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Home My WebLink About112106 Health Plan RatingNovember 21, 2006 City of Virginia Beach Health Care Rate Setting Susan D. Walston Chief of Staff Contents Health Care Rate Setting ? Rate Setting Process – Implicit Subsidy for Retirees – 2007 Rates – Employee -HMO ? Retiree -POS ? 1 Mercer Health & Benefits Rate Setting Process Each year, Mercer projects the total rates needed to fund the cost ? of the plan for the next calendar year Reviews emerging experience – Presents updated forecast for current year and projected – forecast for next calendar year Analysis reviews both employees and retirees ? Health plan budget contributions for 2007 provided by City and ? Schools 2007 City contributions: $5,225 per employee per year (PEPY) – Reflects a 14% increase to current budget ? 2007 Schools contributions: $5,225 PEPY – Reflects an 18% increase to current budget ? 2 Mercer Health & Benefits Rate Setting Process Rate setting process for 2007 ? Actual claims data through June 2006 serves as the baseline – for 2007 projection Health care trends applied to the baseline to reflect costs – expected for 2007 Add administrative expenses and stop loss premiums – Consider addition of appropriate margin (2%) – Compare (at the overall PEPY level) to 2006 rates – Provides required rate adjustment ? To total rates – To employee and retiree rates – 3 Mercer Health & Benefits Implicit Subsidy for Retirees What Is an Implicit Employer Subsidy? Cost of health care increases with increasing age ? In general, cost of health care is higher for retirees than employees ? If retiree premium rate is blended with the employee premium rate, ? there is an implicit employer subsidy due to blending of claims experience Employees’rates will be higher than if rated on their own – experience to reflect the blending of the employee and retiree costs Retiree rates will be lower than if rated on their own experience – to reflect the blending of the employee and retiree costs 4 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 5 Mercer Health & Benefits Implicit Subsidy for Retirees Projected 2007 average costs per retiree is $10,900 per year ? (actual experience data through June 2006) City/Schools’contribution (where applicable) plus the retiree’s ? 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$3,605 Liability valuation includes the implicit subsidy ? City and Schools have implemented a rate strategy whereby – the subsidy is projected to be eliminated over a 10-year period **2007 Average Annual Cost = claims and expenses for retirees andcovered dependents divided by number of retirees * 2007 Annual Average Rate = total of City contribution and retiree premiums for retiree and covered dependents divided by number of retirees 6 Mercer Health & Benefits Implicit Subsidy for Retirees Questions Why separate retirees from employees? ? Historically rates were set for different plans and different tiers – GASB 45 requires calculation of actual retiree medical costs, not – blended with active plan Actual per retiree costs are 1.5 to 2 times the cost of employeehealth – care The City is now setting separate rates for retirees as a separate – category The City is not required to separate the cost for rating purposes. If the – City blended retirees with employees for rating: Employees will continue to subsidize the cost of retiree health care ? The City will continue to subsidize the cost of retiree health care ? GASB 45 results, including the actuarial accrued liability and expense will increase ? What do retirees pay elsewhere? (see separate handout) ? 7 Mercer Health & Benefits 2007 Rates Employees HMO 2006HMO 2007 TotalEmployer Employee Employee TotalEmployer EmployerEmployee Employee Employee/Mth PremiumContributionContributionPer MonthPremiumContribution$ 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 8 Mercer Health & Benefits Considerations 2007 retiree premiums reflect first year of implicit subsidy removal ? over ten years, as incorporated into the GASB 45 valuation Retiree premiums will continue to increase each year through 2015 ? to effect the elimination of the implicit subsidy A change to this strategy will impact the following: ? The City’s expected annual cost – Employee premium – GASB 45 valuation’s actuarial accrued liability and ARC – 9 Mercer Health & Benefits