retiree medical: time to evaluate your approach - towers watson

© 2011 Towers Watson. All rights reserved.

Retiree Medical: Time to Evaluate Your Approach

September 27, 2011

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

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Today’s expertsJane Jensen is a senior health care consultant in Towers Watson's Health andGroup Benefits and is based in Denver. She has over 25 years of experience in health and welfare employee benefits design and financing and is the lead actuary on health reform issues.

Stephen Parahus is a senior consulting actuary in Towers Watson’s Health and Group Benefits practice, based in New York. He specializes in the design, financial management, and valuation of health and welfare plans and serves as a key resource on issues of retiree health care strategy, design, and delivery.

Dave Osterndorf is the chief actuary of Towers Watson’s Global Health and Group Benefits line of business located in the firm’s Milwaukee office. He also serves as the firm’s issue leader and national resource to many Towers Watson clients in the area of postretirement health care.


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Our discussion

Current landscape for retiree medical New solutions and what some employers are doing now Action steps for you Questions and answers


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Current Landscape for Retiree MedicalHow we got here and why it will change


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Why did employers provide retiree medical plans in the first place?

Initially, it didn’t seem to cost much

Employers could purchase or provide coverage more efficiently than the retiree

Employers provided the only access to guaranteed coverage for early retirees in poor or even moderate health

The presence of retiree medical benefits helped employees retirewhen they wanted to — and when the company wanted them to


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A variety of factors are motivating employers to consider changes to their retiree medical plans

Status quo is not

sustainable for most

employers

Increasing tax concerns for employersEffective insurance options

Cost and volatility Reform enhancements in Part D prescription coverage

Status quo is not sustainable

for most employers


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Plan sponsorship and financial subsidy are becoming independent decisions

Employer Subsidization

Full

spon

sors

hip

Hyb

rid a

ppro

ach

Non

e

Uncapped subsidy Capped subsidy Unsubsidized

Account approach with balance based

on traditional funding formula

Account approach with capped subsidy

Full exit — no sponsorship, subsidy, or

enrollment support

Offer government designed and

regulated insured plans

Dual choice account approach

(employer plans, individual options)

Facilitated enrollment in individual options

Traditional employer-sponsored plans

Traditional plan sponsorship

with capped subsidy

Access-only employer plan (retiree-pay-all)

EmployerSponsorship

Most common:Legacy Plans

Today

In 5 years


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Dramatic increases in retiree contributions

Maximizing cost-effectiveness of plan design is a retiree relations issue

Costly benefit to the employer becomes dissatisfying to the retiree

Source: 2011 Towers Watson/ISCEBS Retiree Health Survey

We used caps to control costs — but that created its own problems, making the strategy unsustainable for many employers

Reform may provide assistance for both Medicare and pre-Medicare retirees

62%

15%

23%Costs under

the cap

Varies (by plan,coverage, group)

Costs exceed cap


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New SolutionsA fork in the road presents new options


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Choices and decisions for employers

NO

Continue plan sponsorship?

YES

Considerations for Continuing Plan Sponsorship► Retiree Drug Subsidy

(RDS)

► Employer Group Waiver Plan (EGWP)

Marketplace Opportunities Without Plan Sponsorship► Individual insurance

options for Medicare-eligible retirees

► Medicare Coordinators

► Health insurance exchanges

Different approaches may be appropriate for different cohorts of your retiree medical population


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There is a rapid shift taking place in the post-65 environment

The Employer-Sponsored Plan World

The Medicare/Individual Coverage World

Fewer than 6 million individuals covered under employer-sponsored retiree medical

Pool is shrinking Significant employer

administration Suboptimal value for retirees given

reform enhancements for private plans

45 million Medicare participants, 39 million without employer coverage

11 million in Medicare Advantage Market “reformed” with universal

coverage, federal subsidies and private insurance market to complement or replace Medicare

Enhanced Part D value under HCR


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Marketplace opportunities without plan sponsorship —Medicare retirees

NO


YES

The Opportunity Large number of high-quality,

affordable options available today — no need to wait to 2014

Subsidizing Premium Costs Employers may continue to provide

a subsidy using formulas the same as or equivalent to those currently in place

Administration and Enrollment Medicare Coordinators


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Discontinuing plan sponsorship may result in a win for the company and the retiree

Financials are different in the individual market due to higher government subsidies and community rating

Retiree out-of-pocket, premiums, and contributions

Employer

Traditional Medicare

Retiree out-of-pocket, premiums, and contributions

Employer

Traditional Medicare, Part D subsidies and community rating savings


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Medicare Coordinators make it easy for retirees to transition

Plans

MedigapMedicare Coordinator

Contracts with/provides preferred plans

Supports retiree communications and enrollment

Manages employer subsidy via premium reimbursement account (RRA)

Retirees

Evaluate preferred options

Elect coverage with premiums offset by employer subsidy (if applicable)

Work with Medicare Coordinator or plans to resolve issues

Part D Rx

Medicare Advantage

Employer/Plan Sponsor

Census Funding (if applicable)

Limited interaction


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Towers Watson provides transition services to make it easy for employers with already defined offerings

No additional cost to you or your retirees Personalized retiree enrollment and plan selection services Private exchange choice and expertise

Single-Carrier Model via UnitedHealthcare — Group-like transition experience with post 65 group and individual products in addition to pre 65 offerings

Multi-Carrier Model via Extend Health — Provides “turn-key exit” for post 65 retirees, no group or pre 65 products

Exchange Single Or Multi-carrier

Communications

Subsidy

Enroll Support

Product Menu

$Employer Group Retiree Health Care Program

PersonalizedIndividual

Retiree Health Care Solutions

AnalysisOpportunity analysis, program design and

implementation strategy

ImplementationCommunication strategy,

retiree education and enrollment support

Ongoing OversightOngoing oversight enrollment

of age-ins and subsidy administration

Step 1 Step 2 Step 3

Retiree Experience

Employer Support Services


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26%

65% 9%

30%

65% 5%

Findings from an organization exiting plan sponsorship

Background

Large and complex retiree population

Cost cap for many retirees and costs far exceed the cap

Challenges

Current plan costly to the company, but of limited and eroding value to retirees

Employees do not value the current plan — limited choice, limited plan payments except for prescriptions

Loss of actuarial equivalence for RDS is imminent

Company objective

Provide more meaningful, higher-value options to post-65 retirees

The company’s share of plan cost is already small …

… and will get even smaller in the next five years

Medicare Employer

Retiree

Medicare Employer

Retiree


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Challenge: The cap

While the current cap is modest, resulting in high participant contributions, the company’s actual net cost is less than the cap

In converting to an RRA to offset premiums for individual coverage, several adjustments were required

Plan election

RRA

RDS tax gain

CurrentCap

RDS

…net cost of subsidy

…net of RDS

…net of RDS

tax gain

After adjustments, RRA could be 30% – 50% lower than the current cap

Cost neutral


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Solution: Individual insurance with a Medicare Coordinator

UHC Connector Model with TW Retiree Health Collaborative Manageable choice with UHC Appeal of AARP brand

Tips for a successful conversion Thorough, thoughtful process Clear and simple communications to retirees Retirees with special needs Roles and accountability from all parties Rollout timing

Plan Elected % of TotalMedicare Supplement 82%Medicare Part D 80%Medicare Advantage 11%Did Not Elect Coverage 6%

Most retirees elected coverage under a Medicare Supplement

Plan and a Part D plan


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Some employers will want or need to continue sponsorship for Medicare retirees

NO

Continue post-65 plan

sponsorship?

YES

The OpportunityFROM: the Retiree Drug Subsidy (RDS) program: Is losing tax-favored status Doesn’t access part D

improvements or pharma industry discounts

TO: “EGWPs” — Employer Group Waiver Program plans are: Employer-sponsored “private label”

Part D plans Receive higher, and growing, levels

of federal funding and pharmadiscounts


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Employers that plan to offer Part D EGWP

Source: 2011 Towers Watson/ISCEBS Retiree Health Survey.

EGWPs are a viable alternative for employers today

36% of respondents have either already moved to an EGWP or will consider it in the next two years

Considering action in the next two years

Took action in 2011 or before 12%

24%


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Show me the money: RDS vs. EGWP vs. Part D

Requires design that results in participant exceeding TrOOP threshold, adjusted for risk factor of employer retiree population.

Health Care

Reform

Pre-Reform Post-Reform

RDS

Rein-surance*

DirectPay from CMS**RDS

EGWP (Rich Design)

Standard Part D

RDSEGWP (Rich Design)

Standard Part D

RDS

TaxBenefit

DirectPay from

CMS

$1,100

$600

$750

$500

Rein-surance*

DirectPay from CMS**

DirectPay from

CMS

PharmaDiscount

$1,275

PharmaDiscount

DonutHole Fill

$1,525

DonutHole Fill

$500

$250

$700

$600

$700

$400

$200

$300

$250

$225

$400

Rein-surance*

$225


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Can EGWPs provide the same benefits as an employer’s existing RDS plan?

Yes Employer can design plan

features in a self-insured EGWP

Available structures mean that formularies can be matched or expanded

Non-Part D drugs can be covered in a wrap arrangement

Group enrollment, rather than individual enrollment, is acceptable

No CMS rules on part D plans apply

— excluding some employer dispensing rules and limitations

CMS can review EGWP communications

“IRRMA” surcharges apply to high income retirees — which can be reimbursed but not suppressed

EGWP implementations are like implementing new PBMs —including new ID cards


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Implementing EGWP — One employer’s story

Segmentation of the retiree population is very common —employers need to understand potential interrelationships

Segment of Retiree Population SolutionGroup with clear company reservation of rights

Move retirees to individual market with fixed dollar stipend to purchase coverage

Union retirees — active union population

Negotiate similar stipend approach as non-union retirees with adjusted amounts

Union retirees — acquired group Due to unclear ability to modify benefits, provide post 65 Rx benefits under EGWP + Wrap design


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Implementing EGWP — How they made it happen

The steps were straightforward:1. Contracted with incumbent PBM as government contractor for EGWP + wrap design 2. Determined formulary disruption and remedy, treatment of non-part D drugs, impact of

eliminating mandatory generic requirement3. Estimated financial impact of moving to EGWP from RDS and projected liability impact4. Created communications to inform retirees5. Implemented new program 1/1/11

…but that didn’t mean it was easy — the company: Found implementing an EGWP should be treated like a new plan implementation Discovered that CMS rules aren’t always clear Determined that the financial impact is a complex calculation Accelerated plans for other groups because of the potential failure of RDS equivalence

testing due to the EGWP shift for the union group


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Marketplace opportunities for pre-Medicare retirees

The opportunityTax savings opportunities today with marketplace of affordable exchange-based options in 2014 Federal tax reduction today Federal subsidies (for some) in 2014

Subsidizing premium costsEmployers shift from subsidizing plans to provide money to buy coverage

Administration and enrollmentFuture options currently under development

NO


YES


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Pre-65 coverage strategy is also fundamentally changing

Nearly 42% of employers will consider terminating plan sponsorship and encourage pre-Medicare retirees to elect more favorable coverage in the insurance exchanges when they become operable in 2014.

Source: 2011 Towers Watson/ISCEBS Retiree Health Survey


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Pre-65 retirees — new insurance market opportunity may arise

Retiree with $60,000 family income (including investment earnings)

Employer premium contributions Federal subsidy Employee premium contributions Employee cost sharing

This presents tremendous opportunities for rewards redeployment for employers

Exchange underwriting restrictions may require lower premiums for individuals age 55 – 64

$18,500

$10,000

$6,500 $3,400

$5,000

$5,000

Employer Plan Insurance Exchange

$10,000


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While waiting for exchanges, the best Pre-65 approach: Use an HSA/HDHP Solution

Employer funding$7,000

Non-taxable

Retiree out-of-pocket

$1,500

Current Plan

Employer funding$7,000

Retiree premiums $1,500

HDHP Alternative

HSA Maximum annual contribution

$3,050 (plus catch-up after 55) Transfers from 401(k) to HSA

(after age 59½) shift out-of-pocket expenses from tax deferred to tax-free

Total plan cost$8,500

After tax expense $5,000

After tax expense$1,500

Retiree Option

Total plan cost

$6,500

Retiree premiums $3,500

Retiree out-of-pocket

$3,500funded via HSA

Savings to Retiree Assume retiree HSA contribution

$3,500:– At 25% tax rate, retiree saves

$875 Premiums paid are gone; HSA

savings roll over for future use

Total medical cost est. $12,000/person


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Final question: Do you know if your program is creating the desired outcomes?

Have you gone from this?

…and does it fit your desired workforce strategy?

Retirement Income Adequacy

$-

$500

$1,000

$1,500

$2,000

$2,500

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

Retirement Age

Net

Inco

me (

tod

ay's

$)

Needs

Adequate resources at age 60

Retirement Income Adequacy

$-

$500

$1,000

$1,500

$2,000

$2,500

55 56 57 58 59 60 61 62 63 64 65 66

Retirement Age

Net

Inco

me (

tod

ay's

$)

Needs

Adequate resources at age 65

To this?


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What can you do now? Employer action steps


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Recognize what’s changed — and what hasn’t

It didn’t cost much

Employers could purchase coverage more efficiently than the retiree

Employers were the only access to guaranteed coverage for early retirees in poor health

The presence of retiree medical benefits helped employees retirewhen they wanted to — and when the company wanted them to


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Take action with the four E’s

Use a Medicare coordinator to facilitate post-65 retiree exit

Adopt a Part D Employer Group Waiver Plan

1

2

Monitor insurance exchange developments

Promote retiree savings and health care cost awareness

Medicare Retirees: Exit or EGWP

Pre-Medicare Retirees: Education and Exchanges

3

4


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Contact Us

Jane [email protected]

Stephen [email protected]

Dave [email protected]

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