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Health Coverage as Part of
Retirement Security: Current
Developments
Session 33 PD
Society of Actuaries Annual Meeting
October 28, 2002
Presenters:
Steve Doucette, F.S.A., Hewitt Associates
(steve .doucette@hewitt.com)
Brian Harty, Principal, Argus Consulting
(brian@arguscl.com)
Today’s Discussion
• Background
• Employer Programs
• Insurance Products
• Current/Potential Developments
1
BACKGROUND
Retiree Income Framework
Three Primary Sources
• Social Security
• Employer Sponsored Programs
— Defined Benefit
— Defined Contribution
• Personal Savings
2
Pay Replacement Levels
Career Employee Retiring at Age 62
90.0%
80.0%
70.0%
60.0%
Employee DC
50.0% Employer DC
40.0% DB
Social Security
30.0%
20.0%
10.0%
0.0%
$30,000 $50,000 $100,000 $200,000
Earnings at Retirement
Common benchmark is 70% to 80% pay replacement. With shift in postretirement welfare obligations,
higher pay replacement (e.g., 80% to 100%) may become new standard.
Total Retiree Health Care Costs
$8,000
$100,000
$7,000
$90,000
$6,000 $80,000
$70,000
$5,000
$60,000
Cost
$4,000
Cost
$50,000
$3,000 $40,000
$30,000
$2,000
$20,000
$1,000
$10,000
$0 $0
55 60
60
65
70 65
Age 75 Age at Retirement
80
Age-related annual cost Projected cost over 15 years
3
Number of Medicare Beneficiaries
The number of people Medicare serves will nearly double by 2030.
80 76.8
8.6
70 Disabled & ESRD
Medicare Enrollment (millions)
Elderly 61.0*
60
8.7
50 45.9
39.6* 7.3
40 34.3 5.4
68.2
28.4* 3.3
30
3.0 52.2
20.4
20 38.6
31.0 34.1
25.5
10 20.4
0
1970 1980 1990 2000 2010 2020 2030
Calendar Year
* Numbers may not sum due to rounding.
Source: CMS, Office of the Actuary.
Income Distribution of Medicare Beneficiaries, 2000
Nearly 65 percent of Medicare beneficiaries have annual incomes below $25,000.
$5,000 or less
5%
$40,001 or more
16%
$5,001 - $10,000
20%
$25,001 - $40,000
20%
$10,001 - $15,000
17%
$15,000 - $25,000
22%
Source: CMS, Office of Research, Development, and Information:
Data from the Medicare Current Beneficiary Survey (MCBS) 2000 Access to Care File.
4
Per Capita Out-of-Pocket Expenses for Medicare
Beneficiaries, by Type of Insurance Coverage
$4,500
$4,082
$4,000
$3,428 $3,324
$3,500
Per Capita Dollars
$3,008
$2,862
$3,000 $2,691
$2,406
$2,500 $2,268
$2,094
$1,922 $1,801
$2,000
$1,433
$1,500
$1,000
$500
$0
Medicare FFS Medigap Other Employer Medicaid Medicare Risk
Only Sponsored HMO
Plan
1993 1999
Source: CMS, Office of Research, Development, and Information:
Data from the Medicare Current Beneficiary Survey (MCBS), 1993 and 1999 Cost and Use Files.
Retiree Medical Programs
• Medicare “Safety Net”*
—Part A (Hospital—noncontributory)
– $840 first day deductible (2003)
—Part B (Physician’s—contributory)
– $58.70 per beneficiary per month (2003)
—No Rx or long-term care coverage
* Increased prevalence and cost of prescription drugs has eroded Medicare’s effectiveness as an economic
safety net for senior citizens.
5
Retiree Medical Programs
• Medicaid
— Available to low income seniors only
• Individually purchased coverage
— “Medigap” policies
• Employer-sponsored plans
• VA Program
• Long Term Care
• AARP
Background—Retiree Medical Trends
Average Annual Market Trends
• Fee-for-service Medical: 10–15 percent
• Insured HMO
— Active/Pre-65: 15–25 percent
— Medicare HMO: 20–100 percent
– HCFA reimbursements roughly 2%
• Prescription Drugs: 15–30 percent
6
Background—Retiree Medical Trends
– General aging of U.S. population
– Introduction of more provider-friendly managed care
reimbursement arrangements
– Insurer emphasis on margins over market share
– Introduction of new, high cost drugs and increased
drug utilization
Background—Rising Medical Trends
High Medical/Rx Trends — “The Double Whammy”
• High trends translate into higher annual retiree medical
program cash costs
• Also translate into higher than expected accounting costs to
the extent that the medical trend assumptions used in FAS 106
valuations are unrealistic
— The average Fortune 500 company currently assumes a
7.0 percent health care inflation rate for 2001 declining
to 5.50 percent by 2005
7
Background—Rising Medical Trends
Swings in Trend = Big Dollars
• Now more than ever, employers will be looking for innovative
ways to manage their cash and accounting costs!
Annual FAS 106 Expense
Current with 0.5% trend increase
Current
Current with 0.5% trend decrease
1.0% change in trend
could result in significant
swing in annual expense
2002 2003 2004 2005 2006
EMPLOYER PROGRAMS
8
Key Issues—Retiree Medical Benefit
Strategy
Common Program Objectives (Often Competing)
• Provide quality coverage to retirees at affordable rates
• Meet retiree benefit needs
• Provide competitive benefits
• Manage annual cash and FAS 106 accounting costs
• Minimize employer obligation and exposure
Key Issues—Retiree Medical Benefit
Strategy
Key Questions
• How do retiree medical benefits support the employer’s
broader benefit and business strategy?
• How does the employer coordinate its pension, 401(k), and
retiree medical programs to deliver retirement benefits?
• To what extent should employers help employees prepare for
their own retirement costs?
• Should dependents be covered and subsidized by the retiree
medical plan and to what extent?
9
Historical Trends
(Employer-Sponsored Plans)
Trends in Large Employer Sponsorship of Retiree Medical
• There has been a general erosion of coverage and also employer-
subsidized coverage
• Despite significant cost increases in the recent past, the trend toward
eliminating retiree coverage appears to have slowed
100% Percentage of Large Employers Offering Retiree Medical Benefits to Salaried
Employees (1,000+ Employees)
80% 7% 7%
5%
7%
60% Pre-65 Subsidized
88% 80% Post-65 Subsidized
40%
69% 62% 66%
56% Pre-65 Access Only
20%
Post-65 Access Only
0%
1991 1998 2000
Source: Hewitt Associates, Salaried Employee Benefits Provided by Major U.S. Employers, 1991–2000
Type of Post-65 Coverage
Type of Coverage
• The following pie chart shows whether or not the post-65 retiree is
offered the active plan, a special retiree plan, or a Medicare
supplement
Active plan with Medicare carve-out
4%
18%
Active plan with Medicare coordination
1% of benefits
Special retiree plan with Medicare
carve-out
37% Special retiree plan with Medicare
29% coordination of benefits
Medicare supplement
Other (e.g., depends on option selected
11% by retiree; Medicare Risk HMO)
2001-2002 U.S. Salaried Employees (Hewitt Spec Summary)
10
Employer Changes*
Incremental Significant
Eligibility Eliminate benefit for future hires Eliminate benefit
Change eligibility accrual age Increase full-service definition
Plan Exclusion COB Carve-out COB
Design Update deductibles $300+ increase in deductibles
Update out-of-pocket maximum $500+ increase in out-of-pocket
Confirm lifetime maximum Lifetime maximum <$250k
Update Rx benefits, Rx managed Eliminate Rx coverage or
care with specialty vendor catastrophic Rx coverage only.
Introduce managed care options Offer managed care options only
Subsidy Update in line with actives Fixed, age-related company cost
($, %, incremental pricing of ($, %, DDB, cap, service -related)
options) No subsidy 65+
No dependent subsidy
Subsidy based on M+C option
Key Issues—Subsidy Caps
Impact on Participants Can Be Substantial
Post-65 Retiree Illustration
• Employee, age 65, retires in 2001 with single coverage
• Company subsidy is based on elected option
• Subsidy cap is reached in 2002
• Assumes 16% annual trend in gross costs
2001 2002 2003 2004 2005
Monthly Plan Price Tags (Single Retiree) $176 $205 $238 $276 $320
Monthly Company Subsidy $152 $177 $177 $177 $177
Monthly Retiree Contributions $24 $28 $61 $99 $143
Dollar Increase in Retiree Contributions $5 $33 $38 $44
Percentage Increase in Retiree Contributions 16% 118% 62% 44%
11
Key Issues—Prescription Drugs
Prescription Drugs
• Strategies to manage prescription drug costs are of great importance
in managing retiree medical program costs and the trends in those
costs
• Prescription drugs as a portion of total employer-provided program
costs
— Pre-65: 15–25 percent
— Post-65: 50–80 percent (depending upon Medicare
coordination method)
Pre-65 Retiree Post-65 Retiree
Other
40%
Prescription Drugs Other
20%
80% Prescription Drugs
60%
INSURANCE PRODUCTS
12
Insurance Products
• Retiree healthcare is a local/regional issue
— Product availability
— “Snow birds”
— HCFA reimbursements
— Geographic differences (cost, physician practice patterns,
utilization)
— Culture
Insurance Products
• Active Employees/Retirees <65
— HMO/POS
— PPO
— Fee-for-service Indemnity
• Retiree 65+
— Medicare Supplement
— HMO: Medicare Cost, Medicare Risk
13
Retiree Medical Plan Market in
Massachusetts
Medicare + Choice Plans in Massachusetts
Premium History*
BCBSMA TAHP FCHP HPHC
Blue Care 65 Secure Horizons Senior Plan First Seniority
2003 $122-$130 $105-$145 $0-$40 $120
2002 $110-$135 $80-$110 $0-$10 $60
2001 $85-$105 $25-$45 $0 $35
2000 $25 $30-$35 $0 $0
1999 $25 $0 $0 $0
1998 $0 $0 $0 $0
* Excludes vendors who have exited market over the last 5 years
Primary Reason a Beneficiary Joined a Medicare Risk HMO, 2000
Lower costs or better benefits were the most common reasons for joining a
Medicare Risk HMO.
Employer Paid Lower Cost
Premium 32.7%
8.6%
Doctor was
Member/Convenient
Location
9.5%
Recommendation/
Reputation Better Benefits
9.5% 24.1%
Other
Reasons
14.4%
Source: CMS, Office of Research, Development, and Information:
Data from the Medicare Current Beneficiary Survey (MCBS) 2000 Access to Care File.
14
Disease & Condition Management
Diabetes
Congestive Heart Failure
Depression
Cholesterol Management in Cardiac Disease
Osteoporosis
Anticoagulation Management
PBM Industry Initiatives
15
PFHA: A Definition
Partners for Healthy Aging
(PFHA) is a senior-focused
approach to promote safe and
appropriate medication use by
older adults
PFHA includes educational,
clinical, and customer service
components specifically designed
for older adults and their
healthcare providers
PFHA: Meeting the Needs of Older
Adults
Educational Clinical Customer Service
Objectives: Objectives: Objectives:
l Educate older adults on the l Reduce adverse drug l Understand special
safe use of prescription reactions in older adults emotional and
medications physiological needs of
l Educate physicians and older adults
l Provide written drug pharmacists on safe use l Improve patient
information in easy -to- of medications in older satisfaction with
understand language adults prescription benefit
l Optimize drug therapy in information
older adults
16
CURRENT/POTENTIAL
DEVELOPMENTS
Retiree Health Legislation: Erie Co.
Lots of behind-the-scenes activity regarding the Erie Co. case
• Third Circuit ruled ADEA applies to retirees (August 2000)
• EEOC backed off enforcing Erie Co. decision (2001)
— But, employers operating in PA, NJ, and DE that provide
lesser health benefits to post-65 retirees can still be sued
• EEOC announced proposed regulations for December 2002
that would allow reductions for post-65 retirees
— Receiving input from employer groups and labor unions
— AARP strongly opposes possible rule
— Unclear if EEOC will issue rule without legislation
• Ongoing exploration of a legislative fix
17
Retiree Health Legislation: Medicare
Prescription Drugs
Enactment of a comprehensive Rx plan is unlikely in 2002
• Senate failed to get the required 60 votes to add any of competing
Medicare drug benefit proposals to S. 812 (aimed at expanding
availability of generic products)
• More attempts may be made in the Senate when it considers raising
payments to Medicare providers
— Will top the health care agenda in 2003
• House is expected to consider allowing re-importation of drugs from
Canada (also part of S. 812)
— But is unlikely to expand availability of generic drugs
Medicare Rx Proposal —Employer
Reaction
Would Eliminate
Drug Coverage 80% Would Retain Drug Coverage
20%
– 53% would retain coverage as a supplement to Medicare
– 25% would retain coverage and accept the Medicare subsidy
– 2% would retain coverage as a supplement to Medicare and pay retirees’
added Medicare premium
20% Would Eliminate Drug Coverage
Would Retain – 15% would eliminate coverage for 65+ retirees
Drug Coverage
80% – 5% would eliminate coverage and pay the retirees added Medicare premium
Source: 2001 Hewitt Associates analysis for the Henry J. Kaiser Family Foundation, 1999
18
Current/Potential Developments—
Prescription Drugs
How are employers planning to control prescription drug costs?
Promote mail order for refills of maintenance drugs 78% 13% 9%
3-Tiered copays 60% 19% 21%
Higher copayments 51% 34% 15%
Quantity limitations 40% 8% 51%
Revise the list of excluded discretionary use drugs 32% 21% 47%
Closed or partially closed formularies 21% 12% 67%
Coinsurance (rather than copay) 19% 28% 53%
Deductibles specific to the Rx benefit 16% 22% 63%
Require mail order for refills of maintenance drugs 11% 27% 61%
Cap the annual benefit 5% 12% 83%
2%
4-Tiered copays 10% 89%
1%
5-Tiered copays 4% 95%
In Use/Being Implemented Under Consideration Not Under Consideration
Current/Potential Developments—
Other Plan Changes
In the next three to five years, would your organization seriously consider any of the
following changes with respect to retiree medical coverage?
Yes No
Increase retiree premiums and/or cost sharing 82% 18%
Shift to a defined contribution approach and let retirees
purchase their own coverage 45% 55%
Reduce prescription drug coverage for retirees
Pre-65 44% 56%
Retirees Offer only managed care as an option 39% 61%
Terminate coverage prospectively 30% 70%
Add or improve coverage for retirees 15% 85%
Increase retiree premiums and/or cost sharing 82% 18%
Reduce prescription drug coverage for retirees 47% 53%
Shift to a defined contribution approach and let retirees
purchase their own coverage 42% 58%
Post-65
Terminate coverage prospectively 31% 69%
Retirees
Offer only managed care as an option 28% 72%
Source: 2001 Hewitt Associates
Health Care Expectations Survey Add or improve coverage for retirees 15% 85%
19
Employee Pre-Funding
Introduce or expand vehicles to incent employee pre-funding of
retiree health care costs
Two key options:
— 401(k)
— VEBA
401(k) VEBA
Employee contributions Pre-tax After-tax
Tax on investment earnings Non-taxable Non-taxable
Tax on withdrawals Taxable Non-taxable
Uses Any expenses Health care only
Direct Pension Funding
Mechanics
• Eliminate employer-subsidies in retiree health care program
• Provide an enhancement to the pension or 401(k) benefit
• Several alternatives to creating enhanced benefit:
— Flat dollar amount for all retirees
— Dollar amount times years of service
— Varying amounts based on age and service
• Two downsides
— Pre-retirement leakage of dollars
— Taxability of retirement payments
20
Other Innovative Approaches
• Consumer Directed (Defined Contribution) Health Care
• Retiree-only Administration
Other Innovative Approaches—
Defined Contribution
Why Would Employers Choose Defined Contribution?
Control program costs 85%
Return control of health care decisions to employees 70%
Limit liability from being sued 30%
Transfer health management activities to a third party
23%
Use insured products to eliminate financial risk
14%
Other
6%
Source: 2001 Hewitt Associates Health Care Expectations Survey
21
Other Innovative Approaches—
Defined Contribution
Addresses three risks:
1) Retirement Age Risk
– Pre-65 retirees can cost 2-4 times that of a Medicare-
eligible retiree
2) Spousal Subsidy Risk
– Coverage for a retiree and a spouse can cost 2–3
times that for a single retiree
3) Health Care Trend Risk
– Health care trends are volatile and prone to periods
of double digit inflation
Summary
In the absence of significant change, healthcare expenses are
of significant concern relative to retirement security
• Total cost increasing 3x to 5x pay
• Government programs economically outdated. Significant reform
not likely
• Employer support continues to decline. Increased financial statement
scrutiny should continue this trend
• Insurance vendors struggle to find “affordable” solutions that include
prescription drug coverage
• Limited incentives for employer funding. Emerging awareness
highlighting need for employee funding
22
Health Coverage as Part of Retirement Security:
Current Developments (Session 33 PD)
Society of Actuaries Annual Meeting
October 28, 2002
Presenters:
Steve Doucette, F.S.A., Hewitt Associates
(steve .doucette@hewitt.com)
Brian Harty, Principal, Argus Consulting (brian@arguscl.com)
23
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