Helping People Find the Best Medicare Insurance
A fee-only financial advisor


Contact us by e-mail

Managing Medicare's Costs

Private Medicare exchanges may be here to stay

If you happen to see retired people with bewildered looks, they may have just been informed that from now on they will have to get their health coverage through something called a private Medicare exchange. That’s a message several hundred thousand seniors have heard from their former employers in the last two years.

Last year, for instance, IBM sent a videotaped announcement to 100,000 retirees explaining that they would no longer choose their health insurance from a company-sponsored plan but must instead buy it from a private Medicare exchange. And other large, highly regarded firms are making this switch, including Alcoa, AT&T, General Electric, and Time Warner.

Private Medicare exchanges are simple in concept. Firms contribute a fixed amount to a tax-favored account in the retiree’s name — $1,800 a year per person, for instance. That money can be used by the retiree to buy health insurance on the firm’s designated private exchange. If the cost is greater than the company’s contribution, the retiree pays the difference out of pocket.

The exchanges are clearly a winning tactic for employers. They continue to get tax deductions for their contributions while handing off to the exchanges the time-consuming task of administering a health plan. Moreover, employers don’t have to pay the exchanges, which make their money on commissions. And most important, employers no longer need to be concerned about health care inflation, excessive medical claims, and yearly re-designs of benefit packages. If health care costs rise 5% a year, a firm may increase its contribution by only 2% or not increase it at all.

Even though the exchanges allow employers to shift costs, they are not entirely grim news for retirees. For one thing, seniors can pay for health insurance with tax-free dollars. The exchanges also give retirees more options. Unlike a traditional employer plan that has 4 or 5 choices, private Medicare exchanges often have 20 or more – an assortment of Advantage plans, Medigap policies, Part D stand-alone plans, and dental plans.

Given these additional options, retirees may be able to tailor their coverage so that it more closely matches their needs. And the exchanges provide “decision support” services to help retirees sift through the various options and find the networks that include their physicians.

There’s another consolation for retirees who buy their coverage through a private Medicare exchange — they are still getting health care partly paid for by employers, unlike two-thirds of the 65-and-older population. By moving their retirees to the exchanges, employers can continue to provide health benefits that otherwise would have to be slashed or discontinued.

Even though the level of benefits is not as good as it used to be, the likelihood of companies dropping retiree coverage is much lower since they have found ways to shift costs and risks to Medicare. According to a recent Kaiser Family Foundation survey, the percentage of large firms that provided retirement health benefits in 2013 was the same as in 2009, although the survey’s authors said they expect some further erosion in the future.

The transition to private Medicare exchanges has surged because Medicare’s benefits are much sturdier today than they were a few years ago. That’s similar to what’s happening in the under-65 market. Because of the Affordable Care Act’s fairly strong coverage standards, many firms have given their workers an annual stipend, usually in a tax-favored account, to spend on health insurance purchased on public or private exchanges. Thus for those under 65 the Affordable Care Act has set minimum benefit levels and for those 65 and older Medicare has its own levels. In both cases, they are attracting employers who want to transfer their health care costs to a regulated marketplace.

For Medicare, the prescription drug benefit that began in 2006 was the most important enhancement, followed by 2010 legislation that will gradually phase out the gap known as the doughnut hole. Even employers who continue to provide traditional health plans for their retirees use Medicare’s drug coverage as a base and then supplement it. It’s not only Rx drug benefits that have been strengthened. In 2011 Medicare began paying 100% of the cost for recommended preventive tests and screenings. It still has sizable coverage gaps, of course, but Medicare now has solid enough benefits that Fortune 100 companies feel comfortable in turning their retirees over to the private Medicare exchanges.

In the next three years, roughly 60% of large firms are expected to move some of their retired workers to private exchanges (retired union workers usually cannot be transferred to exchanges because their health benefits are protected by contracts). A 2014 Aon Hewitt survey of more than 1,230 employers found that 30% of the firms that provide health benefits to retirees are already using private exchanges. An earlier survey by Towers Watson indicated that one-third of the companies that are best in controlling health care costs and that also offer retiree coverage are planning to switch to private exchanges by 2015. Those surveys, of course, should be taken with a grain of salt because Aon Hewitt and Towers Watson both own private exchanges.

Meanwhile, if you are retired and your former employer has assigned you to a private Medicare exchange, here are some things to keep in mind:

1) You are no longer in a group plan. One of the great things about traditional employer retiree plans is the flexibility to switch from one option to another while continuing to pay the same group rate as everyone else. It’s different, though, in an exchange. If you want to switch to a Medigap policy at some point, for instance, you will likely have to answer health questions and also pay age-adjusted premiums.

Medigap policies are the only kind of commercially sold insurance still allowed to charge higher premiums to people with pre-existing conditions. But if you are transferred to a private Medicare exchange, you are entitled to a special enrollment period in which you can buy certain Medigap plans without answering health questions. In contrast, Medicare Advantage plans admit all applicants, except that they can decline coverage for people who have end stage renal disease.

2) Ask your exchange for assistance in evaluating your options. The success of any particular private Medicare exchange may depend on the quality of the advice its gives to its customers. The temptation for exchanges will be to trim the level of customer support in order to improve profits. And in theory, the exchanges could steer people toward plans on which they earn higher commissions.

The reason that reliable customer support is so important is that Advantage plans and Part D plans change their benefits and drug formularies yearly. Exchanges should offer assistance every year during annual open enrollment. Retirees with Part D stand-alone plans, whose costs can vary greatly from one year to another, should be encouraged by the exchanges to re-evaluate their plans regularly. And if the exchange doesn’t call you during annual open enrollment, you should contact the exchange and say you want to compare your options for the coming plan year.

3. Know your plan’s rules. Do you have to buy all of your health insurance through the exchange? Let’s say your premiums will exceed the company’s contribution by $1,000. Since it is money from your pocket, can you use that thousand dollars to purchase part of your coverage outside the exchange? Many of the best options may not be available on the private exchange you’ve been assigned to. If you can save several hundred dollars on your prescription drug costs by choosing a Part D stand-alone plan that’s not listed on the exchange, are you breaking plan rules by using your own money to pay the premiums? By understanding your plan’s rules, you may be able to find ways to reduce your health care expenses. ◊◊


© 2010-2018 Dover Healthcare Planning, LLC | Contact Us