1. Lecture 13 Medical 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