Many large employers are struggling with the obligation to cover the rising medical costs of retirees, but last year officials in Michigan found a way to save at least $40 million on care for retired teachers and other public-school workers: Send the bills to Washington.
Almost overnight, by taking advantage of a little-understood feature of Medicare, the school retirement system shifted a big chunk of the healthcare costs of more than 100,000 retirees off its budget and onto the federal government. This year, the state is shifting its civil service retirees too.
Michigan is not alone. Across the country, state and local government agencies, big nonprofit organizations and major corporations are rushing to do the same. One result is that the Medicare trust fund is evaporating even faster than expected.
At the heart of what critics say is a major cost-shifting maneuver is a program called Medicare Advantage, which pays private insurers a bonus to take over Medicare coverage for seniors.
The payments to the private insurers average more per senior than the cost of care with regular Medicare. The bonus payments enable insurers to offer features that seniors in regular Medicare don’t get.
That has made the private plans attractive to individual seniors, with nearly 9 million -- about 1 in 5 -- now enrolled in them.
And, in addition to lifting a financial burden for companies and government agencies, the program has helped boost insurance company profits.
But as seniors switch into such private plans, Medicare Advantage is hastening the depletion of the already stressed Medicare trust fund.
And monthly premiums have risen for everyone -- including the 80% of seniors who remain in regular Medicare -- because the premiums are tied to the government’s overall costs. Seniors in regular Medicare don’t get the extra benefits available through private plans even though they help pay for them; many buy supplemental coverage.
“My jaw dropped when I heard the kind of moneys that were following these programs,” said Chuck Agerstrand, who oversees benefits for the Michigan Education Assn. teachers union. “I can understand the [federal] bureaucrat who says we’re pumping too much money into these programs. A question arises as to how long will these subsidies last, and if they disappear tomorrow, what will happen?”
Some lawmakers of both parties have begun to question whether the Medicare Advantage program needs an overhaul. “It’s a runaway train,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.).
Seniors lobby AARP and the American Medical Assn. want to curtail payments to private plans.
But President Bush remains a steadfast supporter. And the insurance industry counters that interfering with the private plans would disrupt the lives of millions of seniors and jeopardize improvements that could save money in future years. The issue will be a flash point in coming months, because Bush is proposing deep cuts in traditional Medicare.
Enrollment takes off
Medicare is the federal government’s biggest healthcare program, serving some 44 million seniors and disabled people. Private insurance plans have been a part of it for more than 20 years, with a seesaw history tied to funding changes decreed by successive Congresses and administrations.
In 2003, the GOP-led Congress decided to deliver a new Medicare prescription benefit through commercial insurers. At the same time, lawmakers wanted to expand the availability of private Medicare insurance plans, particularly in rural areas and some urban centers where payments had been too low to attract insurers.
To draw more companies, the lawmakers increased payments to the private insurers. A new formula created rates that now exceed the average cost of traditional Medicare in virtually every county in the U.S. But insurers are required to return some of the money to seniors in the form of extra benefits or lower co-payments.
Insurers eagerly embraced the opportunity, which came at a time when the market for employer-based insurance was sputtering. Private-plan enrollment took off, but higher-than-expected costs for the government soon followed.
Currently, payments to private plans average 113% of the cost of care for comparable seniors in regular Medicare.
“It fosters choice, but we don’t see it driving down prices below what the cost would be under traditional Medicare,” said economist Robert Reischauer, whose opinion on healthcare matters is respected on both sides of the political aisle. “There is something wrong with this picture.”
Within the Medicare Advantage program, there are several types of plans. Many are managed care plans like health maintenance organizations and preferred provider organizations. But lately, most of the concerns about the program have focused on a third type, called private fee-for-service plans.
It’s the kind favored by Michigan and many other employers. Not only are these plans the fastest-growing in the program, they also receive some of the highest payments.
Private fee-for-service plans generally mirror the traditional Medicare benefit, and unlike managed care plans they are not allowed to restrain the use of medical services to lower costs. They are attractive to seniors because they offer unrestricted choices of doctors and hospitals and offer lower cost-sharing than traditional Medicare.
Fee-for-service plans were created by Congress in 1997 in part to ease concerns from religious conservatives that seniors could be denied life-saving care by Medicare HMOs. But they were not a big factor in the program until after Congress and the Bush administration raised payments in 2003.
Now they’ve taken off. Enrollment jumped nearly tenfold to about 2 million, from 210,000 at the end of 2005.
It didn’t take long for employers to see the potential. Because fee-for-service plans piggyback on Medicare’s network of doctors and hospitals, retirees in any part of the country can receive care, making the plans simple to administer.
More important, employers who provide retirees with coverage to bridge the gaps in Medicare can score significant savings.
For example, a traditional “Medigap” supplementary policy can cost employers $1,000 to $1,500 a year per retiree, said John Grosso, a consultant with the benefits firm of Hewitt Associates. But it’s not unusual for a private fee-for-service plan to offer a similar benefit for $300 to $600.
“The big reason why those premiums are so low is because of the federal subsidy the plans are receiving behind the scenes,” Grosso said.
That realization raised eyebrows at a recent Senate hearing.
“We’re substituting taxpayers’ dollars for what would have been private dollars,” said Sen. Charles E. Grassley (R-Iowa).
Savings and costs
Various employers have switched retirees into the plans.
They include private companies Eastman Kodak Co., IBM Corp. and Xerox Corp. and nonprofit Deseret Mutual, which administers benefits for the Church of Jesus Christ of Latter-day Saints.
In addition to Michigan, Kentucky has also enrolled retired teachers, and Pennsylvania hopes to save $42 million a year on its state retirees.
Medicare does not know how many employers are in the program, though the trend could raise costs significantly. “There is no reporting mechanism in place,” said Abby Block, who runs the Medicare division that deals with private plans.
Some private employers are reluctant to discuss their participation in the plans; others say it may be the only way to maintain retiree coverage.
State officials say the money they save goes toward maintaining public services.
In Washington, a senior policy expert for the Blue Cross Blue Shield Assn. warned that scaling back payments to private plans could cause as many as 3 million seniors to drop out and lose valuable extra benefits.
The official, Alissa Fox, said private plans were trying to improve the coordination of care for seniors with costly chronic conditions.
Retired teacher Mary Christian of Flint, Mich., said she was satisfied with her private fee-for-service Medicare plan. There’s less paperwork, she said.
But Christian, 74, is troubled that the program is raising overall costs, and that seniors in regular Medicare are paying $2 a month in additional premiums to subsidize her extra benefits.
“We have not had that mentioned to us at all,” she said. “I don’t want cost-shifting. To think that we are also denuding federal dollars that will go into healthcare, that’s really scary.”