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GASB Retiree Life & Health Valuations and Medicare Reform. Implications for Employers, Employees & Retirees. SOUTHERN WESTCHESTER SCHOOL BUSINESS OFFICIALS November 4, 2005. Agenda. GASB 45 overview Solutions to reduce GASB 45 liabilities Coverage Plans and Impact on GASB 45

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GASB Retiree Life & Health Valuations and Medicare Reform

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gasb retiree life health valuations and medicare reform

GASB Retiree Life & Health Valuations and Medicare Reform

Implications for Employers, Employees & Retirees



November 4, 2005

  • GASB 45 overview
  • Solutions to reduce GASB 45 liabilities
  • Coverage Plans and Impact on GASB 45
    • Current Medicare program and plans
    • New Medicare reform and plans
    • Other Employee Benefits
what is gasb 45
What is GASB 45?
  • Government Accounting Standards Board issued Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions
    • GASB 43 applies to the plan itself
    • GASB 45 applies to the plan sponsor’s financial statements
  • Requires public agencies, including school districts and county offices of education (COE), to report their costs and obligations for post-employment healthcare and other post-employment benefits (called “OPEBs”)
  • Reporting - Similar to pensions
    • GASB 25 – Plan; GASB 27 – Employer
  • Recognized as a current cost during the working years of an employee (similar to pension) rather than after they retire.
retiree health life valuations
Retiree Health & Life Valuations
  • Employers FAS 106
  • Multi-Employers SOP 92-6
  • Municipalities GASB 45
impact on school districts county offices
Impact on School Districts & County Offices
  • Identify and disclose OPEBs as an expense and liability on their financial statements for the first time.
  • This means each district or county office will have to evaluate whether they have an OPEB liability
  • Need to have an actuarial valuation done to determine the amount of the unfunded liability for their financial statements.
  • Each affected district and county office will have to address how best to manage this liability for the future.
key financial data
Key Financial Data
  • Annual OPEB Costs (annual expense)
  • Net OPEB Obligation (balance sheet liability)
  • Actuarial Liability
  • Funding Status
  • Unfunded liabilities
    • May impact bond ratings
annual opeb costs aoc
Annual OPEB Costs (AOC)
  • Employer’s Expense
  • Annual Required Contributions (ARC)
    • Normal Cost: Actuarial valuation
    • Amortization of Unfunded Actuarial Accrued Liability (30 years)
    • Amortization of gain/loss and plan changes depending on plan methods
  • Plan Adjustments
    • Contributions going up
    • ARC going down
what is arc
What is ARC?
  • Annual Required Contribution of the employer (ARC).
  • Used to determine the expense and liability values that appear on the employer's financial statements for the purposes of GASB 45.
  • This does not refer to actual contribution requirements, but to employer's accrual expense.
result of gasb 45
Result of GASB 45
  • Clients to recognize costs for OPEB when employee services are rendered (accrual accounting)
    • OPEB is part of employees’ compensation
  • Client under pressure to fund the obligation in advance rather than on the prior “pay as you go” basis.
  • Failure to pre-fund the obligation may impact:
    • Future borrowing costs
    • Credit ratings
    • Overall financial health of organization
    • “Perceived” financial health of organization
  • Most companies do not pre-fund liability (public or private)
implementation dates
Implementation Dates
  • Depending on the district or county office size, the compliance dates for GASB 45 are as follows:
    • 2007-08 fiscal year: Districts/COEs with total revenue of $100 million or more must comply in the fiscal year after December 15, 2006.
    • 2008–09 fiscal year: Districts/COEs with annual revenue between $10 million and $100 million must comply in the fiscal year after December 15, 2007.
    • 2009–10 fiscal year: Districts/COEs with annual revenue less than $10 million must comply in the fiscal year after December 15, 2008.
  • Figures based on 1999 fiscal year.
  • Frequency:
    • 200+ members (every 2 years)
    • Less than 200 members (every 3 years)
difference between gasb and pay as you go
Difference between GASB and Pay-As-You-Go
  • GASB – Level to gradual growth over time since accruing future costs today
  • Pay-As-You-Go – Increases as population of retirees increase over time
  • Impact
    • Pay-As-You-Go: Manage on a year by year basis
    • GASB: Reflect future benefit costs now resulting in potential reduction in retiree benefits to be offered
      • Accrued Liabilites – 6 to 20 times current annual costs
      • Accrual Expense – 1.5 to 3 times current annual costs
opeb what is included
OPEB – What is Included?
  • Medical
  • Dental
  • Vision
  • Hearing
  • Prescription drugs
  • Life insurance
  • Long-term care
  • Long-term disability
  • Death benefits
  • Other Benefits (e.g., Group Legal)
necessary data to complete valuation
Necessary Data to Complete Valuation
  • Summary of Plan Offerings
  • Census Information
  • Plan Costs
  • Actuarial Assumptions
summary of plan offerings
Summary of Plan Offerings
  • Multiple Plan Designs
    • Current Plan
    • Legacy Plans or variations based on hire dates/class
  • Coverage Groups
    • Retirees – Pre 65 & Post 65
    • Covered Dependents
  • Coordination with Medicare
  • Contribution Rates
    • Flat Amount
    • Fixed %
    • Vary by class, date of hire, employee vs dependents
census information
Census Information
  • Date of Birth
  • Date of Hire
  • Gender
  • Status (Active, Retired, Terminated)
  • Benefit Election
  • Coverage Tier (Single, Dependents, etc.)
  • Salary
  • Benefit Amount (e.g., Life Insurance Face Amount)
  • Class
  • Contribution Rates
plan costs
Plan Costs
  • Fully Insured Benefits
    • Current Premium Costs
    • Historical Premium Costs
  • Self-Funded Benefits
    • Current Admin Fees – TPA, PPO, UR
    • Claim Costs – Current & Historical
    • Stop Loss Insurance – Specific & Aggregate
  • Variations by Class & Plan
  • Pre-65 vs Post-65
  • Contribution Rates
actuarial assumptions
Actuarial Assumptions
  • Benefit costs – Pre 65 vs Post 65
  • Healthcare cost trend rate
  • Interest discount rate
  • Retirement rates
  • Turnover rates
  • Disability rates
  • Mortality rates
  • Aging Assumptions (Age/Sex Factors)
  • Asset return on investments (if funded)
  • Salary increases (life insurance)
  • Plan Participation %
  • Actuarial cost methods
benefit costs
Benefit Costs
  • Baseline calculations drives financial results
    • Pre-65 vs Post-65
  • Critical to negotiate favorable cost structure
    • Reduction in cost has magnified long term savings (lowers liability and future accruals)
    • Impacts collective bargaining negotiations
      • Future active and retiree benefits
    • Favorable impact to community
benefit costs continued
Benefit Costs (Continued)
  • Key Negotiation Factors
    • Medical inflation
    • Reserve completion factors
    • Insurance company risk charges (profit margins)
    • Insurance company administrative expense loads
    • Credibility factors
    • Values for plan changes
    • Other factors - Intangibles
challenges in valuation process
Challenges in Valuation Process
  • Quality of Data
  • Impact of Current Experience
  • Limitations in collective bargaining flexibility
  • Fully insured vs. Self-funded
implications for current employees
Implications for Current Employees
  • Increases expense and liabilities to be recognized.
  • Requires additional pressure to reduce costs of employee benefits.
    • Actives
    • Retirees
  • Impacts Budget Process
  • Impacts Collective Bargaining
what makes liabilities increase
What makes liabilities increase?
  • Increase in health care costs and inflation (trend)
  • Reduction in discount interest rates
  • More early retirements
  • Lower turnover (non-vested)
  • Mortality improvements
strategies to reduce liability
Strategies to Reduce Liability
  • Lower current medical costs
    • Managed care plans
    • Consumer Driven Health Plans
    • Mandate certain benefit requirements (mandatory mail order prescription drugs and generics)
    • Reduce benefit offerings
    • Terminate benefit coverages
  • Mandate Medicare Part B participation
  • Change future retiree benefits
    • Tighten eligibility
  • Increase employee contributions
    • Raise contribution rates
    • Implement dollar or inflation caps (limit future trend increases)
other solutions
Other Solutions
  • Define contribution strategy
    • Cap employer subsidy
    • Give employees money to buy their own benefits
  • Medicare Part D will shave some costs for post-65 retiree population
    • Seamless administration will be critical for success
  • Retiree buyouts (selling off liabilities)
  • Be Proactive
    • Initiated discussions now with various departments
    • Discussions with collectively bargained personnel
    • Evaluate various scenarios to identify opportunities
medicare parts
Medicare “Parts”
  • Part A
    • Include: Hospital coverage, skilled nursing
    • Exclude: Custodial, long term care
    • Individual Deductible of $952 first 60 days (2006)
    • Free to most over 65
  • Part B
    • Physician, ambulance, outpatient therapy and other professional services
    • Deductible + 80/20 coinsurance
    • Deductible: $124 (2006)
    • Monthly premium $88.50 (2006)
  • Part C
    • Medicare + Choice
    • Now re-named Medicare Advantage (MA)
    • Private plans made available in lieu of Parts A & B
  • Part D
    • New Prescription Drug plan
medigap plans
Medigap Plans
  • Secondary Payment Plans after Medicare (must have Medicare)
  • “Medigap” = Good housekeeping label
  • Labeled Plans A through J and new K and L
  • Provided by Insurance Companies
  • Standard features – all carriers, generally all states
  • Many provisions make little sense
    • Reimburse enrollee for Medicare deductibles and coinsurance
    • Limited or no coverage for Rx
medicare managed care part c
Medicare Managed Care (Part C)
  • Exchange entitlement to Parts A and B for opportunity to enroll in private plan
  • Government pays private plan the value of the Medicare coverage (AAPCC)
  • Restricted networks (similar to Commercial HMOs and PPOs)
  • Offer increased benefits
    • Dental
    • Rx (e.g., generic coverage, discount cards)
medicare reform
Medicare Reform
  • The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) adds prescription drug coverage as of January 1, 2006.
  • Available to those eligible for Medicare benefits due to age, disability or end-stage renal disease.
  • Provides that employers who continue prescription drug coverage for retirees who would otherwise be eligible for Medicare drug benefits can receive a tax-free subsidy.
prescription drug program medicare part d
Prescription Drug Program – Medicare Part D
  • Voluntary Drug Benefit in 2006+
    • Stand-alone benefit, for a premium (compete with Medicare Advantage)
    • Provided through private plans
    • Enrollment begins 11/2005
    • “Standard” plan or actuarially equivalent plan
    • Catastrophic coverage, with minimal benefits for those with lower costs
    • Subsidies to employers who provide coverage
prescription drug program medicare part d continued
Prescription Drug Program – Medicare Part D (continued)
  • Prescription Drug Plan Design
    • $250 deductible
    • Medicare covers 75% of cost up to $2,250
    • Medicare covers 0% from $2,250 to $5,100
    • Medicare covers 95% of costs above $5,100
    • Low income subsidies
      • Waive premiums/deductibles & increase benefits for low income patients
      • Medicare will be primary payer (over Medicaid)
part d illustrative cost sharing
Part D -- Illustrative Cost Sharing

Retiree also pays $420 Annual Premium

Overall reimbursement

Is about 50% of cost

impact of medicare reform on these employers
Impact of Medicare Reform on These Employers
  • Employers maintaining Rx plans get tax-free subsidies of 28% of gross drug costs between $250 and $5,000 (indexed)
    • Worth perhaps $500 (cash) per year if programs are kept in place
    • Reflect present values in FAS 106 (or GASB 45) valuations
    • Larger savings if plans are dropped
  • Requirements for subsidy
    • Plan must be at least actuarially equivalent to the Medicare Rx plan
    • Provide actuarial certification
    • Maintain records, disclose as required
  • Plan redesign may be needed
    • Meet minimum requirements for subsidy
    • Reduce or eliminate coverage
how the subsidy will operate
How the Subsidy Will Operate
  • A cash credit to the Employer – tax-free
  • Based on the amount of claims underlying the benefits provided
  • 28% of the amounts between $250 and $5,000 per person per year.
  • Estimate subsidy and actuarial equivalence:
    • Model Rx costs by person, projecting costs to 2006
    • Use both current employer design, and Medicare design
planning issues for employers with retiree plans
Planning Issues for Employers with Retiree Plans
  • Should an Employer keep a plan or not?
  • A question of potential savings vs. retiree reaction
    • Subsidy estimated as $400 to $500 per person (cash savings)
    • Total elimination could be $1,600 to $2,200 per person (cash)
  • FAS106 & GASB 45 expense and obligation are also reduced
  • Alternative strategies:
    • Eliminate Rx coverage, but pay the Part D premium (projected to be $420 in 2006, but increasing by drug trend).
    • Encourages members to enroll in Part D, but benefit levels will not be the same as under the Employer Plan.
retiree response
Retiree Response
  • Retirees with employer coverage and/or low drug bills may not want to buy in to Part D
    • Potentially difficult choice
    • Premiums are substantial for low risk individuals: breakeven point is at $810 of drug expense – in 2006. Higher in future years.
  • Those opting out will be taking a risk, as they may not be able to enroll at will
  • Contributions likely to be a driver
    • If Employer plan costs less than Medicare, retirees likely to stay with Employer
    • High cost Employer plan may push retirees to Medicare
impact on medigap policies
Impact on Medigap Policies
  • Recognition that current plans encourage utilization
  • NAIC to be asked to develop new plan standards to recognize changed conditions and need for cost controls
  • New ground rules effective 1/1/2006
    • Prohibits sale or renewal of Medigap with Rx coverage
    • But, those who decline Part D may renew such plans
    • Current Plans H, I & J to be modified to exclude drugs and offered to new enrollees
  • Two new plans
    • 50% and 25% coinsurance, and OOP limits
    • No coverage of Part B deductibles
other medicare reforms
Other Medicare Reforms
  • Medicare to provide:
    • Cover preventative screenings
    • Pay for Medication Therapy Management services, which can be administered by a pharmacist
    • Cover Chronic Care Improvement programs for patients with high healthcare costs or multiple chronic disease states
  • Standards for Electronic Prescribing to be set (compliance required by 2008?)
resources for information websites to know
Resources for Information“Websites to Know”
  • Medicare -
  • Centers for Medicare & Medicaid Services (CMS) –
  • American Association of Retired Persons (AARP) -
  • State Specific
    • New York: Health Insurance Information, Counseling & Assistance Program-
  • Many other resources
thank you
Thank you

Michael L. Frank, ASA, MAAA, FCA

President & Actuary

Aquarius Capital

Phone: (914) 933-0063


Donald J. Rusconi II, CFA

Vice President & CFO

Aquarius Capital

Phone: (203) 458-1495