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Managing Medicare's Costs

Evaluating Medicare employer supplemental plans

In August of 2009, Pfizer, the world’s largest pharmaceutical company, sent a letter to its 23,000 retirees that began, “We’re pleased to announce a change in healthcare benefits.” The letter went on to describe reductions in retirees’ health insurance that would take effect in 2010. Among the changes were substantially higher premiums and deductibles as well as medical coverage that is no better than Medicare’s until people reach a $3,500 out-of-pocket maximum.

Many Pfizer retirees receiving the letter were well into their 70s and 80s. Presumably most of them had based their healthcare spending projections on the mistaken belief that their retiree coverage would remain essentially the same except for annual premium increases. To add to their frustration, the benefits changes came at a time when Pfizer’s senior executives were viewed as spending lavishly on helicopters and other perks.

Two years later Pfizer’s cutbacks to retiree healthcare coverage continue to generate negative publicity for the company. And while Pfizer retirees have not legally challenged the benefit reductions, they have mounted a vigorous letter-writing campaign to the Pfizer board. As if to compound the public relations woes that Pfizer has suffered over the last two years, the company was the subject of an unflattering cover story last month in Fortune magazine (the article did not deal with the retiree benefit cuts).

Other than its ineptly worded first sentence, however, the Pfizer 2009 letter is not that different from other letters announcing health benefits reductions that millions of retirees have received from their former employers. In some cases retirees have responded with court challenges. But with the exceptions of individuals protected by union contracts or those who have a prior assurance from senior management, the challenges have been unsuccessful. The reason is that, unlike pension benefits, retiree health benefits are not guaranteed under the Employee Retirement Income Security Act, or ERISA, although employers who sponsor health coverage do have fiduciary responsibilities.

The erosion in employer plan retiree coverage that began in the early 1990s will continue. The benefits consulting firm Towers Watson recently found in a survey of 328 midsize and large companies that of those currently offering health care benefits to retirees, more than one-half of them plan to discontinue coverage for both pre-65 and post-65 retirees before 2015.

Also, those companies and government entities that continue to provide some coverage for retirees will likely reduce benefits. In 2013, for instance, as a result of the new Health Reform law employers will lose a 28% tax credit that they presently receive for retiree prescription drug coverage. They will doubtless respond by lowering prescription drug benefits and/or increasing cost-sharing for their retirees.

Despite their slimmed-down benefits and higher costs, employer plans that supplement Medicare are likely to be the best options for most retirees. Even Pfizer’s downgraded plan, for instance, is slightly better than other options available to its retirees, particularly its prescription drug coverage. Pfizer provides 100% coverage of prescription drugs that it manufactures and 80% coverage of non-Pfizer drugs, with a $3,500 out-of-pocket limit.

Still, in some instances retirees (including Pfizer’s) may reasonably wonder whether they’re paying too much for what they’re getting. Decisions to drop employer plans are major ones because retirees may not be able to re-enroll later (some plans do allow later re-enrollment in special circumstances such as the loss of coverage under a spouse’s policy).

Here’s a checklist of the items that retirees should be aware of as they evaluate their employer plans:

1) Premiums are not typically adjusted for an individual retiree’s age. Because most employer plans are group plans, the average age of the group is used in setting premiums. If the average age of all retirees in the group is 74, those younger than 74 will subsidize those older than 74. So, younger retirees may find premiums higher than they would otherwise expect, while older retirees may find premiums to be relatively inexpensive. That’s the opposite of what occurs with most Medigap policies, whose premiums are inexpensive for younger retirees but can be very expensive for older ones. Assuming the employer continues to sponsor the retiree plan in the future, younger retirees may eventually benefit from this arrangement because their premiums will not be age-adjusted. Also, in addition to the average age of the group, the insurance company will consider the group’s claims history as well as healthcare inflation and the plan’s benefit design when it sets premiums.

2) Often retirees in employer plans can get preferred group rates for services that neither the plans nor Medicare covers. Some retirees, for instance, have access to group rates for long-term care insurance, which are lower than the rates they could find as an individual. And if their plan does not include dental and vision benefits, they may still be able to get a lower group rate by purchasing these as added benefits.

3) In comparing their employer plan premiums to those of other coverage, it’s important that retirees adjust for (or at least be aware of) differences in benefits. Some Medigap plans, for example, cover foreign travel emergencies, whereas many employer plans do not. Also, employer plans frequently include benefits for dental and vision care that are not covered by either Medicare or Medigap policies. And in some cases the employer plan premium will seem high because it is a combined premium for medical and prescription drug coverage.

4) It’s also important to evaluate an employer’s plan out-of-pocket maximum – not only the amount but any exclusions. Some employer plans, for instance, exclude the cost of mental health treatments or other services in determining when the maximum is reached. Also, network plans typically exclude out-of-network costs. The out-of-pocket maximum for medical coverage should be less than $4,000 unless it includes services that Medicare does not cover.

For retirees who want to evaluate their coverage because it seems overpriced, the best resource is a plan representative or the company’s benefit consultant. Before dis-enrolling from a company plan, retirees should discuss their decisions with the representative and make sure they thoroughly understand their options.

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