Retiree Health Care Costs and OPEB: What to keep an eye on?
Request for Proposals
November 9,Consulting
2011
Actuarial
Services
Alisa Bennett, FSA, EA, FCA, MAAA
April 13, 2010
OPEB Valuation Background
 Other Post-Employment Benefits (OPEB) actuarial
valuations
 Value plan as currently exists (any planned
changes that we know about are considered).
 Calculate claims cost as of the valuation date
based on historical experience and adjusted for
plan changes, if any.
 Different amounts for pre-Medicare and Medicareeligible.
 Claims costs are normalized to age 65 and
individually age adjusted based on age and morbidity
factors.
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OPEB Valuation Background
 Project claims costs into the future using a
healthcare trend assumption.
 Trend for year following the valuation date based on
analysis of national trend studies for retiree
populations.
 Trend steps down each year from current level to
assumed ultimate long-term rate, such as 5%.
 Ultimate rate is generally chosen to be 1-2% higher
than the assumed long-term growth rate of GDP or
(non-medical) price inflation.
 Implicit in this model is the recognition that current
healthcare trend rates are unsustainable in the longterm and “something” has to change.
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OPEB Valuation Background
 Projected claims costs together with mortality and
morbidity assumptions (for retirees and actives)
and assumed rates of termination, disability,
retirement and plan participation (for actives) are
used to develop total OPEB liability.
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Medicare Part D Background
Employer Retiree Group Health Plans
Medicare Part D Options
 Retiree Drug Subsidy (RDS)
 Fully insured Medicare Part D Prescription Drug
Plan (PDP) – or 800 series EGWP
 Direct Contract with CMS – Employer Group
Waiver Plan (EGWP)
 Eliminate drug coverage for Medicare eligible
retirees
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Medicare Part D Background
Retiree Drug Subsidy (RDS)


Continue to offer drug coverage to Medicare eligible retirees
just as before Medicare Part D.
Obtain attesting actuary to attest to:
1.
2.

Creditable coverage – employer plan must provide drug
coverage as least as good as Medicare Part D. If not, retiree
will be subject to late enrollment penalties if enroll in
Medicare Part D sometime in the future.
Net value of the employer sponsored portion of the benefit
must equal or exceed the net value of benefit under
Medicare Part D.
If 1. and 2. above are satisfied, then the employer receives
federal subsidy payments equal to 28% of each qualifying
member’s allowable prescription drug costs between the
cost threshold and cost limit.
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Medicare Part D Background
Retiree Drug Subsidy (RDS)
Advantages
 Receive federal subsidies where there were none before
Medicare Part D.
 No change to plan design or administration unless
necessary to pass actuarial equivalence tests.
Disadvantages
 Administrative burden – both actuarial and record keeping.
 No low-income subsidy.
 GASB 43 and 45 disadvantage over other options. Although
federal money is received by the plan to offset drug costs
for Medicare eligible retirees, this money only can be
recognized as a GASB 43 or 45 asset when received and
deposited in the Trust. No future RDS payments can be
anticipated to offset liability for future benefit payments.
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Medicare Part D Background
Fully Insured Medicare Part D PDP




Drug coverage to Medicare eligible retirees provided on a
fully insured basis by purchasing coverage.
If large enough employer group, vendor usually willing to
design specially tailored plans to mimic as close as possible
the current plan. May continue to cover non-Part D drugs for
extra premium. Possible disruption in pharmacy networks.
Possible to enter into 800 series EGWP where third party
contracts with CMS. Retain plan design and experience
(favorable or unfavorable) with the plan, but vendor
contracts with CMS for an additional admin fee.
Plan will need to make other arrangements for preMedicare eligible retiree drug coverage.
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Medicare Part D Background
Direct Contract Employer Group Waiver Plan


Plan sponsor contracts directly with CMS to provided PDP.
Plan would receive a base monthly subsidy payment equal
to:
(National Average Part D Basic Bid) – (Average Beneficiary Premium)
 Currently $53.42 per member per month.
 Same for all participating employer and plan sponsors.
 Additional subsidies are paid (at year end) for members that
either:
 Qualify for a Low Income Premium Subsidy (varies based
on member’s income relative to the Federal Poverty
Level) – passed through to member.
 Incur drug claims above a catastrophic level – CMS pays
a significant portion of these costs.
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Healthcare Reform and
Medicare Part D
 Elimination of tax deduction for Retiree
Prescription Drug Subsidy (RDS)
 Effective for tax years after December 31,
2012
 For tax paying entity, reduces the value of
the subsidy
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Healthcare Reform
Elimination of Medicare Part D Doughnut Hole
Brand Drugs
Year
Manufacturer
Discount
Government
Subsidy
Retiree Portion
2010
0
0
100% less $250 rebate
(covers brand and generic)
2011
50%
0
50%
2012
50%
0
50%
2013
50%
2.5%
47.5%
2014
50%
2.5%
47.5%
2015
50%
5%
45%
2016
50%
5%
45%
2017
50%
10%
40%
2018
50%
15%
35%
2019
50%
20%
30%
2020
50%
25%
25%
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Healthcare Reform
Elimination of Medicare Part D Doughnut Hole
Generic Drugs
Government
Subsidy
Retiree Portion
2010
0
100% less $250 rebate
(covers brand and generic)
2011
7%
93%
2012
14%
86%
2013
21%
79%
2014
28%
72%
2015
35%
65%
2016
42%
58%
2017
49%
51%
2018
56%
44%
2019
63%
37%
2020
75%
25%
Year
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Healthcare Reform and
Medicare Part D




Elimination of Medicare Part D doughnut hole and
elimination of tax deduction for RDS subsidy payments
makes RDS an even less attractive option compared with
PDP.
Elimination of Medicare Part D doughnut hole is not to be
considered when performing actuarial equivalence tests for
RDS. Suggests improvements to Medicare Part D do not
mean improvements to RDS.
RDS website: The Healthcare Reform Bill includes
language indicating that any discount or coverage for drugs
in the “donut hole” does not impact the actuarial value of
Standard Medicare Part D coverage for purposes of the
RDS actuarial equivalence test.
Makes elimination of employer group sponsored drug
benefit for Medicare eligible retirees a viable option.
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GASB 43 and 45




RDS has GASB 43 and 45 disadvantage over other options.
Although federal money is received by the plan to offset drug
costs for Medicare-eligible retirees, this money can only be
recognized as a GASB 43 or 45 asset when received and
deposited in the Trust. No future RDS payments can be
anticipated to offset liability for future benefit payments.
For postemployment benefit plans that offer health coverage
for life, up to 65% – 70% of liability comes from Medicareeligible retirees (includes future Medicare eligible retirees).
Even though one-year cost for individual Medicare-eligible
retiree is less than that for a pre-Medicare retiree, most of the
future lifetime of the retiree population spent as Medicareeligible.
Approximately 2/3 of a Medicare-eligible retiree’s liability
comes from drug costs.
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GASB 43 and 45
Reduction in GASB 43 and 45 Liability in Year Switch from RDS to PDP
Number Active
Number Retirees
% Savings over Prior
Year Accrued Liability
125,000
66,000
22%
46,000
38,000
12%
4,000
2,600
9%
(Hazardous Duty)
84,000
40,000
13%
9,800
5,800
7%
(Hazardous Duty)
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GASB 43 and 45


“Savings” really an accounting issue. For GASB 43 and 45
liability purposes, PDP allows recognition of all future Medicare
Part D subsidies for the life of the plan (unlike RDS).
Actual cash savings for switching from RDS to PDP equals
amount of premium savings or CMS reimbursement greater
than RDS subsidy amounts. This amount depends on:
 Cost of PDP arrangement (cost of insurance,
additional administrative fees through either vendor or
direct contract EGWP).
 Sharing of savings with Medicare-eligible retirees
through premium reductions.
 Plan design.
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Direct Contract EGWP

Plan receives a base monthly subsidy payment equal to:
(National Average Part D Basic Bid) – (Average Beneficiary Premium)
Year
National
Average Part D
Basic Bid
Average
Beneficiary
Premium
Base Monthly
Subsidy
2009
$84.33
$30.36
$53.97
2010
$88.33
$31.94
$56.39
2011
$87.05
$32.34
$54.71
2012
$84.50
$31.08
$53.42
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Direct Contract EGWP
 Additional subsidies are paid (at year end) for members that
either:
 Qualify for a Low Income Premium Subsidy (varies based
on member’s income relative to the Federal Poverty
Level) – passed through to member.
 Incur drug claims above a catastrophic level – CMS pays
a significant portion of these costs.
 Caution regarding GASB disclosures for plans that switch
from RDS to EGWP (or other Part D arrangement). RDS
money received, if put into health benefit trust, counts as an
employer contribution toward the Annual Required
Contribution (ARC). EGWP reimbursements, since these
amounts are already subtracted from the total Medicare
eligible prescription drug liability, do not count as employer
contributions toward the ARC.
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Early Retiree Reinsurance Program
(ERRP)
 Reimbursements of up to 80% of medical claims between
$15,000 and $80,000 ($16,000 and $93,000 for plans that
begin on or after October 1, 2011) for retirees age 55 or older
and not eligible for Medicare, and their dependents.
 Temporary program – will last until the $5 billion appropriated
by Congress runs out. This is projected to happen in
September 2012.
 Program ceased accepting applications May 6, 2011.
 ERRP payments cannot be used as general revenue; must
be used to reduce plan participants’ costs, reduce plan
sponsors’ costs of providing coverage, or both.
 OPEB implications:
o If permissible to deposit money in OPEB trust and count as employer
contribution, will increase assets and reduce unfunded liability dollar for
dollar.
o If money was used to lower retiree premiums or improve benefits, must
recognize that income stream will be temporary when projecting long
term benefit costs and retiree premiums.
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“Cadillac” Excise Tax
 Scheduled to go into effect in 2018.
 Beginning in 2018, a plan with annual value of more than
$10,200 for an individual and $27,500 for a family is subject
to a 40% excise tax. For retirees and workers in high-risk
professions amounts are $11,850 and $30,950.
 Indexed by CPI-U starting in 2020.
 These amounts include medical, prescription drugs,
administrative fees and contributions to a flexible spending,
health reimbursement of health savings account. Stand-alone
vision and dental plans are not included.
 Applies to retiree-only plans.
 Questions about calculation such as aggregating pre-65 with
over-65 and low cost plans with high cost plans.
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Plan Design Changes
 Coverage of dependent children to age 26.
 Benefit mandates:
o Removal of lifetime and annual limits on essential health
services.
o Cover preventive services in network with no cost sharing.
o Retiree-only plans exempt from benefit mandates, but
many employer-sponsored retiree plans blend pre-65
retirees with actives.
 OPEB implications:
o Cost of plan design changes estimated and baseline
claims costs are adjusted. Healthcare trend and morbidity
factors applied to adjusted baseline claims costs to
calculate liabilities.
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Individual Mandate and Health
Insurance Exchanges
 Exchanges will provide a “qualified health plan” that covers
essential benefits.
 Scheduled to begin in 2014.
 Also scheduled to begin in 2014, requirement to maintain
minimum essential coverage.
 Retiree health plan implications:
o Taxpaying retirees will not be able to go without coverage
without paying a penalty. May increase participation in
retiree health plans.
o Pre-65 retirees may have affordable options through the
health exchanges and decline coverage in retiree health
plan.
o With both pre-65 and Medicare eligible retirees able to
purchase individual insurance at affordable rates, retiree
health plan may consider switching to flat dollar benefits
with our without indexing. More stable OPEB liabilities.
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Changes to Medicare and/or
Medicare Advantage Plans
 Health care reform changes are intended to:
o Close the gap between CMS payments for traditional
Medicare and CMS average payments for Medicare
Advantage plans.
o Reward high quality plans with cash bonuses (five-star
government rating system).
o Strengthen protections for Medicare Advantage plan
beneficiaries.
 Medicare Advantage plans will be required to maintain a
medical-loss ratio of 85%, limiting administrative fees and
profits.
 Accountable care organizations (ACO) in Medicare are
intended to lower costs.
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Changes to Medicare and/or
Medicare Advantage Plans
 Debt reduction: Joint Committee of Congress could propose
cuts to Medicare. Actual outcome is unknown but proposals
include:
o Raising age of eligibility from 65 to 67
o Combining Parts A and B deductibles into single
deductible.
o Additional means testing.
o Eliminating first dollar Medigap coverage.
o Shifting dual eligibles to Medicaid.
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Conclusion
 The impact of many changes due to health care reform are still
unknown.
 Proposals are intended to reduce health care costs. Will any aspects
help provide the “something” needed to bring health trend down to
our assumed ultimate level?
 Will drastic plan design changes be needed to avoid the “Cadillac”
excise tax?
 From an OPEB perspective, we are concerned with both future
costs and behavior patterns. For example, if the Medicare age were
raised to 67, how would that impact retirement patterns? If
affordable health insurance exchanges become reality, will early
retirees opt for them rather that the employer sponsored plan? Will
this cause adverse selection for your plan?
 Current OPEB strategy is to value plan changes as they are
implemented, consider potential ways to maximize cost savings
(such as Part D instead of RDS) and continue to evaluate the
employers role in providing retiree health care.
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