A large public employer faced rapidly rising retiree healthcare costs: Healthcare inflation and retiring baby boomers would double the employer’s retiree healthcare costs over the next six years. The employer could not sustain that level of expenditure without cutting into other essential government programs or raising taxes. It was important to take immediate action because the employer would have less flexibility to act later.

The employer wanted to control costs while still providing meaningful healthcare benefits for its retirees. The employer also was concerned about passing significant additional costs to retirees who have limited income and few ways to cope with significant healthcare expenses.

GASB 45 accounting requirements contributed to financial pressures

Adding to the problem was the Governmental Accounting Standards Board’s (GASB) recently issued Statement 45, which requires a government employer to account for the cost of retiree healthcare benefits during an employee’s working years. The existing healthcare plan would generate large unfunded liabilities. The employer was concerned that the bond rating agencies would view these unfunded liabilities negatively and decrease its bond rating, making it more expensive to borrow money for essential government programs.

Evaluating a Medicare Advantage-Prescription Drug plan alternative

The Centers for Medicare and Medicaid Services (CMS) had introduced an alternative way for groups to finance Medicare benefits. Under the program, a healthcare plan could apply to become a Medicare Advantage-Prescription Drug plan, or MA-PD. With MA-PD plans, CMS no longer pays doctors and hospitals directly for Medicare-covered services. Instead, CMS pays the healthcare plan a predetermined monthly rate for each Medicare-eligible retiree. The healthcare plan then pays the providers for all Medicare-covered services, plus any additional benefits as determined by the healthcare plan. This financial arrangement shifts the risk of the cost of Medicare benefits from CMS to the employer’s healthcare plan.

In some circumstances, it is financially advantageous for a healthcare plan to use this arrangement; however the employer must undertake a comparative financial analysis to find out if using an MA-PD plan would be in its best interest.

Comparing costs of CMS versus MA-PD

The employer evaluated the MA-PD alternative. A combined team of Milliman healthcare and employee benefits consultants completed an analysis of the employer’s Medicare eligible retirees. The Milliman team obtained demographic data on the Medicare retirees and used it to estimate the amount that CMS would pay to an MA-PD for those retirees. The team then compared the CMS payment to the estimated cost of the Medicare benefits and concluded that it was financially advantageous for the employer to provide benefits to its Medicare-eligible retirees through an MA-PD instead of continuing to coordinate with Medicare.

First-year savings predicted at 25% of retiree medical costs

The “hat trick”? First, the employer found it could provide benefits to its Medicare-eligible retirees through an MA-PD and expects the first-year savings to be about 25% of its retiree medical costs. It could obtain these savings without reducing the benefits of any retiree. Second, this action caused a corresponding reduction in the employer’s retiree healthcare liabilities under GASB 45 and demonstrated to bond rating agencies that the employer was finding innovative ways to meet its commitments.