Bloomberg News

Texas Pension Predicts Health Shift Will Save $20 Million a Year

December 14, 2011

Dec. 12 (Bloomberg) -- The Texas Employees Retirement System, the state’s second-largest public pension, figures it will save about $20 million next year by shifting most of its retirees to a Medicare Advantage health-insurance plan.

Projected unfunded costs for health care fell $828 million or 3.7 percent, mostly because of the shift, said Catherine Terrell, a pension spokeswoman. She said about 70 percent of the plan’s more than 71,000 retirees and dependents have accepted coverage managed by Humana Inc. starting next month.

By comparison, the state’s 1.3 million-member Teacher Retirement System last month forecast a 16 percent increase in its health-care deficit, to $28.9 billion, up $3.9 billion in 12 months. Covering the spiraling cost of health insurance for government workers and retirees is becoming a bigger concern than pension funding, prompting the Texas shift that’s similar to changes in states such as Ohio and Florida.

“The concept of Medicare Advantage is that Humana can negotiate better fees and cut down on unnecessary procedures,” said David Warner, who teaches health policy at the University of Texas at Austin, in a Dec. 8 telephone interview. “The concern is that they won’t contract with the highest-quality doctors and people won’t get the referrals they need.”

Medicare Advantage insurers are paid a set fee by the U.S. government for each enrollee and can profit by holding down costs for such things as consultations with specialists and tests, unlike traditional fee-for-service plans.

Savings Outlook

The $21.2 billion Texas pension expects $20 million in annual savings from the move, Terrell said Dec. 9 by telephone. With the change, the system’s projected unfunded liability for retiree health care fell to $21.5 billion as of September from a year earlier, according to a Dec. 1 report to the fund’s board. Retirees had until Dec. 9 to opt out of the Advantage plan.

The pension, based in Austin and covering about 545,400 members, spent $2.35 billion on health care in fiscal 2010, according to the report. The system’s current, self-funded insurance is overseen by Blue Cross Blue Shield of Texas.

Employees and retirees pay nothing for their own coverage currently and that won’t change for benefits under the Medicare Advantage program, according to the Dec. 1 report. Adding a spouse or child will cost $113 a month under the Humana plan, less than half the cost in the existing program.

Benefiting From Change

“It looks like most of our retired members are going to benefit from this change,” said Mike Gross, vice president of the Texas State Employees Union. “We’re pretty pleased with how this has turned out.”

“ERS is so big that they can be a tough negotiator on health contracts,” Gross said by telephone Dec. 9.

Medicare is forecast to pay Advantage plans $115 billion in 2012, about 21 percent of its expenses, the Henry J. Kaiser Family Foundation said in a report, citing a congressional forecast. Enrollment in the privately run plans has more than doubled to 11.9 million since 2004 to include a quarter of all beneficiaries, the foundation said in a separate analysis.

Members of Humana’s Advantage program typically pay about $800 annually compared with $4,000 for similar benefits under traditional Medicare with a supplemental policy, Humana Chief Financial Officer James Bloem said at a Nov. 10 conference. “That’s what makes it a very compelling proposition,” he said.

The teachers’ system, the biggest public pension in the state, is studying whether to add an Advantage plan, according to Howard Goldman, a spokesman.

Opposition to such managed-care plans is declining as Baby Boomers at or near retirement are more accustomed to them than many older Americans, said Jennifer Kowalski, a director at Avalere Health LLC, a consulting firm in Washington.

--Editors: Ted Bunker, Pete Young.

To contact the reporter on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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