They also have higher out-of-pocket maximums, which transfer added risk to the retirees. And when the PPO networks do not include all of the providers that they see, retirees will have extra costs not just for doctor’s office visits but for any related treatments and referrals.

In some cases a retiree may save money in the employer’s HMO option even though one of her providers is not in the HMO network. Most employer retiree HMO plans are Medicare Advantage plans that include enhanced benefits. And if an HMO plan is also an Advantage plan, retirees will not be covered when they go out-of-network (emergencies are exceptions). Still, retirees who see non-network doctors once or twice a year could come out ahead by choosing the HMO.

Here’s a hypothetical example: let’s say a retiree can reduce her premiums by $100 a month by enrolling in the employer’s Advantage HMO option. She decides to enroll in the HMO even though her dermatologist is not in the plan network. During the year she has two visits to the dermatologist at a total cost of $500 ($250 per visit), which she must pay out-of-pocket. At year end she’s saved $700 ($1,200 in premium savings minus $500 paid to a non-network doctor).

Because plan rules vary, retirees should discuss the risks of such an approach with a company benefits representative. Sometimes they may have other options – a high-deductible supplemental plan, an HMO with a point-of-service option, or an HMO plan that is not a Medicare Advantage plan.

Employer plans also have a valuable safety net for retirees — the flexibility to change options from year to year without going through medical underwriting. In most states, this same degree of flexibility is not available in most states to retirees who do not have employer retiree coverage. People in Advantage plans have almost as much flexibility, with the exception of those with end-stage renal disease.

Even when retirees decide to remain in their PPO plans, they should look for ways to cut costs within those plans. These include managing their prescription drug costs wisely by choosing the least expensive refill schedules and asking their doctors to prescribe therapeutically similar drugs if they are available.

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