Typically, when you become Medicare-eligible, one of three things will happen to your retirement health care plan. It will end, it will turn into Medicare supplemental insurance, or it will turn into Medicare "carve out" insurance.
Medicare supplemental insurance fills the gaps in Medicare coverage (deductibles and co-insurance), and can result in your paying less for health care. Medicare carve out plans don't do that. Instead, they fill the gap, if any, between what Medicare paid and what they would have paid if you weren't on Medicare.
Why Carve Out?
Employers use Medicare carve out plans to preserve the equity between the benefits they provide to pre- and post-Medicare retirees, as well as to save money. Typically, but not always, carve out plans reduce the amount your company would spend on your health care benefit if they didn't use carve out.
Coordination Ends
Prior to the year 2000, employers routinely coordinated retirement health care benefits with Medicare. That routine coordination stopped in 2000 when the US Court of Appeals for the Third Circuit, ruled (Erie County Retirees Association vs. Erie County) that offering different health care benefits based on Medicare eligibility was in violation of the Age Discrimination in Employment Act (ADEA).
EEOC Responds
Responding to the court's ruling, the Equal Employment Opportunity Commission changed its enforcement policy, requiring that companies treat all retirees equally, without regard to Medicare eligibility. Companies, the Commission said, must provide the same benefits to both, or invest equal amounts in each group.
The rule of unintended consequences stepped in when employers complied by reducing pre-Medicare retiree benefits to post-Medicare levels. It took seven years, but the employers made their point.
ADEA Exception
In 2007, the EEOC decided that employers had a legitimate interest in providing greater benefits to early retirees in order to cover the gap between retirement and Medicare. They created a narrow (health care insurance only) exemption to the Age Discrimination Act. Employers now could modify, change or even eliminate benefits provided to Medicare-eligible retirees.
The AARP challenged the exemption and the case reached the Supreme Court in 2008. The Court declined to hear it, upholding an appellate court's earlier decision in support of the EEOC exception. The exception stands and so does Medicare carve out.
Computing Carve Out
With carve out, your company computes what it would have paid for your treatment as your primary insurer (including any unpaid deductible and co-pay). It subtracts from that the amount Medicare paid. If the results are positive (that is, Medicare paid less than your company would have), the company pays the difference. If the result is equal to or greater than the amount your company would have paid, they don't pay at all.
If you are in a Medicare carve out program, the net result is that you won't pay more once you're on Medicare, but you won't pay less either.
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