112106 Health Plan RatingNovember 21, 2006
City of Virginia Beach
Health Care Rate Setting
Susan D. Walston
Chief of Staff
Contents
Health Care Rate Setting
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Rate Setting Process
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Implicit Subsidy for Retirees
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2007 Rates
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Employee -HMO
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Retiree -POS
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1
Mercer Health & Benefits
Rate Setting Process
Each year, Mercer projects the total rates needed to fund the cost
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of the plan for the next calendar year
Reviews emerging experience
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Presents updated forecast for current year and projected
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forecast for next calendar year
Analysis reviews both employees and retirees
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Health plan budget contributions for 2007 provided by City and
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Schools
2007 City contributions: $5,225 per employee per year (PEPY)
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Reflects a 14% increase to current budget
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2007 Schools contributions: $5,225 PEPY
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Reflects an 18% increase to current budget
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2
Mercer Health & Benefits
Rate Setting Process
Rate setting process for 2007
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Actual claims data through June 2006 serves as the baseline
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for 2007 projection
Health care trends applied to the baseline to reflect costs
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expected for 2007
Add administrative expenses and stop loss premiums
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Consider addition of appropriate margin (2%)
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Compare (at the overall PEPY level) to 2006 rates
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Provides required rate adjustment
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To total rates
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To employee and retiree rates
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3
Mercer Health & Benefits
Implicit Subsidy for Retirees
What Is an Implicit Employer Subsidy?
Cost of health care increases with increasing age
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In general, cost of health care is higher for retirees than employees
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If retiree premium rate is blended with the employee premium rate,
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there is an implicit employer subsidy due to blending of claims
experience
Employees’rates will be higher than if rated on their own
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experience to reflect the blending of the employee and retiree
costs
Retiree rates will be lower than if rated on their own experience
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to reflect the blending of the employee and retiree costs
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Mercer Health & Benefits
Implicit Subsidy for Retirees
Illustration of an Implicit Employer Subsidy?
What is the implicit subsidy?
$8,000
$7,000
$6,000
Implicit
$5,000
Subsidy
$4,000
$3,000
$2,000
Premium
$1,000
$0
202428323640444852566064
Age
PremiumClaim Cost
Note: Not City specific
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Mercer Health & Benefits
Implicit Subsidy for Retirees
Projected 2007 average costs per retiree is $10,900 per year
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(actual experience data through June 2006)
City/Schools’contribution (where applicable) plus the retiree’s
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premium is less than the actual cost of health benefits
POSRetiree
2007 Annual
Average Cost**
$10,900
2007 Annual
Average Rate*
$7,295
Implicit Subsidy$3,605
Liability valuation includes the implicit subsidy
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City and Schools have implemented a rate strategy whereby
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the subsidy is projected to be eliminated over a 10-year period
**2007 Average Annual Cost = claims and expenses for retirees andcovered dependents divided by
number of retirees
* 2007 Annual Average Rate = total of City contribution and retiree premiums for retiree and covered
dependents divided by number of retirees
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Mercer Health & Benefits
Implicit Subsidy for Retirees
Questions
Why separate retirees from employees?
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Historically rates were set for different plans and different tiers
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GASB 45 requires calculation of actual retiree medical costs, not
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blended with active plan
Actual per retiree costs are 1.5 to 2 times the cost of employeehealth
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care
The City is now setting separate rates for retirees as a separate
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category
The City is not required to separate the cost for rating purposes. If the
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City blended retirees with employees for rating:
Employees will continue to subsidize the cost of retiree health care
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The City will continue to subsidize the cost of retiree health care
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GASB 45 results, including the actuarial accrued liability and expense will increase
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What do retirees pay elsewhere? (see separate handout)
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7
Mercer Health & Benefits
2007 Rates
Employees
HMO 2006HMO 2007
TotalEmployer Employee Employee TotalEmployer EmployerEmployee Employee Employee/Mth
PremiumContributionContributionPer MonthPremiumContribution$ IncreaseContributionPer Month$ Increase
EE$4,585$4,585$0$0.00$5,225$5,225$640$0$0.00$0.00
EE+minor$5,514$4,585$929$77.42$6,166$5,225$640$941$78.42$1.00
EE+children$8,919$4,585$4,334$361.17$9,666$5,225$640$4,441$370.08$8.91
EE+Spouse$7,635$4,585$3,050$254.17$8,360$5,225$640$3,135$261.25$7.08
EE+ family$10,120$4,585$5,535$461.25$11,234$5,225$640$6,009$500.75$39.50
Retirees
POS 2006POS 2007
TotalEmployer Employee Employee TotalEmployer EmployerEmployee Employee Employee/Mth
PremiumContributionContributionPer MonthPremiumContribution$ IncreaseContributionPer Month$ Increase
EE$4,645$4,585$60$5.00$5,699$5,225$640$474$39.47$34.47
EE+minor$5,776$4,585$1,191$99.25$6,781$5,225$640$1,556$129.67$30.42
EE+children$9,860$4,585$5,275$439.58$10,827$5,225$640$5,602$466.83$27.25
EE+Spouse$8,320$4,585$3,735$311.25$9,688$5,225$640$4,463$371.92$60.67
EE+ family$11,431$4,585$6,846$570.50$12,252$5,225$640$7,027$585.58$15.08
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Mercer Health & Benefits
Considerations
2007 retiree premiums reflect first year of implicit subsidy removal
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over ten years, as incorporated into the GASB 45 valuation
Retiree premiums will continue to increase each year through 2015
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to effect the elimination of the implicit subsidy
A change to this strategy will impact the following:
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The City’s expected annual cost
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Employee premium
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GASB 45 valuation’s actuarial accrued liability and ARC
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Mercer Health & Benefits