Sn-100 Post-Employment Benefits

Front 1

Benefits for retirees include:

Back 1

 Pensions
 Health, Life, LTC
 Dental, Vision, Hearing
 spousal / dependents’ benefits

Front 2

TYPES OF COORDINATION OF AN EMPLOYER PLAN WITH MEDICARE

Back 2

 Medicare is primary, Er plan is secondary
 M = final Medicare coverage (after ded/coinsurance)
 C = Er plan coverage (in the absence of Medicare)
 C * % = Er plan coverage after ded / coinsurance are applied
 P = Cost of Er plan benefits

Standard COB
P = the lesser of C * % or C – M (usually C - M)

Exclusion method
P = (C – M) * %
 independent of timing of bills

Carveout method
P = (C * %) – M
 P depends on timing of bills

Supplement method
Er plan pays a portion of the amount that Medicare plan does not pay.

Combinations

Front 3

Relative Costs of the Benefits to the ER

Back 3

 Standard COB (P highest)
 Exclusion (P middle)
 Carveout (P lowest)

 Supplement method varies.

Mnemonic: “Co-excavates”

Co ex cavat s
COB carveout supp
exclusion

Front 4

YESTERDAY’S RETIREMENT PLANS

Back 4

 Continuations of active-life plans
 Retirees paid same premiums as actives
 Standard COB
 Easy eligibility for retirement benefits (55 + 5yos)

Front 5

TOMORROW’S RETIREMENT PLANS
Ways for Employers to Control Retirement Plan Costs

Back 5

 increase retirees’ contributions
 Fixed Er contribution (a.o.t. % of costs)
 stricter COB
 eliminate benefits that Medicare covers
 stricter eligibility reqs
 make benefits service-related
 use cost-controls:
 CM, DM, UM, QM
 enroll retirees in an HMO:
 premiums lower
 HMO’s have built-in CM, DM, UM, QM
 use spousal initiatives
 surcharge
 make spouse use his/her own plan
 compensate for deductible leveraging
 Manage prescription drugs (Not as important now, since Medicare will soon cover them)
 Negotate pharmacy discounts and manufacturer rebates
 Drug utilization review
 Formularies
 mail-order pharmacies (cheaper)
 Improve administration.

Front 6

The Effect of the Medicare Modernization Act on Employer Retirement Plan Design

Back 6

 If the employer’s drug plan is actuarially equivalent to Medicare’s:
 The government will reimburse 28% of drug charges between $250 and $5000
 This subsidy is tax-free to the employer.

Front 7

An employer’s options, given the new Medicare Drug Plan, are:

Back 7

For employers whose current plans are richer than Medicare’s New Plan:
 Continue the same coordination method.
Issues:
 Drug prices will vary depending on which competing private plan retirees sign up with under Medicare.
 Drug expenses are small; COB is inefficient to compute
 Use a PBM to simplify the coordination. Er pays the PBM to provide supplemental coverage over Medicare.

For employers whose current plans are weaker than Medicare’s New Plan:
 Improve the plan to equal Medicare’s, in order to get the 28% subsidy.

Front 8

Difficulties in enforcing a retirement plan

Back 8

 grandfathered ee’s
 hard to communicate with retireess
 hard to get them to change physicians
 deductible leveraging
 plan cost trend exceeds underlying trend

Front 9

FUNDING OF RETIREMENT PLANS
(Prefunding vs. Pay-as-you-go)
Advantages of Prefunding (funding)

Back 9

 tax advantages
 allocates costs between generations of ph’s
 interest earned
 FAS 106 costs lower
 makes plan attractive (competitive)
 assets sheltered from corporate raiders
 cashflows more stable

Front 10

Disadvantages of Prefunding

Back 10

 cash not available for other uses (acquisitions)
 Er must borrow cash (cost of capital)
 less choice of investments
 lose flexibility to change plan design
 regulations

Front 11

ACTUARIAL ASSUMPTIONS: HOW THEY DIFFER BETWEEN HEALTH PLAN VALUATIONS and PENSION PLAN VALUATIONS
Health assumptions that are also Pension Plan assumptions

Back 11

 Inflation
 discount rate, long-term ror on assets
 salary increases
 Medicare increases
 Decrements (and why they are more important for Health than for Pension)
 (q) post-retirement death rate
 Health includes COLA
 (w) pre-retirement termination rate
 terminators don’t get health benefits
 (r) retirement rate
 Health has no early-retirement reductions
 (d) disability rate
 Medicare covers some disabilities  affects employer plan cost

Front 12

Health assumptions specific to Health plans (Why Health Valuation is harder than Pension Valuation)

Back 12

 Retiree plan costs
Difficulties in setting cost assumptions:
 actives / retiree costs differ
 costs vary by age
 composite / tiered premiums
 missing claims data
 grandfathering
 estimating admin expenses

Split the cost valuation into classes of retirees:
 Retirees over 65 have lowest plan cost
 Retirees under 65 have highest cost.
 Retirees who are disabled vary

 Use incurred claims as a cost measure.

 Current retiree contributions
 expected increase per year
 variations by class (<65, >65, Disabled)

 Total health care cost trend
 inflation, utilzation, technology, plan benefit changes, demographic changes.
 hospital vs. drugs vs. physician cost trends
 trend should begin at current level, then grade down
 Leveraging

 Medicare Assumptions
 Part A & Part B premium increases, deductible increases, benefit increases
 Gross vs. Net plan cost trend (i.e. with vs. without leveraging)
 ee participation %
 spouses’ plan continuation rate
 dependents’ plan termination rates

Front 13

General Considerations in choosing Assumptions

Back 13

 Assumptions must be consistent
 Health assumptions should match pension plan assumptions.

Front 14

ACTUARIAL FUNDING METHODS FOR HEALTH PLANS

Back 14

 PUC, Entry Age Normal, etc.
 Benefits = f(YOS, salary, plan costs, plan cost trend)
 Divide valuation into <65, >65, Disabled
 …and into Indemnity vs. HMO
 Assume each ee retires at date of first eligibility.
 Could ignore young ee’s (delayed funding eligibility)

Done.

Front 15

Benefits for retirees include:

Back 15

 Pensions
 Health, Life, LTC
 Dental, Vision, Hearing
 spousal / dependents’ benefits

Front 16

TYPES OF COORDINATION OF AN EMPLOYER PLAN WITH MEDICARE

Back 16

 Medicare is primary, Er plan is secondary
 M = final Medicare coverage (after ded/coinsurance)
 C = Er plan coverage (in the absence of Medicare)
 C * % = Er plan coverage after ded / coinsurance are applied
 P = Cost of Er plan benefits

Standard COB
P = the lesser of C * % or C – M (usually C - M)

Exclusion method
P = (C – M) * %
 independent of timing of bills

Carveout method
P = (C * %) – M
 P depends on timing of bills

Supplement method
Er plan pays a portion of the amount that Medicare plan does not pay.

Combinations

Front 17

Relative Costs of the Benefits to the ER

Back 17

 Standard COB (P highest)
 Exclusion (P middle)
 Carveout (P lowest)

 Supplement method varies.

Mnemonic: “Co-excavates”

Co ex cavat s
COB carveout supp
exclusion

Front 18

YESTERDAY’S RETIREMENT PLANS

Back 18

 Continuations of active-life plans
 Retirees paid same premiums as actives
 Standard COB
 Easy eligibility for retirement benefits (55 + 5yos)

Front 19

TOMORROW’S RETIREMENT PLANS
Ways for Employers to Control Retirement Plan Costs

Back 19

 increase retirees’ contributions
 Fixed Er contribution (a.o.t. % of costs)
 stricter COB
 eliminate benefits that Medicare covers
 stricter eligibility reqs
 make benefits service-related
 use cost-controls:
 CM, DM, UM, QM
 enroll retirees in an HMO:
 premiums lower
 HMO’s have built-in CM, DM, UM, QM
 use spousal initiatives
 surcharge
 make spouse use his/her own plan
 compensate for deductible leveraging
 Manage prescription drugs (Not as important now, since Medicare will soon cover them)
 Negotate pharmacy discounts and manufacturer rebates
 Drug utilization review
 Formularies
 mail-order pharmacies (cheaper)
 Improve administration.

Front 20

The Effect of the Medicare Modernization Act on Employer Retirement Plan Design

Back 20

 If the employer’s drug plan is actuarially equivalent to Medicare’s:
 The government will reimburse 28% of drug charges between $250 and $5000
 This subsidy is tax-free to the employer.

Front 21

An employer’s options, given the new Medicare Drug Plan, are:

Back 21

For employers whose current plans are richer than Medicare’s New Plan:
 Continue the same coordination method.
Issues:
 Drug prices will vary depending on which competing private plan retirees sign up with under Medicare.
 Drug expenses are small; COB is inefficient to compute
 Use a PBM to simplify the coordination. Er pays the PBM to provide supplemental coverage over Medicare.

For employers whose current plans are weaker than Medicare’s New Plan:
 Improve the plan to equal Medicare’s, in order to get the 28% subsidy.

Front 22

Difficulties in enforcing a retirement plan

Back 22

 grandfathered ee’s
 hard to communicate with retireess
 hard to get them to change physicians
 deductible leveraging
 plan cost trend exceeds underlying trend

Front 23

FUNDING OF RETIREMENT PLANS
(Prefunding vs. Pay-as-you-go)
Advantages of Prefunding (funding)

Back 23

 tax advantages
 allocates costs between generations of ph’s
 interest earned
 FAS 106 costs lower
 makes plan attractive (competitive)
 assets sheltered from corporate raiders
 cashflows more stable

Front 24

Disadvantages of Prefunding

Back 24

 cash not available for other uses (acquisitions)
 Er must borrow cash (cost of capital)
 less choice of investments
 lose flexibility to change plan design
 regulations

Front 25

ACTUARIAL ASSUMPTIONS: HOW THEY DIFFER BETWEEN HEALTH PLAN VALUATIONS and PENSION PLAN VALUATIONS
Health assumptions that are also Pension Plan assumptions

Back 25

 Inflation
 discount rate, long-term ror on assets
 salary increases
 Medicare increases
 Decrements (and why they are more important for Health than for Pension)
 (q) post-retirement death rate
 Health includes COLA
 (w) pre-retirement termination rate
 terminators don’t get health benefits
 (r) retirement rate
 Health has no early-retirement reductions
 (d) disability rate
 Medicare covers some disabilities  affects employer plan cost

Front 26

Health assumptions specific to Health plans (Why Health Valuation is harder than Pension Valuation)

Back 26

 Retiree plan costs
Difficulties in setting cost assumptions:
 actives / retiree costs differ
 costs vary by age
 composite / tiered premiums
 missing claims data
 grandfathering
 estimating admin expenses

Split the cost valuation into classes of retirees:
 Retirees over 65 have lowest plan cost
 Retirees under 65 have highest cost.
 Retirees who are disabled vary

 Use incurred claims as a cost measure.

 Current retiree contributions
 expected increase per year
 variations by class (<65, >65, Disabled)

 Total health care cost trend
 inflation, utilzation, technology, plan benefit changes, demographic changes.
 hospital vs. drugs vs. physician cost trends
 trend should begin at current level, then grade down
 Leveraging

 Medicare Assumptions
 Part A & Part B premium increases, deductible increases, benefit increases
 Gross vs. Net plan cost trend (i.e. with vs. without leveraging)
 ee participation %
 spouses’ plan continuation rate
 dependents’ plan termination rates

Front 27

General Considerations in choosing Assumptions

Back 27

 Assumptions must be consistent
 Health assumptions should match pension plan assumptions.

Front 28

ACTUARIAL FUNDING METHODS FOR HEALTH PLANS

Back 28

 PUC, Entry Age Normal, etc.
 Benefits = f(YOS, salary, plan costs, plan cost trend)
 Divide valuation into <65, >65, Disabled
 …and into Indemnity vs. HMO
 Assume each ee retires at date of first eligibility.
 Could ignore young ee’s (delayed funding eligibility)

Done.