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Medicare Prescription Drug Program.ppt

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					    GASB Retiree Life &
    Health Valuations and
     Medicare Reform
              Implications for Employers,
                Employees & Retirees

                               SOUTHERN WESTCHESTER
                              SCHOOL BUSINESS OFFICIALS

AQUARIUS CAPITAL                   November 4, 2005
                                                          1
                    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 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.

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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)
    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

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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.
         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)

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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
                                                      Case #1            Case #2           Case #3

 1   Actual Benefit Payments *                         $ 120,000       $ 129,621,230     $ 11,386,000

 2   Accrued Expense                                      435,000        191,157,171       15,828,700

 3   Ratio of Expense to Benefits: (2) / (1)                     3.6               1.5               1.4

 4   Projected Liability                                3,933,000      2,384,014,000      151,255,000

 5   Ratio of Liability to Benefits: (4) / (1)               32.8               18.4             13.3

 6   Ave Exp. Future Working Lifetime (Yrs)                  11.0               11.4             16.3

 7   Number of Active Employees                                  150           6,309            1,550

 8   Number of Retirees                                           27          11,121            3,242

     *Note: Benefit Payments are net of Employee Contributions


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




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   Part D -- Illustrative Cost Sharing
           $7,500


                                            Gov't Pays 95%
                                            after $5100;
                                            Retiree pays 5%

           $5,100
                                            "Doughnut Hole"
                                            Retiree pays all
                                            between $2250 and
                                            $5100



                                                Gov't Pays 75%
           $2,250
                                                Between $250 and
                                                $2250;
                                                Retiree pays 25%


                                                Retiree pays $250
           $ 250                                deductible

                            Retiree also pays
    Overall reimbursement
                              $420 Annual
    Is about 50% of cost
                                Premium
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Impact on Individual Beneficiaries -- 2006

 Annual Rx      Government Beneficiary Beneficiary         Total Bene.     Beneficiary
   Costs         Payment   Out-of-Pocket Premium              Cost        Share of Costs

 $       250    $        -     $    250.00    $   420.00   $    670.00        268%            High
 $       500    $    187.50    $    312.50    $   420.00   $    732.50        147%            Cost
$         810   $     420.00 $      390.00    $   420.00 $       810.00       100%         Break-even
$       1,500   $     937.50 $      562.50    $   420.00 $       982.50        66%
$       2,250   $   1,500.00 $      750.00    $   420.00 $     1,170.00        52%
 $      3,000   $   1,500.00   $   1,500.00   $   420.00 $     1,920.00       64%          No added
 $      4,000   $   1,500.00   $   2,500.00   $   420.00 $     2,920.00       73%          Coverage
 $      5,100   $   1,500.00   $   3,600.00   $   420.00 $     4,020.00       79%
 $      7,500   $   3,780.00   $   3,720.00   $   420.00 $     4,140.00       55%
$      10,000   $   6,155.00   $   3,845.00   $   420.00 $     4,265.00       43%          Meaningful
$      15,000   $ 10,905.00    $   4,095.00   $   420.00 $     4,515.00       30%          Protection
$      25,000   $ 20,405.00    $   4,595.00   $   420.00 $     5,015.00       20%




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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 Information
               “Websites 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@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
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