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For years, Medicare-eligible retirees who worked for Waco, Texas, had a simple decision when choosing a health care plan offered by the city.
“There was the robust, high-cost plan, or "Cadillac' plan, and there was the low-cost, scaled-back "Pinto' plan,” said Missie Pustejovsky, Waco's assistant director of human resources.
For retirees with modest health care needs and who were higher utilizers of health care services, the plans were a good fit.
But for retirees between the extremes, neither plan worked very well, leaving them with high expenses or paying for coverage they didn't need.
In 2010, Waco contracted with private health care exchange Extend Health Inc. to offer coverage to retirees through commercial health insurers. Now, retirees have more than 15 plans from which to choose.
The exchange “is a win for retirees,” Ms. Pustejovsky said, noting that, on average, retirees pay about $600 a year less in premiums and other out-of-pocket costs compared with the prior arrangement.
The exchange arrangement is a win for Waco too, she said. Benefit advisers with San Mateo, Calif.-based Extend Health, which Towers Watson & Co. acquired last year, assist retirees in evaluating and enrolling in the exchange's health care plans.
“Retirees got more choices,” cost savings and benefit advisers, she said. Now, “we can focus more on active employees.”
Waco is just one of dozens of employers that no longer directly offer coverage to Medicare-eligible retirees. Instead, they contract with private health insurance exchanges. Other exchanges include those offered by Aon Hewitt Navigators Insurance Services Inc., My Medicare Advocate, a Xerox Corp. unit.
In addition, Mercer L.L.C. last year announced that it, along with tech firm Connextions Inc., will offer an exchange for retired employees eligible for Medicare.
The private exchanges are growing rapidly.
For example, Extend Health, in a registration statement filed with the Securities and Exchange Commission, said its revenue since 2008 increased more than four-fold to $51.1 million in fiscal 2011. Most revenue comes from commissions from insurers.
“Exchanges can make a lot of sense,” said Bruce Richards, a partner and chief actuary for health care in the Richmond, Va., office of Mercer L.L.C. “For employers, they are relieved of a big administrative burden,” while retirees will have more choices and potential premium savings.
Despite increased costs and opposition to the health care reform law, the overwhelming majority of employers intend to keep providing health care coverage for their employees, according to a Business Insurance survey.