Lecture 13 Medical Benefits: Plan Provisions and Post-Retirement Benefits

1. Lecture 13Medical Benefits:Plan Provisions and Post-Retirement Benefits • Eligibility • Post Retirement Benefits • Coordination of Benefits • Termination of Coverage • Health Insurance Portability and Accountability Act

2. Eligibility • Employees • Probationary period • Full time • Not actively at work • Dependents • Age of children • Omnibus Budget Reconciliation Act of 1993 • Adopted children • Medical support orders • Pressure on states to enact laws • Portability • Limitations on preexisting conditions • Creditable coverage • Domestic partners

3. Development of Postretirement Medical Benefits • First offered in the 1940s by insurance companies for their employees • Became more widespread in the 1960s • Generally cheap compared to pension benefits • “Pay as you go” accounting • Cost became a concern in the ‘70s and ‘80s • Medical costs increasing greater than inflation • Decline in average retirement age • Amount paid by Medicare decreased • Range of benefits provided has expanded

4. Financial Accounting Statement 106 (FAS 106) • “Employers Accounting for Postretirement Benefits Other Than Pensions” issued in 1990 • Previously, paid expenses as incurred • Now,“pay” for them over working lifetime • Some companies had a very large one-time charge when statement was issued • Charge in annual financial statements for both current and future retirees

5. Impact of FAS 106 on Postretirement Medical Plans • Liabilities often higher than pension liabilities • Most plans are not prefunded • Rising medical costs and implications of FAS 106 has caused many employers to take steps to limit their financial obligations • Eliminate and/or change plans • Shift costs to employees • Legal issues

6. Postretirement Medical Plan Design • Who will be eligible for coverage? • Anyone who retires • Service requirements • What coverage and benefits will they receive? • Indemnity plan, HMO, PPO, POS • Defined benefit or defined contribution approach • Prescription drug coverage • Medicare Part B • Dependants

7. Postretirement Medical Plan Design - (cont.) • How much will the plan cost, and who will pay for it? • Contributions • Retiree and dependents • May or may not be age-related • Employer may limit portion of cost they will pay • Cost containment measures • For how long a period of time will the coverage be promised?

8. Integration with Medicare • Medicare coordination provision • Retiree plan, as a secondary payer, pays up to the amount it would pay as primary payer, but will not pay benefits already paid by Medicare • Medicare exclusion provision • Benefit amount calculated by determining what the plan covers, subtracting out Medicare payments, and then determining what the plan pays on the resulting amount • Medicare carve-out • Benefit calculated in absence of Medicare and then Medicare payments are subtracted out

9. Medicare Integration Example • Covered Expense of $1,100 • Medicare pays $600 • Plan pays 80% after $100 deductible • Coordination Provision • Plan pays lesser of ($1,100 - $600) or .80*($1,100 - $100) = $500 • Retiree pays $0

10. Medicare Integration Example - (cont.) • Exclusion provision • Plan pays .80*{($1,100 - $600) - $100)} = $320 • Retiree pays $180 • Carve-out • Plan pays .80*($1,100 - $100) - $600 = $200 • Retiree pays $300

11. Coordination of Benefits • NAIC Model Group COB Regulations • Reasons for duplicate coverage: • Employee has two jobs • Children covered under both parents’ policies • Employee also covered as dependent on spouse’s policy • Which policy is primary: • Employee rather than dependent • Parent with earlier birthday in year • Custodial parent primary, then custodial stepparent, then non custodial parent, then other stepparent • Plan in effect for longest time

12. Coordination of Benefits - (cont.) • Traditional approach • Primary plan pays as if there is no other coverage • Secondary plan pays remaining expenses up to amount of benefits • Preservation of deductibles and coinsurance • Second plan pays difference between 80% of allowable expenses and what primary plan paid • Second plan pays difference between what it would have paid and what the primary plan paid

13. Coordination of Benefits - Examples • Husband, born 12/13/70, has a medical plan that pays 90% of eligible expenses • Wife, born 10/11/71, has a medical plan that pays 80% of eligible expenses • Child covered under both plans incurs $10,000 in eligible medical expenses • Wife’s plan is primary and always pays $8000 • What does husband’s plan pay? • Traditional • Husband’s plan pays lower of $10,000-$8000 or $9000, or $2000 • Preservation of deductibles and coinsurance • 80% Provision • Husband’s plan pays .8($10,000)-$8000=0 • Difference Approach • Husband’s plan pays $9000-$8000=$1000

14. Termination of Coverage COBRA 1985 • Requires employer to offer to extend medical coverage when coverage lapses due to: • Death of the covered employee • Termination of the employee other than for gross misconduct • Reduction of hours causing loss of coverage • Divorce or separation • Employee’s eligibility for Medicare (affect dependent coverage) • Child ceasing to be eligible • No evidence of insurability can be required

15. Termination of Coverage COBRA 1985 - (cont.) • Coverage for • 18 months if terminated or hours reduced • 36 months otherwise • Notification of rights required twice • Initially • When qualifying event occurs • Cost of coverage can be passed on to individual, up to 102% of the cost for an active employee • Potential penalties to employer • Loss of income tax deduction for all medical expense benefits • Highly compensated employees taxed on employer contributions for their medical expense coverage

16. Health Insurance Portability and Accountability Act • Applies to employees shifting jobs • Also encourages states to establish mechanisms for providing health insurance coverage to those losing group coverage that are not eligible for individual coverage