Nevada Saves $8 Million a Year Using Private Medicare Insurance Exchange, Thoughts on Exchanges For Credit, Derivatives

Source: Pew Center on the States 2010
It is well known that U.S. States face a $1 trillion shortfall in funding long-term pensions and health care liabilities. The unfunded liability percentage is worse for retiree health care and other non-pension benefits. From Pew Center's "Trillion Dollar Gapreport:

"But pensions are just one side of the problem. Retiree health care and other non-pension benefits represent the other half of the challenge facing states: a $587 billion long-term liability, with just over five percent of that amount, or almost $32 billion, funded as of fiscal year 2008. Pew found that only two states have more than 50 percent of the assets needed to meet their liabilities for retiree medical or other non-pension benefits: Alaska and Arizona. Twenty-eight states have less than one percent of their liabilities funded, and twenty states have not set aside any funds." (source:

Aside from cutting services and benefits, or raising taxes and premiums, there is another way for states and municipalities to cut retiree health care costs (administrative and premiums) and retain benefits. Instead of overspending on group plans, States and munis can utilize a private medicare health insurance exchange, similar to Expedia for airline tickets and Lending Tree for loans, to let retirees purchase private medicare supplement insurance plans at competitive rates (Read: Extend Health prescribes new model - San Francisco Business Times).

Extend Health, a private medicare insurance exchange (not a public company, yet), "provides a marketplace of 67 health insurance carriers" for medicare-eligible retirees to purchase medicare supplement insurance. They have already saved clients a $1 billion in the private sector. Nevada's Public Employees Benefits Program (PEBP) just hopped on the exchange.

"Nevada is on track to move state government retirees on Medicare to private insurers for gap coverage, now that a state board has approved a contract with an insurance exchange firm, a state official said Wednesday.

James Wells, executive director of the Public Employees' Benefit Program, said the change will save the state about $8 million a year and reduce monthly costs for retirees.

The state Board of Examiners, made up of the governor, attorney general and secretary of state, on Tuesday approved a $1.5 million contract with San Mateo, Calif.-based Extend Health to counsel retirees on choosing a private plan within their exchange." (Bloomberg/BusinessWeek 12/2010)

State of Nevada PEBP press release:

"Using the Extend Health exchange and its licensed benefit advisors, retirees participating in PEBP will be able to compare and purchase individual Medigap, Medicare Advantage, Part D prescription drug, dental and vision coverage from more than 45 plans offered by 12 carriers licensed in Nevada."

"According to James R. Wells, Executive Officer of PEBP, “This agreement with Extend Health enables PEBP to continue providing Medicare-eligible retirees with quality health care benefits while reducing costs to taxpayers and participants. By purchasing individual plans on a health insurance exchange, retirees will have more choice and control over their health care coverage, and the opportunity to select plans that are right for them.”" (source: State of Nevada PEBP)

It is another example of how open electronic exchanges make markets more efficient, boost price transparency and cut costs through competition. Ever since the credit market blew up in 2008, I've been a strong advocate of having over-the-counter illiquid debt and derivatives trade openly on electronic exchanges, to boost liquidity, marketability and price transparency. OTC credit markets: bonds, senior/subordinated debt, asset-backed securities and credit derivatives (credit default swaps aka credit insurance), should trade on electronic exchanges like stocks, ETFs and options. If a retail investor can buy a risky, illiquid microcap stock, or ETF, that trades 1,000 shares a day on an electronic exchange and subject to wild bid/ask spreads, why can't it be done with credit and CDS. I'm talking about for retail consumption. Is there not enough product to go around?

Unfunded State Retiree Health Care and Other Non Pension Benefits (Top 10 listed below)

Source: PewCenterOnTheStates, "Trillion Dollar Gap" 2010
  1. New Jersey: $68.9 billion
  2. California: $62.46 billion
  3. New York: $56.28 billion
  4. Illinois: $39.94 billion
  5. Michigan: $39.87 billion
  6. North Carolina: $28.741 billion
  7. Texas: $28.61 billion 
  8. Ohio: $27 billion
  9. Connecticut: $26 billion
  10. Georgia: $18.32 billion

Pew Center On The States Data:

The Trillion Dollar Gap report - (PDF)

Unfunded state retirement systems (all state fact sheets) - (PDF)

Percentage of State Retiree Health and Other Non-pension Benefit Liabilities That Are Funded - Pew

About this Assessment: OPEB Funding Level -

Related articles (search for unfunded health care liabilities in Google News)

Broke Town, U.S.A. - NY Times

Embedded report by the Massachusetts Taxpayers Foundation: "The 50 largest cities and towns in Massachusetts face a “staggering” $20 billion unfunded liability for retiree health benefits that will wreak havoc on local government and place crushing burdens on property taxpayers in the future, a new report warns." -

San Francisco's Multi-Billion Unfunded Health Care Liability To Be Revealed -

Editorial: State must get handle on health care obligations -

California Audit shows big bill looming for state retiree benefit - Sacramento Business Journal

Editorial: Employee cost figures rising: "Changes must be made here and on the federal level to reduce the city's unfunded liability." - The Commercial Appeal (Memphis Tennessee)

Leggett, Montgomery County unions spar over pension costs - WashingtonPost

Local officials ponder how to fund retiree health liabilities - Daily Hampshire Gazette

Report highlights Providence’s unfunded pension, health care liability - The Providence Journal

Michigan Plans Big Overhaul - Bond Buyer

Citing pension costs, Costa Mesa, Calif., plans to lay off nearly half its employees - Washington Post/Bloomberg

Moody's: Conditions To Get Worse For State, Local Issuers - IDD Magazine

Bill Gates' TED 2011 Speech: State Accounting Tricks, California's Unfunded Healthcare Liabilities and Education Spending - DistressedVolatility

Challenges for State and Local Governments (Ben Bernanke, 3/2/2011) - DistressedVolatility