FORUM ON PRE-65 INSURANCE: AN

INITIAL VALUE PROPOSITION

Emeriti, Aetna, and PricewaterhouseCoopers

April 27, 2007 A benefit program of, by, and for colleges, universities, and higher education-related tax-exempt organizations.

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INTRODUCTIONS AND WELCOME

PRESENTATION TEAM

Kenneth Cool, President, Emeriti

Linda Cool, Founding Director, Emeriti

Michael Thompson, Principal, PricewaterhouseCoopers

Michael Fusaro, Vice President, Aetna

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AGENDA

MORNING SESSION – 11:00 am (ET)

Strategic Value of Pre-65 Insurance Ken Cool

Results of Pre-65 Insurance Survey Linda Cool

National Content of the Pre-65 Group Mike Thompson and Individual Markets

Embedded Costs of Pre-65 Coverage Mike Thompson

Pre-65 Insurance Concepts for Emeriti Michael Fusaro

Short Question Period Audience

LUNCHEON BREAK – 12:30 pm (ET)

AFTERNOON FEEDBACK SESSION – 1:30 pm (ET)

Dialogue with Participants Emeriti Team

Closing Remarks Ken Cool

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STRATEGIC LINKAGE OF HEALTH CARE TO RETIREMENT

MOUNTING EVIDENCE

AAUP Survey of Faculty Retirement – 2000

Mellon College Retirement Project – 2000

Emeriti Pre-65 Insurance Survey – 2007

AAUP Survey of Faculty Retirement – 2007

STRATEGIC ISSUES

Coordination with Retirement Incentive Programs

Coverage Gaps and COBRA Limitations until Medicare

Employer Insurance Expense and Unfunded Liabilities

“Early” Retiree Affordability, Access, and Choice

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CONTINUUM OF COMPREHENSIVE SUPPORT

Age 55 Medicare Eligibility End of Life

Savings and Payment Flexibilities

Portable Guaranteed Issue Coverage

Tax-Free Reimbursement of Qualifying Medical Expenses

Integrated Retirement Planning and Education for Participants

Outsourced Administrative Services for Employers

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EMERITI FUNDING FLEXIBILITIES

EMPLOYER OPTIONS

• Pre-funded DC Contributions (into Employer VEBA Trust)

• Special DC Lump Sums (into Grantor Trust)

• Continuing DB Subsidies (on Pay-as-you-go Basis)

PARTICIPANT OPTIONS

• Systematic Payroll Contributions (into Employee VEBA Trust)

• Periodic Lump Sums (into Employee VEBA Trust)

• Monthly Electronic Transfers (Pay-as-you-go Payments)

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EMERITI INSURANCE CHOICES

Suite of coordinated pre-65 and post-65 insurance options

Comprehensive benefits at varying levels of coverage and cost

Guaranteed issue group coverage

(in coordination with plan eligibility criteria)

National access

Annual enrollment choice among plans

Family health security at retirement

(retired participant, spouse/partner, and pre-majority

children)

Access to other health care benefits

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THE PRE-65 RETIREE INSURANCE SURVEY

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THE PRE-65 RETIREE INSURANCE PROJECT

Purpose of the Survey

Explore institutional practices and opinions concerning health insurance for pre-Medicare eligible retirees

Institutions Contacted 42 current institutional members of Emeriti

58 institutions expressing interest in Emeriti

15 institutions with no Emeriti contact

Surveys Returned N= 44 (38%)

26 Emeriti Members

16 Institutions with Emeriti contact

2 Institutions with no Emeriti contact

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INSTITUTIONAL CHARACTERISTICS

Size of Active Institutional Workforce

Small (under 500) 9 (21%) Medium (500-1,500) 24 (55%)

Large (over 1,500) 11 (25%)

Type of Institution

Private 40 (91%) Public 4 (9%)

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HOW IMPORTANT IS OFFERING HEALTH INSURANCE TO THE PRE-MEDICARE RETIREMENT DECISION?

Very Important 36 (84%)

Important (along with pension) 6 (14%)

Of Little Importance 1 ( 2%)

One survey respondent noted that the institution provides a generous pension contribution so that early retirees should have sufficient resources to buy pre-65 individual coverage.

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THE PRE-65 RETIREE HEALTH

CONTEXT TODAY

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DOES YOUR INSTITUTION OFFER A

PRE-65 RETIREE MEDICAL PROGRAM?

Yes, for all employees 14 (32%)

Yes, faculty only 4 ( 9%)

Yes, certain defined groups 8 (18%)

Individual ad hoc arrangements 5 (11%)

No program, access only 11 (25%)

Nothing done for early retirees 2 (5%)

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DOES YOUR INSTITUTION CONTRIBUTE

TO THE RETIREE PREMIUM COST?

Average Cost of Total Premium

Per Month

Average Employer

Contribution Per Month

Yes, for retiree only

7 (19%) $439 $324

Yes, for retiree and dependent(s)

18 (50%) $831

$469

No,

access only 11 (31%) N/A N/A

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PREMIUMS CHARGED FOR

PRE-65 RETIREE INSURANCE

Same premium as actives 29 (76%)

Higher premium than actives 9 (24%)

NOTE: A statistically significant relationship was found between when an institution assigned the same premium to pre-65 retired participants as the blended active employee rate and when the employer chose to pay all or part of the pre-65 retiree’s premium.

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ARE EARLY RETIREES KEPT IN ACTIVE

PLAN UNTIL MEDICARE ELIGIBILITY?

Yes, retiree only 1 (2%)

Yes, retiree and eligible dependent(s)

36 (82%)

No, retirees must find individual insurance

7 (16%)

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PROPOSED PROGRAM CHANGES FOR PRE-65 MEDICAL INSURANCE

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WHAT IS YOUR INSTITUTION’S CURRENT THINKING ABOUT

THE FUTURE OF YOUR PRE-65 RETIREE HEALTH PROGRAMS?

Continue existing program

19 (54%)

Set up a new, very different program

15 (43%)

Eliminate the program 1 ( 3%)

Total 35

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MANAGING EMPLOYER COSTS

Employer contributions to premiums have been capped

13 (52%)

Employer contributions are not capped today

12 (48%)

Total Responses 25

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MANAGING COSTS THROUGH

PROGRAM DESIGN CHANGES

Various grandfathered groups were created 15 (39%)

No grandfathered groups in place today 24 (62%)

Total Responses 39

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MOST FREQUENTLY MENTIONED PROGRAM

CHANGES UNDER CONSIDERATION

Reduce/Eliminate Employer Premium Subsidy

Cap Future Employer Subsidies at Current Level

Find Alternative Employer Funding without FAS/GAS Liabilities

Remove Retirees from Active Employee Insurance Pool

Re-introduce a “Viable” Pre-65 Retiree Health Program

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CONCLUDING COMMENTS FROM RESPONDENTS

Lobby for universal health care before Medicare eligibility

Recognize that continued health care is a major concern of those considering early retirement

Develop a voluntary product (“…that allows individuals to fund and then purchase retiree health coverage and that does not require the employer to assume…significant legal, financial, and administrative obligations…is the ideal solution. Unfortunately we all know that this is not practical at this time...”)

Thank Emeriti for this preliminary exploration

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THE PRE-65 RETIREE MEDICAL DESIGN

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Factors Influencing Retiree Medical Design

• Employers are increasingly unwilling or unable to incur an expense and liability that cannot be sufficiently controlled

• Increasingly, access to healthcare coverage during retirement affects an employee’s decision to leave the workforce or re-enter the workforce

• Employers want to avoid “retiree burden,” financial and administrative

• Current movement toward healthcare consumerism

• “Double-edged sword” – Current active employees are foregoing voluntary 403(b) or 401(k) contributions to pay for increased healthcare coverage costs today, further eroding future ability to pay for retiree coverage

• Emerging active health plan designs (e.g. HSAs, HRAs) with spillover feature for retirement

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RETIREE HEALTH ACCESS*RHA Consensus Objectives

“Pre-65 is the Key”

Fully insured, guaranteed issue catastrophic coverage

Pre- and post-65 retiree access No employer contribution required Integration with Medicare reforms Long-term, sustainable solution for current and future retirees

Comprehensive administrative support

* Sponsored by Health Care Policy Roundtable (HR Policy Association & Pacific Business Group on Health)

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RETIREE HEALTH ACCESS*

Employer Options: Pre-65 and Post-65 Coverage

Retiree Health Access

RHA Direct(Individual)

• Non-ERISA• Individual Policies• Subject to Medical

Underwriting

RHA Group

• Group, ERISA Plan• Guaranteed Issue

RHA Hybrid

• Group, ERISA Planfor Pre-65

• Individual and Group for Post-65

• Guaranteed Issue

• Guaranteed issue and re-entry underwriting to enable phased retirement• Total health advocacy and support geared toward retirees• Suite of retiree health options available nationally • Consortial “risk sharing” among plan sponsors and plan options

* Sponsored by Health Care Policy Roundtable (HR Policy Association & Pacific Business Group on Health)

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Emerging Goals for Retiree Health Benefits

• Controlled expense and liability for sponsored health plan

• Shared responsibility for health and health security

• Joint ability to plan for and “fund” the benefit during active years

• Flexible coverage/access for retirees’ personal situations

• Measurable value of benefit during working lifetime

• Reduced barrier to employees’ retirement decision

• Added security against devastating financial risks and long life

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Next Generation Retiree Health Strategy

Retiree Health Account (RHA)

Active Health Account• Spillover excess into Retiree RHA• Incentives for Consumerism/Wellness

Retiree Health Account• Discretionary, matching, or fixed dollar contributions• Investment direction, interest only, or no interest• Incentives for Consumerism/Wellness

EmployerPre-funded Contributions

Retiree Health Plan(s)

Out of Pocket Expenses

Part B and D Premiums

Long term care

Fund accountwhile working

Subject to eligibility and vesting

requirements

Pay premiums/ medical expenses from other

retirement income

EmployerPay-as-you-go Subsidies

$

$

$

Employee

$

Retiree

GradualDraw Down

AnnuityPayouts

Health & Security PlanningTools

Pre-65 and Post-65

$ $

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EMBEDDED COSTS OF PRE-65 HEALTH COVERAGE

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The Hidden Costs of Pre-65 Health Coverage

• Pre-65 Retiree Healthcare Costs are not always what they seem

– Pre-65 retiree healthcare can cost 1.5-2 times those of a typical active health premium ……. But may be included in a “composite active rate”

– Pre-65 retirees may elect COBRA at the “active rate” ….…. But the institution is indirectly picking up the excess cost

– Pre-65 retiree utilization may be buried in composite retiree rate ….…. But net costs for pre-65 retirees may be 2-3 times those of post-65s eligible for Medicare reimbursement

• FAS 106/GASB 45 require recognition of the true cost of Pre-65

• Implicit Pre-65 subsidies can be extracted and redirected toward true Pre-65 costs

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