Magazine article Government Finance Review

Getting to Know the Most Important Benefit Plan Measurements

Magazine article Government Finance Review

Getting to Know the Most Important Benefit Plan Measurements

Article excerpt

Retirement and health-care plans provide an alternative to cash compensation, enhancing an employer's ability to attract and retain employees--but unlike cash compensation, the true costs of benefit promises are not easy to ascertain. On the health-care side, we have had years of increases for medical services and prescription drugs. And while the Patient Protection and Affordable Care may provide broader access to health care, it remains to been seen whether or not it will contain costs. Jurisdictions that decide to continue providing their own health-care plans will likely still struggle with sustaining health-care benefits. On the pension side, the Great Recession took its toll on defined benefit and defined contribution assets. Future capital market expectations are pessimistic, and DB liabilities continue to climb, putting funding pressure on employers. To keep their plans on track so they can deliver promised benefits, trustees and government finance professionals need practical measurements they can monitor.

To ensure that benefit promises are sustainable, trustees and finance officers must be equipped to make decisions about copayments, where to set the DB plan's benefit formula multiplier, and many other plan features. The most important of these are featured below. Knowing these measurements can get you quickly acclimated to the most important information about how your plans are performing.

MEDICAL PLAN

If you are responsible for your organization's medical plan, you will likely participate in establishing the plan premium. This is based on what the plan paid during the current year and an estimate of what the additional expenses will be next year, based on the plan's claims experience at the time the rates are set. This is a bit like trying to shoot a bird in flight--not an easy task.

If the medical plan is fully insured, the most important measurement is the medical loss ratio. This is the ratio of claims paid to the premiums the employer, employees, and retirees paid to the insurance carrier. The medical loss ratio should be in a range of 80 to 90 percent. This measure has become extremely important recently, as the Affordable Care Act now requires insurers to provide rebates to customers if loss ratios are too low.

If the health insurance plan is self-insured, there are a number of measurements to review. The first is how much the plan spent last year for medical services and prescription drugs for active employees and retirees. Next is how much heath and prescription drug costs are predicted to increase next year. This is the medical claim trend. If the plan can't tolerate the projected total costs for the next year, more decisions have to be made. Next, look at network discounts. These are discounts the doctors, hospitals, and clinics in your network are giving the plan in return for potentially getting a larger group of patients. These discounts vary by medical provider and region of the country. Larger jurisdictions should be able to get larger discounts; if not, it might be time to explore better terms.

It is also possible to set cost sharing targets for the employer and employee's share of medical services. Typically, employee copayments for medical services represent 15 to 25 percent of the plan's cost for the underlying service. Those who are responsible for plan design can thus manage the plan by establishing, for instance, that employees will pay an average 20 percent of the costs of medical services under the plan. Each year, plan administrators can report how much, on average, employees paid for different types of medical services. If the data show that employees paid less, plan design changes would be reset against the 20 percent target. This avoids arguments about whether employees should pay a $20 copay or a $25 copay; the copay will be set to reflect the 20 percent of the average costs for that particular service.

Administrative fees can also add up if your medical plan is self-insured. …

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