Medicare Advantage Has Become More Popular Among the Shrinking Share of Employers That Offer Retiree Health Benefits

Employer and union-sponsored retiree health plans play an important role in providing supplemental benefits to about a quarter (26%) of all people with Medicare or 15.2 million Medicare beneficiaries. However, the share of employers offering retiree health benefits has been shrinking. Among large employers that offer health benefits to active workers, the share offering retiree health benefits has dropped from 66% in 1988 to 21% in 2023, according to the latest KFF Employer Health Benefits Survey. In 2023, a smaller share of employers offering to active workers, 14 percent, offer retiree health benefits to Medicare-age retirees. Among the declining share of large firms that offer retiree health benefits to Medicare-age retirees, Medicare Advantage has become more popular.

This analysis examines the extent to which large private and non-federal public employers that offer retiree health benefits are turning to Medicare Advantage, using data from the 2023 KFF Employer Health Benefits Survey (see Methods). Highlights include:

• About half (52%) of large employers offering retiree health benefits to Medicare-age retirees in 2023 offer coverage to at least some retirees through a Medicare Advantage plan, double the share in 2017 (26%).
• About two-thirds of large employers (65%) that offer Medicare Advantage coverage to their retirees in 2023 do not give retirees a choice in coverage options, a statistically significant increase from 2022 (44%).

Background

For people with Medicare, employer or union-sponsored retiree health benefits can make Medicare more affordable by covering some or all of Medicare’s cost-sharing requirements and by providing supplemental benefits that are not covered by traditional Medicare. Until fairly recently, employer and union-sponsored retiree health benefits were typically designed to coordinate or wrap around traditional Medicare.

Concerns about retiree health benefit costs have led employers and unions to implement a variety of changes to limit their financial obligations, such as imposing caps on their retiree health liability, shifting toward defined contribution approaches, increasing retirees’ premium contribution, and more recently, by offering their Medicare-eligible retirees coverage through Medicare Advantage plans. Medicare Advantage plans, mainly HMOs and PPOs, provide all Medicare-covered benefits, typically include Part D drug coverage, and often include supplemental benefits such as lower cost sharing and vision, dental, and hearing benefits. Medicare Advantage enrollees continue to pay the Medicare Part B premium, but often pay no additional premium for covered benefits. While group enrollment has accounted for roughly the same share of total Medicare Advantage enrollment since 2010 (18%), the actual number of group enrollees has increased from 1.8 million in 2010 to 5.4 million in 2023 as Medicare Advantage enrollment overall has grown.

Under this approach, employers and unions contract with a Medicare Advantage private insurer to provide all Medicare-covered benefits as well as supplemental benefits for their Medicare-eligible retirees (and spouses). The employer (or union) and/or private insurer (acting on behalf of an employer) receives a payment from the federal government (Medicare) and agrees to cover all Medicare-covered benefits, along with a package of supplemental benefits for retirees in their group. Payments are based on the bids of other Medicare Advantage plans available to individual (non-group) enrollees, and set as a percentage of the area benchmark, adjusted for geography and risk. Employer plans are eligible to receive rebates and bonus payments from Medicare, both of which help cover the costs associated with supplemental benefits for their retirees and contribute to the growth in Medicare spending. Bonus payments for group Medicare Advantage plans reached nearly $10 billion over the last 5 years (2019-2023). MedPAC estimates that Medicare Advantage payments to employer plans will average 102 percent of traditional Medicare spending in 2023.

Findings

About half (52%) of all large firms (firms with 200 or more workers) that offer retiree health benefits to Medicare-age retirees do so through a Medicare Advantage plan in 2023, double the share in 2017 (26%) (Figure 1).

Among firms with 5,000 or more workers offering retiree benefits, 62% offer retiree health benefits through a Medicare Advantage plan in 2023, a share that has more than doubled over the same time period (29%).

Among large firms (200 or more workers) offering retiree benefits through a contract with a Medicare Advantage plan, about two-thirds (65%) provide at least some retirees no choice but to receive their retiree health benefits through a Medicare Advantage plan, a significant increase from 2022 when 44% of firms offered no choice (Figure 2).

Medicare-age retirees in firms that provide retiree health benefits exclusively through Medicare Advantage may not be able to choose to get their Medicare benefits under traditional Medicare unless they are willing to forfeit their retiree health benefits.

Among employers with 1,000 or more workers that offer retiree benefits through a Medicare Advantage plan, more than a quarter of employers (27%) said the primary reason they selected this option was to the lower cost for retirees. Nearly a quarter (22%) said they don’t know, while 17% said it provides flexibility for enrollees, and 13% said it was due to the lower cost for the firm. Another 11% said Medicare Advantage offers better coverage options, 4% said it is administratively simpler, and 5% selected another reason (data not shown).

Discussion

The declining share of large employers offering retiree health benefits to Medicare-age retirees are increasingly turning to Medicare Advantage to do so – a decision with implications for employers, retirees and Medicare spending.

For some large employers, the shift to Medicare Advantage may be a strategy to maintain benefits for their retirees, rather than terminate or scale back coverage, and potentially reduce costs. For retirees, the shift to Medicare Advantage can mean similar or better benefits and lower costs but can also mean more limited access to doctors and hospitals in the plan’s network and greater exposure to cost management tools, such as prior authorization, that may limit access to Medicare-covered services. Limited provider networks was a major area of concern when New York City tried to move its city worker retirees into a Medicare Advantage plan in 2022 to save an estimated $600 million per year and may explain why a Manhattan Supreme Court Judge prohibited the implementation of this plan (though it is still possible that the mayoral Administration may try to appeal the ruling).

Retirees in firms that offer health benefits exclusively through Medicare Advantage plans have the option to enroll in traditional Medicare, but if they do, they may be required to give up retiree benefits in perpetuity. They may or may not be able to purchase a Medigap policy to supplement traditional Medicare, depending on their health condition, since most states do not have guarantee issue protections for Medigap.

The rising number of Medicare-eligible retirees into Medicare Advantage plans also has implications for Medicare spending because Medicare pays more for enrollees in Medicare Advantage plans (including group plans) than it pays for similar people in traditional Medicare, which contributes to higher Medicare spending that ultimately affects the solvency of the Medicare Trust Fund and higher Medicare premiums paid by all beneficiaries, raising questions as to whether employers are limiting their liability for retiree health benefits at the expense of the Medicare program.