GASB Retiree Life

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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
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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

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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 sponsors 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.

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Retiree Health Life Valuations

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

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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.

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Key Financial Data

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

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Annual OPEB Costs (AOC)

• Employers 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

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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.

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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)

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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.
• 200809 fiscal year Districts/COEs with annual
  revenue between 10 million and 100 million must
  comply in the fiscal year after December 15,
  2007.
• 200910 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)

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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

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Sample Calculations
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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)

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Necessary Data to Complete Valuation

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

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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

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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

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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

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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

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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

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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

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Challenges in Valuation Process

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

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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

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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

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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)

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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

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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

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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

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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)

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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.

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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

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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)

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• Okayso how do we assess the cost of all these
  benefits?

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Part D -- Illustrative Cost Sharing
Retiree also pays 420 Annual Premium
Overall reimbursement Is about 50 of cost
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Impact on Individual Beneficiaries -- 2006
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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

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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

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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.

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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

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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

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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?)

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Resources for InformationWebsites to Know

• 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

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• Open Discussion

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Thank you
Michael L. Frank, ASA, MAAA, FCA President
Actuary Aquarius Capital Phone (914)
933-0063 E-Mail michael.frank_at_aquariuscapital.co
m Donald J. Rusconi II, CFA Vice President
CFO Aquarius Capital Phone (203)
458-1495 E-Mail donald.rusconi_at_aquariuscapital.c
om Website www.aquariuscapital.com