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Utilizing private exchanges to provide health care coverage for Medicare-eligible retirees

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For years, Medicare-eligible retirees who had worked for the city of Waco, Texas, had a simple choice when it came to 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 some retirees—those with modest health care needs and higher utilizers of health care services, the plans were a good fit.

But for retirees in between those two ends of coverage, neither plan worked very well. In one case—the low-end plan—retirees were exposed to the cost of big health care claims. At the other extreme, the high-end plan was more than they needed and if they enrolled it, meant they would be paying for unnecessary coverage.

In 2010, Waco decided on another approach. It contracted with Extend Health Inc., a private health care exchange, to offer coverage to the retirees through commercial health insurers that had agreed to participate in the arrangement.

Now, Waco retirees have more than 15 plans from which to choose, Ms. Pustejovsky, said. And through that expanded choice, retirees are able to select a plan that better fits their health care needs.

The exchange “is a win for retirees,” Ms. Pustejovsky said, noting that, on average, retirees are paying about $600 a year less in premiums and other out-of-pocket costs compared with the prior arrangement.

And, the exchange arrangement is a win for Waco too, she says. Benefit advisers with San Mateo, Calif.-based Extend Health, assist retirees with evaluating in and enrolling in the health care plans offered through its exchange.

“This has freed us to spend more time with employee issues. Retirees got more choices,” cost savings and benefit advisers, she said. And now, “we can focus more on active employees,” she added.

Waco is just one of dozens of employers during the past few years who no longer directly offer coverage to Medicare-eligible retirees and have contracted with private health insurance exchanges. Aside from Extend Health, other exchanges include those offered by Aon Hewitt Navigators Insurance Services Inc. and My Medicare Advocate, a Xerox Corp. unit.

The exchange concept for Medicare-eligible retirees is a relatively new one, with exchanges set up during the past three or four years.

But they are rapidly growing. For example, Extend Health, in a registration statement filed with the Securities and Exchange Commission as part of its intent to go public, notes that its revenues since 2008 have increased more than four-fold to $51.1 million in fiscal 2011. Most of its revenues are derived from commissions it receives from insurers enrolling retirees who selected coverage in its exchanges.

And benefit experts say future significant growth is likely. “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, Mr. Richards said.

“Retirees can have more meaningful choices,” said Dan Cahill, market leader in Cincinnati for My Medicare Advocate.

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For employers, exchanges are particularly well-suited in defined contribution arrangements, in which an employer will credit, such as through a health reimbursement arrangement, retirees with a specific amount of money to pay for health care plan premiums and other health care expenses. That approach contrasts sharply with the traditional defined benefit plan approach in which employers directly offer a health care plan and pay for most of the costs.

“Once you start to limit funding, you need to give retirees broader access to coverage. The exchanges have gotten employers more comfortable with the defined contribution approach,” said Pearce Weaver, senior vp-benefits consulting with Fidelity Investments in Boston.

Still, for retirees, the move from a single or a couple of employer plans to an exchange where there can be dozens on plans from which to choose can be overwhelming.

“Communications and education is very important,” Mr. Weaver said.

For that reason, the exchanges employ benefit advisers that work with retirees in evaluating plans.

Retirees can discuss with exchange advisers how plans offered through the exchanges differ. “We help to educate retirees” on plan choices, said Craig Maloney, executive vp—strategy and business development in Washington with Aon Hewitt Healthcare Exchanges.

With more employers trying to seek a middle ground between the extremes of providing ever more expensive retiree health care plans or no coverage at all, exchange growth should be robust, advocates say.

“We are only in the first quarter of the game,” Mr. Maloney said.

“We intend to aggressively pursue opportunities to help private sector employers transition their retirees to individual health plans,” Extend Health said in its SEC registration statement.