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Managing Medicare's Costs

Finding ways to trim costs in employer retiree plans

Employer retiree health coverage is like an iceberg that melts a bit more each year. From the late 1930s until the early 1990s, the percentage of seniors in employer plans steadily increased. That trend was slowly reversed, however, by a combination of rising health insurance premiums and a 1990 accounting board requirement that companies must show as current expenses the future retirement healthcare costs of their workers.

If you are still working, you may be concerned that by the time you call it quits, your retiree coverage will be much weaker or will have altogether vanished. There’s some reassurance that this won’t happen. Several assessments made following the Supreme Court’s Health Reform decision were that most of the remaining employer retiree plans will not likely go out of business. Government plans and union plans, which are protected by labor contracts, are the surest bets to continue at near full strength.

Still, companies retain the flexibility to trim benefits or stop offering retiree health coverage at any time. The Department of Labor’s website says that “when employers do offer retiree health benefits, nothing in federal law prevents them from cutting or eliminating those benefits—unless they have made a specific promise to maintain the benefits.” That’s probably the chief reason that one-half of the firms providing employer retiree coverage 20 years ago have shut down their retiree plans – it was easy for them to do so.

Last year Mercer Consulting reported in its annual survey of 800,000 public and private employers that the percentage of large companies (500 or more employees) offering health benefits to Medicare-eligible retirees was just 16%, down from 40% in 1993. The year before the Employee Benefits Research Institute ( EBRI) found a similar trend, saying that only 21% of large companies provided health insurance for Medicare-eligible retirees, down from 40% in 1993.

And Compdata Surveys, which gathers information on nearly 4,500 company benefit plans covering more than 6 million employees across the country, said its most recent survey indicates that only 22 % of today’s employers provide retiree coverage. Utility companies have the highest percentage of those (69.1%) and (ironically) healthcare companies are next-to-lowest at 15.8%. Hospitality firms rank last, with only 3.3% of them having retiree health benefits. None of the surveys includes government employers.

Firms that have maintained their retiree plans have generally shifted some costs to retirees. The deterioration in these plans’ benefits can be seen in EBRI’s surprising estimate in 2010 that a 65-year-old married couple with an employer retiree health plan and median prescription drug expenses needs only $4,000 less in savings for healthcare costs than does a couple without employer coverage during retirement.

Even government plans that have traditionally offered strong retiree health benefits are asking their retirees to pay more. A Pew States Survey released last month showed that states are $627 billion underfunded in their retiree health plans, which will lead to greater cost-sharing for many retirees. President Obama has proposed that Tricare, the superb coverage for military retirees, be changed to require retirees to pay more. Tricare’s out-of-pocket costs did not increase between 1995 and this year, when co-payments were raised.

If you have an employer plan during retirement, you probably have an excellent benefit. The exception might be if your former company requires that you pay 100% of the premium (an estimated 20% of employers do this). Otherwise, your employer plan will give you flexibility you don’t have in other types of coverage. When your employer plan has several options, for instance, during open enrollment you can switch among these options without answering health questions or paying higher premiums because of your age.

You should understand your plan’s rules and types of coverage so that you can get the most from it. Companies usually offer their former workers at least one fee-for-service option to supplement Medicare. These are also called wraparound plans, and their distinguishing feature is that they don’t have networks. With a fee-for-service plan, you can see any provider who accepts Medicare without needing a referral. Some companies sponsor a Medigap plan as their fee-for-service option, typically paying a portion of the premium and expanding the benefits.

Besides the fee-for-service option, employers may offer one or more managed-care plans to their retirees. These may be Medicare Advantage plans, which usually have benefits that are better than non-employer Medicare Advantage plans. The risk with a Medicare Advantage HMO option, which is almost always the least expensive plan, is that if you go out of the plan’s network you may pay full cost (except in emergencies). Some companies also offer managed-care options which are not Advantage plans, and if you leave the network the underlying Medicare coverage still pays its share of your costs.

If you are a younger retiree in relatively good health, you can often save money by choosing a managed-care option, particularly an HMO. Because you don’t go to doctors that often, an HMO’s restrictions may not constrain you much. In later years if you want more flexibility, you can switch to your company’s fee-for-service plan.

In looking at your employer’s PPO option, you may find that it costs more than the fee-for-service plan. It depends, of course, on the plan’s design, but PPO’s are the default options for too many retirees. Retirees are comfortable with PPO’s because they had similar plans during their working years. That may be because their employers did not have fee-for-service plans, which are rare for working-age people. But the automatatic choice of a PPO may not be a good one if you are enrolled in Medicare.

When your health is good and you have a fee-for-service option that is not too comprehensive, that may be a more cost-effective choice than a PPO. An example of a not-too-comprehensive plan is one with a $250 annual deductible that pays one-half of the costs that Medicare doesn’t cover. So if you see a doctor whose fee is $200, Medicare pays $160 (80%), the plan pays $20 (10%), and you pay the remaining $20 out-of-pocket.

Sometimes when you and your spouse have retiree coverage from two employers you can find ways to save money without leaving either plan. Possibly your dental coverage is superior, and so your spouse uses his or her company’s medical coverage and your company’s dental benefits. Combining spousal benefits in this way – choosing one plan’s current coverage but keeping the door open to re-enter the other plan – can be an effective long-term tactic when one set of options is better in the short term but the other set has better fee-for-service choices, which can be beneficial in late retirement. In each instance, you need to know your plan’s rules before moving part or all of your coverage to your spouse’s employer. ◊◊


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