Request for Proposals Actuarial Consulting Services

April 13, 2010

Retiree Health Care Costs and OPEB: What to keep an eye on?

November 9, 2011Alisa Bennett, FSA, EA, FCA, MAAA

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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 Medicare-eligible. 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 long-term 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. 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.

2. 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 pre-Medicare 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

Healthcare ReformElimination of Medicare Part D Doughnut Hole

Brand Drugs

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YearManufacturer

DiscountGovernment

Subsidy Retiree Portion

2010 0 0100% 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%

Healthcare ReformElimination of Medicare Part D Doughnut Hole

Generic Drugs

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YearGovernment

Subsidy Retiree Portion

2010 0100% 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%

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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 Medicare-eligible 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 Medicare-eligible.

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 67o 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.