A growing number of employers that offer health insurance to post-65 retirees are turning to private exchanges since the health care reform law took effect to provide coverage on an individual basis, often at a lower cost than their group plans could.

The percentage of employers with 200 or more employees offering retiree health coverage had dropped to 28% in 2013 from 66% in 1988, according to the 2014 Kaiser Family Foundation/Health Research & Educational Trust survey of employer-sponsored health benefits.

And while about 29% of employers that offer post-65 retiree health benefits are using private health exchanges, 27% of employers are considering doing so in the future and 44% are evaluating changes, according to a survey of 424 private and public plan sponsors representing 3.8 million retirees, benefit consultant Aon Hewitt said in a study released in February.

Drivers of the movement that grew further as a result of the Patient Protection and Affordable Care Act were the 2013 elimination of the tax-favored status of the retiree drug subsidy and improvements to the Medicare Part D program that will eliminate the so-called “donut hole” by 2020, according to the Aon Hewitt survey.

“In the post-ACA market, individual coverage has been more cost-effective for retirees, all while preserving retiree benefit value,” said John Grosso, Norwalk, Connecticut-based actuary and leader of Aon Hewitt's retiree health care task force.

“Most employers that provide group health benefits to post-65 retirees are at the very least evaluating whether an exchange would work for them and their retirees,” said Eric Stanger, principal of health exchange solutions at Buck Consultants at Xerox in East Greenwich, Rhode Island. “We're not looking at first movers anymore. The level of activity we're seeing from employers has increased almost exponentially every year.”

Moreover, by using exchanges, “it caps the costs for employers if they move to a defined contribution approach” to fund the benefits, and “it gives the retirees the ability to customize their benefits to what they really need,” said Barbara Gniewek, a principal at PricewaterhouseCoopers L.L.P. in New York. “It also eliminates the burden of administration.”

Atlanta-based United Parcel Service Inc. moved its 17,000 nonunion post-65 retirees and spouses to Aon Hewitt's private exchange in 2012.

Now, the retirees, depending on where they reside, can have nearly three dozen plans from which to choose to find one that best fits their health care needs. Previously, UPS had a “one-size-fits-all” medical plan with a deductible and coinsurance, but paid a subsidy to post-65 retirees to purchase Part D coverage on the individual market, said B.J. Dorfman, Atlanta-based director of U.S. benefits.

“We had a lot of feedback before from our retirees that there wasn't much value to our existing plan,” Ms. Dorfman said. “It was secondary to Medicare and didn't pay unless they hit a $1,000 out-of-pocket maximum. So from a design standpoint, the fact that they could pick their own plan and they had more choice — it was really appealing to them.”

To fund its post-65 retiree health benefits, UPS in 2015 will put $2,157 per plan member into a health reimbursement arrangement, which the retirees use to purchase exchange coverage. If they purchase a less costly plan, they can use the funds in their HRA to pay out-of-pocket medical expenses.

“It was a cost-neutral solution. We saw it as a way to provide better value for the same cost,” Ms. Dorfman said.

While UPS' decision kept its costs the same, the Alameda County Employees' Retirement Association halved its costs by moving 1,300 post-65 retirees in 2013 to Extend Health Inc., a private exchange Towers Watson & Co. purchased in 2012.

“We were paying $5 million in 2012 for the group plan,” said Kathy Foster, assistant CEO for the Oakland, California-based association. “We also had some retirees call us and ask why they could get an individual plan through AARP that was basically the same plan but half the cost.”

By switching to individual coverage via the exchange, the association's costs dropped to $2.5 million and kept coverage levels the same while giving retirees more choice.

“Our retirees are enrolled in 214 different plans with 55 different carriers,” Ms. Foster said.

One reason the cost is often less for individual post-65 retiree coverage purchased on an exchange is the risk is spread more than for a single-employer plan, experts say.

“Your retiree group typically is getting smaller, older and sicker. The individual market has baby boomers retiring into it, most of whom don't have employer coverage. This is a better risk group because it's relatively healthy,” said John Barkett, director of health policy affairs at Towers Watson in Arlington, Virginia.

Still, the change can be confusing for retirees, who have little or no experience in shopping for health insurance, experts say. But most private health exchanges have customer service representatives to help post-65 retirees through the process.

“Hand-holding, communications, customer service is critical to employers that send their retirees to the private exchanges,” said David Embry, president of Lockton Marketplace, a private exchange platform offered by Kansas City, Missouri-based insurance broker Lockton Cos. L.L.C. that is powered by SelectQuote Insurance Services.

When the Alameda County retiree group evaluated exchange options prior to selecting Extend Health, “one of our main goals was to make sure retirees had a good level of customer service,” said Ms. Foster. “Prior to that, retirees would contact my staff regularly. They liked to call us and have us fix their problems. Since we didn't have control over the plans they would be enrolled in, we wanted to make sure that they had that same level of service.”

In fact, even after contracting with an exchange, “we still do Medicare transition seminars and provide assistance to those who need it,” Ms. Foster said.