Last month Almanac carried two articles related to the adoption of a new accounting standard, known as FAS 106, that requires the University to estimate the projected cost of retiree medical benefits for both current and future retirees and to recognize this amount in its financial statements. The first article (December 8) focused on recent trends in benefits costs and how Penn funds such costs; it also described in some detail the decisions that must be made as a result of the University's adopting the new accounting standard. The second article (December 15) discussed modifications to the current retiree medical benefits program that have been proposed by the FAS 106 Work Group, a task force of faculty and administrators that has been examining the effect of the rising cost of benefits on the total compensation offered faculty and staff. These proposed modifications are reprinted below for comment; responses should be directed to either Provost Michael Aiken or Acting Executive Vice President John Wells Gould by January 22, 1993.
(Part II of a Report to the University Community)
Increasing benefits costs, decreasing availability of unrestricted funds, and the impact of the new FAS 106 accounting rule on University budgets could undermine the University's goal of providing medical benefits to retirees and their families as part of an affordable and competitive benefits program for both active and retired employees. As explained in [ Almanac December 8], based on the current design of the University's retiree medical benefits plan, independent actuaries have determined the University's liability for these benefits, as of July 1, 1991, to be approximately $96 million; by July 1, 1993, when the University must adopt FAS 106, this amount could be as much as twenty percent higher.
By making judicious modifications now to the existing plan, the University's liability can be significantly reduced-perhaps by as much as $18 to $20 million-thus better enabling Penn to meet its goal of providing affordable and competitive benefits to both active and retired employees.
Three goals guided the FAS 106 Work Group in its examination of the retiree medical plan:
Current Plan
Currently, Penn's retiree medical benefits are available to employees who retire at age 55 with fifteen years of service, or at age 62 with ten years of service. Service does not have to be continuous. The plan has the following features:
Proposed Plan Modifications
After lengthy study and discussion, the Work Group is proposing the modifications outlined below. These represent a modest adjustment to the existing plan. The basic program of providing medical benefits for retirees and their families will remain intact. The plan will continue to offer early retirees the same medical plan choices available to active employees and will continue to serve as a Medicare supplement beginning at age 65 for all retirees. However, under the proposed modifications: 1) service for meeting eligibility requirements must be continuous; 2) retirees will share the cost of medical plan premiums ; and 3) additional spouses and dependents may not be added after retirement.
While it is our hope that modest changes now will place us on a sound footing for the future, in light of such uncertainties as economic exigencies, legislative reform or changes in the health care delivery system, Penn may be compelled at some point to further modify its retiree medical program.
The active rate referred to in the chart below represents the premium cost sharing paid by active employees; this rate varies depending on the plan chosen. The "65 Special" rate represents the proposed premium cost sharing to be paid by retired employees enrolled in the Blue Cross 65 Special Plan (Medicare supplement).
As the chart indicates, early retirees (ages 55-64) would cost- share at a higher rate for the whole period of their retirement. Given the wide variation in retirement ages, family situations and plans selected, it is not practical to illustrate every possible retirement situation. For Blue Cross Plan 100 single coverage, based on 1992-93 premium cost sharing, active employees now cost share at 30% (active rate: $48.33/month, single plan). Under the pro-posed modifications, the impact for this plan is: those retiring between 55 and 61 would currently cost share at 50% (1.67 x active rate=$80.50/month, single plan) until they are 64; and those retiring between 62 and 64 would currently cost share at 40% (1.33 x active rate=$64.40/month, single plan) until age 64. If early retirees chose family coverage or other medical plans, their costs can be projected using the current medical plan rates. (For more information on these rates, see the PENNFLEX Medical and Dental Plan Rate Sheet in Almanac Supplement March 24, 1992.)
Regular retirees (65 and older) are eligible for Medicare upon retirement and will premium cost share on the Blue Cross 65 Special Plan. The "65 Special" rate will be the same percent as the active rate for the Blue Cross 100 Plan, currently 30%.
At age 65, all retirees, regardless of the age at which they retire, become eligible for Medicare and share in the cost of the Medicare supplement (Blue Cross 65 Special Plan). Based on 1992-93 Medicare supplement cost and proposed cost sharing rates, the costs to Medicare-eligible retirees (all retirees once they are age 65 or older) would be as shown on the chart below.
In designing the modifications, the Work Group focused particularly on the medical benefits of those who retire before age 65 (the current age for Medicare eligibility), in part because of the high medical expense to the University associated with employees who retire between ages 55 and 64 before Medicare eligibility begins. At the same time, changes in this aspect of the program affect a relatively small number of employees since very few staff and even fewer faculty retire before the age of 65. For FAS 106 purposes, however, this aspect of the program is very costly because the University must recognize the potential that many individuals will retire before age 65. Similarly, the Work Group's proposal that service be continuous allows the University to realize a significant reduction in its FAS 106 liability while affecting a limited number of individuals.
In recommending that retirees contribute some part of the cost of premiums, the FAS 106 Work Group concluded that it would be more consistent to treat retirees the same as active employees. Further, the proposed modification of basing premium co-payment rates on the individual's age at retirement parallels the design of pension plans in which individuals taking their pension early receive a reduced benefit because of a longer life expectancy at time of retirement.
Making the Transition
If adopted, the proposed plan would become effective for all employees hired on July 1, 1993, and thereafter. For all other employees, the proposed plan provides for a three-year window, beginning July 1, 1993, and closing on June 30, 1996. Individuals who meet the eligibility requirements before or during the window will have the opportunity to retire on or before June 30, 1996 under the current plan, upon reaching the eligibility requirements. A three-year window creates a relatively long transition period, but the Work Group considered it appropriate for the University community to give University employees ample planning time, particularly in light of the concurrent phasing out of the faculty voluntary early retirement program.
Review of the Proposed Modification
We invite responses from the University community. Comments should be directed to Provost Michael Aiken or Acting Executive Vice President John Wells Gould by January 22, 1993.
* An Almanac article 12/8/92 stated that active employees contribute towards the expense of the medical plans through premium cost sharing. While the vast majority of employees have premium cost sharing, employees who have chosen to remain in Blue Cross Plan B (a closed plan) do not have premium cost sharing. - Adrienne Riley, Human Resources
Reminder: The costs above are only for retirees after they reach age 65. Before age 65, early retirees' costs vary and could be expected to be higher until 65 is reached. Even after the retirees reaches 65, costs will differ if the retiree's spouse is under 65 and/or if the retiree has dependent children.
Almanac
January 12, 1993
Volume 39 Number 17
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