GASB Retiree Life & Health Valuations and Medicare Reform

Presentation Transcript

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

Current Medicare program and plans
New Medicare reform and plans
Other Employee Benefits

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

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

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

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)

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?

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

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

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

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

Sample Calculations

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

Summary of Plan Offerings
Census Information
Plan Costs
Actuarial Assumptions

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

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

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

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

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)

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

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

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?

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

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

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”

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

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)

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

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

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 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)

Okay…so how do we assess the cost of all these benefits?

Part D -- Illustrative Cost Sharing

Retiree also pays $420 Annual Premium

Overall reimbursement

Is about 50% of cost

Impact on Individual Beneficiaries -- 2006

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

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

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

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

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

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