Actuarial and

Risk Management Guide to Self-Funded Government Entity Health Care Plans

This Web Site (govplans.com) was created and is maintained by:

Self Funding Actuarial Services, Inc.	Tel: (336) 759-2035
8025 North Point Blvd., Suite 207W	Fax: (336) 896-0392
Winston-Salem, NC 27106	harker2@earthlink.net
Carlton Harker, FSA, MAAA, Principal	See www.self-fundhealth.com

The purpose of this Web Site is to offer actuarial and risk management guidance to those government entities which sponsor self-funded health care plans. Three topics are considered:

1.	Retiree Benefits
	This Sub-Site discusses the administration of retiree benefits in general and the available options with the GASB 43 and GASB 45 AICPA accounting pronouncements in particular. Retirees and postemployment terminations are synonymous.
2.	Risk Management
	This Sub-Site discusses the urgent need for government entities to embrace a more realistic compensation-benefit risk paradigm.
3.	Health Savings Account
	This Sub-Site offers a model feasibility study by which a government entity may confidently view its HSA options and their cost impacts.

The role of Self-Funding Actuarial Services, Inc. (SFA) is to provide to the plan requisite actuarial and risk management services by engagement to either the entity or the consultant/broker thereof as may be the preference of such entity or consultant/broker. Self-Funding Actuarial Services, Inc. anticipates sub-contracting some of the GASB 43 and GASB 45 computations to its co-partner(s), if any, where appropriate. Details of work flow, work products, responsibilities, relationships, due diligence, pricing, etc. are set forth in Details of Engagement.

Retiree Benefits

A general discussion of this topic is found at Retiree Benefits and Self-Funded Health Care Plans.

Because this Web Site deals only with government entity health care plans, a general discussion of GASB 43 and GASB 45 is provided. These two recent AICPA Pronouncements are scheduled to go into effect in 2006. They mandate that the accounting of retiree health benefits be comparable to the accounting of pension plans. That is, treat such retiree health benefits as though they were vested as are pension benefits.

The government entity usually has these options with regards GASB 43 and GASB 45:
	Early Retirees^1
		Discontinue Coverage^2
			All Retirees
			GASB 43 and GASB 45 do not apply.
			All except those presently retired
			GASB 43 and GASB 45 do not apply.
			New Hires only
			GASB 43 and GASB 45 do apply.
		Coverage is Retiree-Pay-All
		GASB 43 and GASB 45 do not apply.^3
		Treat as Special Class of Active Participants
		GASB 43 and GASB 45 do not apply.^4
		Treat as COBRAs
		GASB 43 and GASB 45 do apply^5
				COBRA premiums are age-adjusted.
				COBRA premiums are not age-adjusted.
		Treat as Retirees
		GASB 43 and GASB 45 do apply.^6
	Age 65 Retirees^1
		Discontinue Coverage^2
			All retirees
			GASB 43 and GASB 45 do not apply.
			All except those presently retired
		GASB 43 and GASB 45 do not apply.
			New Hires Only
			GASB 43 and GASB 45 do apply.
		Coverage is Retiree-Pay-All
		GASB 43 and GASB 45 do not apply.^3
		Coverage Continued with Some Entity Contribution
		Coverage is insured (Medicare Supplement)^7
			GASB 43 and GASB 45 do apply.^8
		Coverage is self-funded^6
			GASB 43 and GASB 45 do apply.^8

Modifying Plan Benefits
	Each participant with an expectation of a retiree benefit will be offered a choice.^9
		Give up the expectation in exchange for:
			Pay increase
			HSA Contribution
			Expanded plan benefit.
		Retiree benefits removed as a plan benefit.
		Retain that expectation but evidenced by a deferred compensation agreement mutually agreed to by the entity and the participant.
	The deferred compensation agreement will be contractual and will be treated in accordance with GASB 32 (GASB 43 and GASB 45 do not apply).^10
		Benefits may or may not be vested.
		Entity subsidies may or may not be guaranteed.

Miscellaneous Considerations
	When GASB 45 Applies
		Subsidy to the entity must be actuarially-determined by these assumptions available to the actuary
			Early retirees may be classified as COBRAs.^11
			Plan costs (or premiums) may be age, sex, cost area sensitive.^12
		Accounting-recommended parameters^13 should be expanded by the actuary to include the probabilities of these decrements:
			Benefit discontinuance
			Plan discontinuance
			Employer subsidy discontinuance.^7
	Performing the Computations
		Traditional professional engagement^14
		Engagement of Self-Funding Actuarial Services, Inc.^15
		GASB 43 and GASB 45 computations are a byproduct of overall plan risk/actuarial supervision and provided by:
			Subcontracted Actuary^16
				SFA-appointed
				Appointed by entity.
			Self-Funding Actuarial Services, Inc.
	Insured v Self-Funding
	Both funding methods have the necessary means to determine plan costs so as to maintain a competitive stand-off between them
		Self-funders can treat early retirees as COBRAs.
		Both can have single, bifurcated or trifurcated risk pools for actives, early retirees and age 65 retirees.
		Both can vary their premiums or contributions by age, sex, cost area, etc.
	Mandated Retiree Benefits
	These are found for two reasons:
		State Law
		See state laws of Florida, Kansas, Massachusetts, Montana, e.g.
		Labor Union Contracts
		Many government entities are required to provide retiree benefits to their public safety employees because of labor negotiations.
	Investment Considerations
	Two types of entities must be considered
		Those wanting small accrued liabilities
		This would be most of the entities where asset-creation is not an investment goal. Options set forth to minimize such liabilities are made.
		Those wanting large accrued liabilities
		Entities are free to use new rules in a manner to create the largest possible accrued liability if asset creation is a financial goal of such entities.
	Related Considerations
		Cobra Premiums
			Actuarially-determined^17
			Other.^18
		Risk Management Disciplines^19
			New paradigm adopted
			Old paradigm followed
		Health Savings Accounts^20
			Not offered
			Offered as a Cost Containment Provision
				Future retirees primarily
				Both actives and future retirees

Endnotes

1

Retirees are those characterized as being totally disconnected from plan sponsor. Participants under age 65 with a Medicare Card due to disability or ESRD should be ignored.

2

GASB 43 and GASB 45 do not apply whether such retiree coverage is discontinued for either present and/or future retirees.

3

So long as funding is the total responsibility of the retiree, GASB 43 and GASB 45 do not apply.

4

If the employer is able to clearly show the following, GASB 43 and GASB 45 may not apply:

• The employer’s personnel practices demonstrate that early retirees are in every way treated as active employees on special extended leave. Because GASB 43 and GASB 45 do not distinguish between postretirement and postemployment (as do FASB 106 and FASB 112) it is arguable whether this option will be accepted.
• There are instances where early retiree coverage, if offered as a special class benefit, fail to be a pension-type of benefit and become more of a negotiated employment termination contract. This is particularly the case where a significant participant contribution is required.

5

As a byproduct of the actuarial computation of the COBRA premiums for the relevant plan year, the following information should be provided to the actuary as respects early retirees:

• Present Retirees

Participant Designation	Age	Sex	Family Status	Participant Classifications	Adjusted COBRA Premiums	Participant Share
Comments Participant designation may be name, SSN or other designation. Age may be attained age or DOB. Family status is normally I or F. Participant classification is police, fire, all, etc. COBRA premiums will usually (but not necessarily) be age-adjusted and exclude the statutory 2% loading participant share as a percent on a dollar amount.

• Plan Census

Participant Designation

Age

Sex

Family Status

Hire Date

Participant Classifications

Comments

Participant designation may be name, SSN or other designation.

Age may be attained age or DOB.

Family status is normally I or F.

Hire date may be employment or eligibility date.

Participant classification is police, fire, all, etc.

• Other Documentation

Relevant retiree-related terms or conditions expressed in either the plan, SPD or employee handbook.

6

The following information should be provided to the actuary as respects age 65 retirees:

• Present Retirees

Participant Designation

Age

Sex

Family Status

Participant Classifications

Adjusted Funding Factor

Participant Share

Comments

Participant designation may be name, SSN or other designation.

Age may be attained age or DOB.

Family status is normally I or F.

Participant designation is fire, police, all, etc.

Adjusted Funding Factor covers claims and fixed costs.

Participant Share is a percent or dollar amount.

• Plan Census

Participant Designation

Age

Sex

Family Status

Hire Date

Participant Classifications

Comments

See above.

• Other Documentation

Relevant retiree-related terms or conditions expressed as the plan, SPD or employee handbook.

7

Plan should be drafted so that it is secondary to both Medicare Part A and Part B expenses and not part A expenses only.

8

The following information should be provided to the actuary.

• Present Retirees

Participant Designation	Age	Sex	Family Status	Participant Designation	Medicare Supplement Premium	Participant Share
Comments Participant designation may be name, SSN or other designation Age may be attained age or DOB Family status is normally I or F Participant designation is police, fire, all, etc. Medicare Supplement Premium anticipated both Medicare Parts A and B. Participant Share is a percent or dollar amount.

• Plan Census

Participant Designation

Age

Sex

Family Status

Hire Date

Participant Designation

Comments

See above.

• Other Documentation

Relevant retiree-related terms or conditions expressed in either the plan, SPD or employee handbook.

9

By offering each participant with an expectation of a retiree benefit (however remote) the retiree benefit will be legally converted from a plan benefit to an individual contract of deferred compensation. That is, GASB 43 and GASB 45 are out and GASB 32 is in.

10

Had a clear entity-participant understanding been memorialized as a deferred compensation contract the tragic and enervating parade of litigation on such benefits would have been avoided.

11

Whether early retirees are classed by the plan as COBRAs or otherwise appears to be a matter of unconcern to GASB 43 and GASB 45.

12

Actuarially-determined plan costs (COBRA premiums less 2%) translate into entity annual retirement costs which become, in effect, the pension benefit for GASB 43 and GASB 45 purposes. The actuary is free to determine such plan cost as such actuary sees fit. This including varying such plan costs by age, sex, cost area, etc.

13

The accountant – ideated model used to compute the unfounded accrued liability of retiree benefits as contemplated buy GASB 43 and GASB 45 would be actuarially proper were such benefits vested; but they are not vested. The solution to this challenge is simple; create a model which computes the unfounded accrued liability contemplating those decrements which cause the retiree benefit to be not vested. That is, make the probability of (a) benefit reduction or termination of (b) participant contribution increases model assumptions. This is the only way to obtain a reasonable and/or actuarially-defensible cost estimate.

14

Such actuary is totally independent of SFA and deals directly with the entity as regards requisite dates, workflow, responsibilities, etc.

15

The entity has the option of engaging SFA (either directly or through its broker/consultant). The independence of SFA is the same whichever method is used.

16

In some instances, the entity may wish SFA to provide the overall actuarial/and risk management services and also the GASB43 and the GASB45 computations. SFA reserves the right to either (a) subcontract the GASB43 and GASB45 computations to another actuary (only done with larger plans) or (b) perform such GASB43 and GASB45 as an SFA work product (only done for smaller plans). Whatever the terms of engagement, the government entity will necessarily be informed of all relevant terms, conditions and parties and will assent thereto.

17

See a description of SFA’s Annual Actuarial Report in which COBRA premiums are a by-product of and also an Article Actuarial Determination of COBRA premiums for Self-Funded Health Care Plans.

18

Typically, such COBRA premiums are the entity-determined factors to fund maximum claims and fixed costs plus 2% and do not meet COBRA’s statutory requirements.

19

The old paradigm is “we may not pay the best salaries but we have good health care benefits”; the new paradigm is “compensation-benefits-time loss-productivity collectively constitute a cost center which must be subject to fiscal and budgetary disciplines.” The reason why the old paradigm remains in use is because such uncontrolled increasing health costs are so easily passed on to the taxpayer. Political realities menace the future of the old paradigm and properly so.

20

Health Savings Accounts and their virtues which are being espoused have the same place with both government entity and private health care plans. See www.hsaplanning.com.

Risk Management

A treatise entitled Risk Management Guide to Self-Funded Health Care Plans sets forth the design and administrative options available to all self-funders.

Government entity plans (along with hospital plans) have been particularly prone to a notable lack of risk management discipline with their self-funded plans. While their logic in persistantly ignoring these disciplines is understandable, current cost/benefit analyses call out for a more disciplined and cost-effective paradigm.

Health Savings Account

The logic which motivates the health savings account (HSA) options apply equally to both private and government plans. The HSA has been made an option in the Federal Governmental Employee Plan. For an HSA model feasibility study see www.hsaplanning.com.

Details of Engagement

Self-Funded Actuarial Services, Inc. is primarily work product-oriented which reduces the necessity for the usual professional engagement formalities. On SFA’s Web Site (www.self-fundhealth.com) are located these items of interest:

• Due diligence items
• Description of work products along with requisite documentation and fees
• Various support Sub-Sites related to the firm’s products and services.

SFA treats risk management and actuarial matters as essentially the same. The firm maintains other complementary Web Sites an example of which is www.hsaplanning.com.

In providing SFA’s risk and actuarial work products and/or serves to self-funded government entity health care plans as regards retiree matters. These options are offered:

Engagement
	Direct with entity
		Invited by broker, consultant, etc.
		Invited by accountant
		Other.
	Indirect through entity-approved intermediary (consultant, broker, eg.)
Work Products of SFA
	Annual Actuarial Report
	› Recommended Funding Contributions
	› COBRA premiums
	› Estimates reserves
	Monte Carlo Simulation
	Confidence levels of predicted future claims
	Economic value of stop-loss
	Health Saving Account Feasibility Study
	Risk Management Analyses
	Claim Reserves (AICPA Standards)
	State-Required Certifications
	Florida, Iowa, New York, Ohio, Idaho, etc.
	Providing Requisite Data to GASB 43 and GASB 45 Actuary
	Such requisite data from two sources: One. Byproduct of Annual Actuarial Report for retired lives. Two. Raw census data provided by entity for active lives.
GASB 43 and GASB 45 Certification
Prepared by Self-Funding Actuarial Services, Inc. For smaller plans with no reliable claims or census-related experience. Methodology is less rigorous than should be used for larger plans.
› Prepared by an Independent Actuary (Not SFA) Such actuary has a directly responsibility to the entity (both as to billings and work quality) but coordinated through and by SFA. Such GASB 43 and GASB 45 actuary uses data provided through SFA. Such GASB 43 and GASB 45 actuary must consent to the relationships and work responsibilities and may be selected by either of the following:
	› Entity
	› Self-Funding Actuarial Services, Inc.