Employers Shift Retiree Coverage to Medicare Advantage

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If you retired in 1988 from a job at a large employer with health insurance, you had good odds you would continue to be covered into old age. Two-thirds of large employers that covered their current workers continued to insure them after they retired.

The odds today are not so good: just one in five large employers extends insurance to former employees. Covering retired workers is expensive, and a growing number of companies are unwilling to pay for it.

Among the employers that still do, a development has been afoot that may be limiting the options available to their former workers. The employers and unions that still offer health benefits to retirees are increasingly rolling out Medicare Advantage plans to at least some of their retirees.

And in about 65 percent of these cases, an Advantage plan was the retirees’ only option last year, up sharply from 44 percent in 2022, according to KFF, a healthcare research organization.

This blog has written often about Medicare Advantage’s surge in popularity among all retirees over the past decade. KFF’s new data on employer health coverage for retirees provides a window into a narrower, but still important, corner of the Medicare market.

Some employers are offering Advantage plans as a lower-cost option so they can preserve an insurance benefit for former employees. But the problem it poses for retirees is that if they don’t want an Advantage plan and instead want coverage through traditional Medicare, they have to be “willing to forfeit their [employer’s] retiree health benefits,” KFF said.

That’s a lot to give up because the benefits reduce out-of-pocket medical costs. Another issue is that once a retiree enrolls in an Advantage plan, it can be more difficult or even impossible to find a Medigap insurer that will approve them if they want to switch.

In most states, Medigap insurers are required to cover retirees only during the first six months after they initially sign up for Medicare Part B and in a few other special circumstances. After that initial period, the insurer usually has the option of accepting or rejecting an application for coverage. Only a few states, including Connecticut, Massachusetts, Maine, and New York, do more to protect retirees’ right to buy Medigap at any age.

Historically, the employers that extended workers’ health insurance into retirement offered a range of options, including cash subsidies to pay for supplements to Medicare and subsidized Medigap plans. Medicare Advantage is distinct from Medigap, which is a separate policy that supplements a retiree’s traditional federal insurance through the Medicare program.

But Medicare Advantage plans’ market share among all eligible Medicare beneficiaries has doubled over the past decade, to 51 percent today. The plans first came on the scene in 2003 after Congress allowed insurers to provide a retiree’s federal Medicare benefits in a single policy that provides additional coverage for doctor’s appointments, tests, and other services.

Now, Advantage plans are moving into the employer market, reshaping another part of the healthcare landscape for retirees.

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7 comments
Daniel Ryan

With employer and/or union oversight, an advantage plan can be designed and administered to provide significant benefits and avoid the pitfalls that sometimes accompany these plans sold on late-night TV ads.

    Don in GA

    My concern about these plans is why are so many organizations rejecting them and their customers? If Medicare Advantage is so good (as opposed to initially cheaper), why would hospital chains not want to work with them anymore? I’ve heard nightmares about convoluted and lengthy referral approvals, which, when dealing with the elderly, times of the essence. Hospitals and news organizations have reported massive overbilling problems and much-delayed billing (timing arbitrage?).

    I’m no expert, but I’m getting there, and it seems there’s simply too much risk with Medicare Advantage plans. If you can afford it, it seems Traditional Medicare with a Medigap plan is the way to go.

Economist

I have never understood why households buy retiree health insurance or employers think it s a desirable benefit. But then again, I have never understood why households buy bicycle insurance. Long term care apart, Medicare does a pretty good job of insuring households against catastrophic health care costs. Why would anyone incur the insurance company overheads of insuring against small and somewhat predictable costs? The only explanation I have been able to come up with is tax arbitrage – retiree health insurance is a non-taxable benefit that covers expenses that would otherwise be paid out of after tax income. Equally, I have never understood why the government permits retiree health insurance. The co-pays exist for a reason – to discourage frivolous use of health care – and having co-pays covered by insurance obstructs that purpose.

    Decision Maker

    I agree in principle with your perspective; Medicare covers the majority of the really big stuff and people would be better off to “self-insure” for the balance. But in practice, I don’t know that the balance is really “small and somewhat predictable”. Medicare (and insurers and AMA) have the data to educate us on that point but it is not shared in any form that I can digest. This lack of relevant data leads many retirees to choose options that may be expensive and/or limit choice, but also limit risk. I would like to see a web site that, given my age, health status, and family history, would lay out the predictable outcomes with probabilities and costs.

    Gardener54

    The reason people NEED a supplemental plan in addition to traditional Medicare is precisely because the possible out of pocket costs are not “small and predictable.” Medicare pays 80% of costs they accept. That sounds like a lot until you start adding up a possible 20%. For a surgery and/or long-term treatment such as for cancer, the costs can easily exceed $100,000 dollars. All of a sudden the patient, who is battling a life-threatening situation already, has to come up with the additional $20,000. That is just an example. But this is a choice. If you have enough to self-insure, go for it. Most people don’t. That supplemental insurance can save them from debt and anxiety at a time when they are already dealing with a difficult situation.

    Don in GA

    It seems obvious given the risks inherent in healthcare costs that “free” (as in the marketing brochures, not necessarily in real life) would be an exceptionally attractive employer benefit.

    As for Medicare ensuring against catastrophic illness, sure, but those illnesses can still bankrupt a household with the 20% coinsurance requirement. Given that half of all retirement households have ~$250k net worth, they could be one serious ailment away from the poor house. It’s enough of a problem that the govt is stepping in to buy medical debt at pennies on the dollar and then forgiving the debt.

    I agree with you on the need for deductibles and moderate copays, but thinking Medicare alone is enough may be an area we aren’t aligned on.

David Marans

Yes, Medicare Advantage is a big mistake. Still, each of us needs to make a choice.

It is easy to say that I am just among the privileged and dismiss my comments. But in this matter, privilege is the just the ability to understand and the determination to act accordingly.

Now age 81, at age 65 I purchased Medicare Supplement Plan J in Florida (an Issue Age state, thus slowing premium growth). It covers the Part B deductible, excess doctor charges, ER care, and has saved considerable medical expenses, avoided delays, allayed worries, and allowed peace of mind regarding medical treatment. At any hospital or doctor, I just show my Plan J card and there are no questions. The Medigap provider then handles all rest. (True, Plan J was discontinued two years after I purchased it but is grandfathered for those who want to keep it. [I wonder how many of us remain.])

More to the point, based on my career experiences, fully half of seniors on Medicare Advantage vastly undervalue their own health. To put is bluntly, they do have the resources for a Supplemental, but they prefer things that offer immediate consumer, creature, and familial, and peer satisfaction.

THIS TOO–The older you get, the harder it is to recover from illness. And the added stress of finding the means of paying the medical cost (and the stresses of MA restrictions and denials) can prolong the illness. So having a good Medigap plan will alleviate the stress and promote healing. Thus in a subtle way, in part, Medigap helps pays for itself.

My wife and I gladly pay quite a bit for Medigap and maintain a modest yet confident retirement. We don’t travel, nor go out dining, nor own a car, but neither did we pay a dime for her two knee replacements nor my dislocated shoulder, nor the nursing, nor the therapy.

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