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The expanding role of Medicare private exchanges

It’s fair to say Medicare private exchanges are re-shaping the way that many employers provide health care benefits for their retirees. With 30% annual increases in enrollment, these exchanges are expected to cover 6 million retirees by the end of next year. That’s one-half of the 12 million retirees who have employer-sponsored plans that supplement Medicare.

In a Medicare private exchange, the company contributes monthly amounts to its retirees to help them pay for health care. Retirees then use this money, as far as it goes, to buy health insurance and pay deductibles and co-payments. The contribution amount varies, but a recent study found that the average is about $175 a month. Typically the money is placed in a health reimbursement arrangement (HRA) so that retirees will not owe taxes if they use the money for qualified medical expenses. And any unspent dollars can be saved for future use.

By making these defined contributions, companies avoid the time-consuming job of administering health care benefits for their retirees or the cost of hiring benefits consultants to do it for them. Instead, the private exchanges take over these tasks at little or no cost to the companies. That’s because the exchanges’ revenue comes almost entirely from commissions. When a private exchange enrolls people in Medicare Advantage plans or Part D plans or sells them Medigap policies, the commissions cover the costs of administering benefits with money left over for profits.

Three years ago, for instance, when IBM moved its 110,000 retirees to a Medicare private exchange, it substantially reduced the company’s costs for administering retiree health benefits. IBM thus got out of the business of selecting which health plans to offer retirees and of negotiating pricing with insurance companies. And importantly, it no longer needed to answer retirees’ questions about their coverage. Today when IBM retirees call the company with a question or concern about their health care benefits, they are transferred to OneExchange, the private exchange that IBM selected to provide its retiree health insurance.

In addition to trimming their administrative costs, companies get predictability. Because they contribute fixed monthly payments, they know how much they will spend for retiree health benefits this year and they can control how much they will spend in future years, setting contributions at levels that they choose. They do not have to worry about double-digit premium increases or a year of excessive claims.

What do retirees get in return? An implied commitment that the companies they worked for will continue to provide them with at least some health care benefits. That can be reassuring at a time when a growing number of firms are dropping retiree health care benefits altogether. A 2015 Kaiser Family Foundation survey found that only 23% of companies with 200 or more employees that offer health benefits to workers also offer coverage to retirees, and an even smaller percentage of those provide coverage for Medicare-eligible retirees.

Another positive for seniors is that there are more choices in private exchanges than in traditional employer plans, which often have only three or four options. A traditional plan’s limited number of choices may make it difficult for people find an option that meets their needs. There may not be a plan that has low costs for the prescription drugs they take, or there may not be a managed care option that has all of their physicians in its network.

The large number of choices in Medicare private exchanges is especially noticeable in urban areas. In Los Angeles County, for instance, OneExchange offers eight Medigap plans, each of them sold by one or more of six insurance companies. It also offers 19 Medicare Advantage plans and 16 Part D plans.

Other good features of private exchanges are their online decision-support tools and call centers. Staffed by licensed insurance agents who are salaried employees, the call centers are capable of answering detailed questions about the plans available in the exchange. In some cases the agents who work at the call centers become advocates for retirees, assisting them as coverage problems arise. And because they are salaried and according to the exchanges do not know the commission schedules, they give unbiased advice.

Such expert assistance is perhaps the most valuable service offered by the exchanges. Over the years surveys have found that what retirees want most when choosing their Medicare coverage is a knowledgeable person to talk to who can answer their questions and clearly explain the choices. Medicare private exchanges have the potential to do that job.

Moreover, the exchanges’ call centers provide a level of expertise about insurance products that the publicly funded Medicare counseling agencies and 800-MEDICARE do not. Those agencies tend to deal more with enrollment and eligibility questions and with finding the lowest-cost prescription drug plans. But in most cases they do not provide side-by-side comparisons of different plans or an evaluation of the tradeoffs in choosing one plan over another.

Despite the upsides of greater choice and personalized assistance, Medicare private exchanges’ financial incentives may conflict with what’s best for retirees. While the exchanges say that they do not steer people to products that pay higher commissions, they do exclude from their menu of choices the products that pay low commissions. It is doubtful, for example, that Medicare private exchanges will ever include Advantage plans from non-profit insurers like Kaiser Permanente, even though non-profit Advantage plans consistently earn higher quality ratings from Medicare than do for-profit plans.

Another concern is that even though Medicare private exchanges offer more options than company-sponsored health care plans, the choices are still more limited than they are in Medicare. In the Los Angeles County example, retirees who do not have an employer plan can choose from among 37 Advantage plans, not just the 19 that OneExchange offers. And they can select from among 26 Part D plans instead of 16 Part D plans listed by OneExchange. Neither do retirees have the option of buying a Medigap policy from UnitedHealthcare, which sells almost one-third of all Medigap policies nationwide.

Some Medicare private exchanges have said that retirees served by the exchanges are pleased with the coverage they choose because the vast majority of them remain in the same plans year after year. That may indicate retirees’ inertia, however, rather than satisfaction with their current plans. The exchanges could provide value by contacting retirees every year at the start of annual open enrollment to ask if they want to consider other plans.

Along similar lines, during open enrollment the exchanges might offer to find the lowest cost plan for each retiree’s prescription drugs for the coming year. Then retirees could decide whether to switch plans. By providing that level of service, exchanges could further differentiate themselves and make a valid argument that they are consistently looking for ways to save money for retirees.

Private exchanges are not limited to retirees, of course, and they are gradually becoming the way that health care benefits are offered in this country, reducing the role of independent insurance agents. A 2014 Kaiser Family Foundation report indicated that as many as 40 million people – workers and retirees – may purchase their health insurance through private exchanges by 2018. And a 2015 retiree health care survey by Aon Hewitt found that roughly 30% of companies polled had switched their retirees to Medicare private exchanges.

The Affordable Care Act popularized the term “exchange,” which is simply a marketplace where money is traded for goods and services. Grocery stores and barber shops are exchanges. The potential value of a Medicare private exchange is that, by focusing on a narrower segment of the population, it can help retirees understand their choices and remind them during annual open enrollment of the importance of reviewing their coverage. ◊◊


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