Volume Two, Issue 1 February 1999 In This Issue Medicare ...

1 Volume Two, Issue 1 February 1999. In This Issue Medicare Risk HMOs AN ALTERNATIVE TO Medicare . We welcome you to the first is- sue in Volume Two of the In the continuing battle against BACKGROUND. McGraw Wentworth Benefit Ad- the rising cost of post-retirement health care benefits, more em- The cost of retiree health ben- visor, the second full year of pub- ployer sponsors are utilizing efits is growing substantially. lication for our technical bulle- Medicare -Risk HMOs for their Not only are medical costs, most tin. retirees. These employers hope notably prescription drugs, ris- to voluntar- ing at a signifi- ily attract cant rate, but Providing retiree health care their retiree our population benefits is an expensive propo- segment to is aging as sition for employers.

2 This Issue the Medi- well. There- care-Risk fore, there are of the Benefit Advisor reviews: HMOs. This a growing is done by number of - Alternative medical coverage offering en- retirees who hanced ben- require post re- for retiree's through HMO's efits to en- tirement health rollees. The gain for plan spon- care protection. Medicare alone - The effect of new accounting sors is a reduction in current out- often doesn't do the job. standards on employers lays and FASB 106 liabilities. Most employer-sponsored retiree Medicare -Risk HMOs may save medical plans rely on two sources - Recent developments in post- money by eliminating the need to meet the needs of retirees: retirement health care for supplemental Medigap insur- ance coverage.

3 They do this by Medicare Parts A and B. offering services that go beyond Medigap Supplemental Insur- We look forward to your com- what traditional Medicare /. ance ments and suggestions regarding Medigap coverage offers. A Medi- care-Risk HMO is tantamount to A 1997 survey of employers all future issues of the Benefit getting Medicare and Medicare found that the average cost of Advisor. You can reach us by supplements on a combined ba- providing Medigap supplemental contacting your account team or sis with higher benefits and coverage was nearly $2,000 per by utilizing the Feedback Forum reduced costs. retiree per year (for post-65 re- on our interactive web site at Continued on Page 2.)

4 Volume Two, Issue 1 February 1999, Page 2. tirees, not early retirees). companies must accrue the AN ALTERNATIVE SOLUTION. Also, many services Medicare present value of all future retiree doesn't cover are the ones se- health care liability on their fi- Into this gap come Medicare - niors care most about, includ- nancial statements. That amount Risk HMOs. While Medicare cov- ing: can be several million dollars for ers some of the basic necessities a mid-sized of health Routine & preventive office company with care, Medi- visits generous post- care-Risk retirement HMOs cover Outpatient prescription drugs health care more. They Vision care expenses benefits. usually of- fer preven- LIABILITIES EXPANDING With this in tive care, mind, many prescrip- Not only are employer sponsors companies are tion drug, observing the direct cost of re- looking for vision care services and other tiree medical benefits going up ways to get the cost of post- benefits associated with pre-65.

5 Year after year, but they also retirement health care under HMO coverage levels. face the problem of accounting control. One way is to reduce for their costs on an accrual benefits to retirees, or eliminate Many Medicare -Risk HMOs offer basis. Thanks to the Financial the post-retirement health care these comprehensive benefits for Accounting Standards Board, plan for future retirees. There are little, if any, premium charge which issued Financial Ac- often employee relations and/or against the employer. These counting Standard 106 a few legal problems associated with benefits are largely funded by years ago, companies can no these changes depending upon the federal government, which longer account for their costs on the nature of the promise made pays the Medicare -Risk HMO to a pay-as-you-go basis.

6 Instead, by the company in earlier years. Continued on Page 3. Volume Two, Issue 1 February 1999, Page 3. provide the Medicare benefits Risk HMO generally prices its ENHANCED BENEFITS FOR. while the retiree pays the Part products so that the subsidy re- B premium. ceived from the federal govern- RETIREES. ment, plus a small employer pre- Many Medicare -Risk HMOs are In a Medicare -Risk HMO, the US. mium, are enough to deliver a willing to offer unlimited pre- Government pays the HMO to more attractive benefit level to scription drug benefits for the provide health care coverage the retirees. That means less group retirees with only a small rather than directly paying a money is going out from the em- additional premium funded by portion of retirees' medical ex- ployer and a reduced FASB 106.

7 The employer. This allows the penses. The HMO's ability to pro- liability is obtained. As an ex- employer to offer attractive ben- vide more services at a lower cost ample: efits to the enables them to offer benefit en- retiree so An employer hancements that typically re- as to per- pays $1,800 quire Medigap supplemental in- suade the per retiree per surance. This attracts enrollment retiree to year for cover- by cost conscious seniors. try the age to supple- While details of coverage will Medicare - ment Medicare . differ from plan to plan, basi- Risk HMO With a Medi- cally everything is paid in full delivery care-Risk HMO, except for co-payments for of- system. that same em- fice visits and prescriptions.

8 Ployer may re- From an Routine preventive care is cov- duce the pay- employer's point of view, Medi- ered as are hospital stays, diag- out to $600 per year ($50 per care-Risk HMOs offer a clear nostic tests, durable medical month) while increasing ben- advantage. All of the additional equipment, etc. efits for the retiree. services under the Medicare -Risk Not only does the company save Beyond superior benefits, retir- HMO come at a price substan- about $1,200 per retiree per year ees enjoy reduced paperwork as tially lower than a Medigap in current expenses, but the FASB well. Also, some Medicare HMOs supplement that would provide 106 liability is reduced as well. offer special arrangements so similar coverage.

9 The Medicare - Continued on Page 4. Open space for optional use. Volume Two, Issue 1 February 1999, Page 4. that so-called snowbirds are A WIN/WIN SITUATION many Medicare -Risk HMOs, re- covered when they head to 1998 INDEXED PLAN LIMITS. tirees are reducing their out-of- warmer climates for the winter. Assuming that Medicare -Risk pocket cost for health care. Such arrangements are available HMOs stand the test of time, both from national HMOs. employers and retirees can win FINAL NOTES. from the arrangement. HEALTH COSTS DECLINE As employer plan sponsors Employers win because they are evaluate Medicare -Risk HMOs as Employer sponsors observed a getting substantial cost savings options to help control retiree small cost reduction in retiree and reduced FASB 106 liabilities.

10 Health plan costs, there are sev- health care plans in 1997. Re- Some employers may be able to eral final points to consider: tirees 65 and older eligible for continue offering retiree medical Medicare have followed their benefits by virtue of having ac- Since their inception, Medicare - younger co-workers into man- cess to Medicare -Risk HMOs when Risk HMOs have been subject to aged care plans thereby assist- they otherwise might have had government-imposed price con- ing employers and reducing the to terminate such programs. trols. Effective January 1, cost of heath care. In 1997, 11% 1999, the price controls disap- of Medicare eligible retirees with Retirees win by gaining access to pear, and Medicare -Risk HMOs employer provided coverage were medical benefits beyond what will be able to charge plan ben- enrolled in Medicare -Risk HMOs.