GASB Retiree Life & Health Valuations and Medicare Reform - PowerPoint PPT Presentation

GASB Retiree Life & Health Valuations and Medicare Reform

Implications for Employers, Employees & Retirees

SOUTHERN WESTCHESTER

SCHOOL BUSINESS OFFICIALS

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

• 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.

• Employers FAS 106
• Multi-Employers SOP 92-6
• Municipalities GASB 45

• 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.

• Annual OPEB Costs (annual expense)
• Net OPEB Obligation (balance sheet liability)
• Actuarial Liability
• Funding Status
• Unfunded liabilities
• May impact bond ratings

• 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

• 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.

• 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)

• 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)

• 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

• Medical
• Dental
• Vision
• Hearing
• Prescription drugs
• Life insurance
• Long-term care
• Long-term disability
• Death benefits
• Other Benefits (e.g., Group Legal)

• Summary of Plan Offerings
• Census Information
• Plan Costs
• Actuarial Assumptions

• 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

• 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

• 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

• 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

• 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

• 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

• Quality of Data
• Impact of Current Experience
• Limitations in collective bargaining flexibility
• Fully insured vs. Self-funded

• Increases expense and liabilities to be recognized.
• Requires additional pressure to reduce costs of employee benefits.
• Actives
• Retirees
• Impacts Budget Process
• Impacts Collective Bargaining

• Increase in health care costs and inflation (trend)
• Reduction in discount interest rates
• More early retirements
• Lower turnover (non-vested)
• Mortality improvements

• 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)

• 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

• 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

• 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

• 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)

• 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.

• 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 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)

Retiree also pays $420 Annual Premium

Overall reimbursement

Is about 50% of cost

• 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

• 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

• 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.

• 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

• 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

• 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?)

• Medicare - www.medicare.gov
• Centers for Medicare & Medicaid Services (CMS) – www.cms.gov
• American Association of Retired Persons (AARP) - www.aarp.org
• State Specific
• New York: Health Insurance Information, Counseling & Assistance Program- www.hiicap.state.ny.us/medicare/
• Many other resources

Michael L. Frank, ASA, MAAA, FCA

President & Actuary

Aquarius Capital

Phone: (914) 933-0063

E-Mail: michael.frank@aquariuscapital.com

Donald J. Rusconi II, CFA

Vice President & CFO

Aquarius Capital

Phone: (203) 458-1495

E-Mail: donald.rusconi@aquariuscapital.com

Website: www.aquariuscapital.com