Nina Krammer:
Christian, can you introduce yourself?
Christian Goodman:
Hi, Nina. My name's Christian Goodman. I'm a retiree healthcare strategy leader. I've been working with retiree healthcare clients for about 30 years. My job is to work with public employers, specifically in helping them analyze, review, educate them, and try and find ways to help them save money while maintaining a valuable public sector retiree benefits.
Nina Krammer:
So Steve and Christian, welcome. You recently co-authored a white paper called Reinventing Healthcare for Public Sector Retirees. And so this is rising retiree healthcare liability strain public sector budgets, but shifting to the individual marketplace with defined contributions, offers cost relief and better retiree healthcare. In the white paper, you also talk about something called other post-employment benefits or OPEB. Maybe Steve, could you explain to our listeners who may not be familiar, uh, with what OPEB exactly is and why it matters?
Steve Schatt:
Sure. It's effectively the promise that these employers have made to provide healthcare and other, uh, benefits after employees and their active working careers. Uh, it's important because it's, it's a measure of the current financial value of a future promise, and in some cases, those promises can be quite large in terms of the, the actual dollar amount that has to be reflected on their financial statement. It's a growing issue. It's a sizable portion of their over financial, uh, outlay. And it's, uh, an important number to be aware of.
Nina Krammer:
How big is that number and how did we get here?
Steve Schatt:
The combined unfunded OPEB obligation for public sector employers is approaching a trillion dollars, and we've gotten there because healthcare costs are rising, the population is aging, and oftentimes the benefits promised to public sector employees are quite rich. And so the value of these benefits continue to increase year over year.
Nina Krammer:
Wow, that's a huge number. Christian, can you tell us why have retiree healthcare obligations grown so dramatically compared to other budget items?
Christian Goodman:
A lot of reasons actually. You know, one of the main reasons is that the medical trends or medical inflation continue to outpace general inflation. So your general cost to provide medical to these retirees continues to outpace the actuarial tables. The retirees are living longer, so you're not only paying more, but you're paying them for a longer period of time. Unlike a pension plan, which is typically funded by assets, which on average in the country, it's about 70% funded for your average public sector pension plan. These retire healthcare benefits have not been funded. So they, you know, 9%, nine 10% is what you see on your average OPEB plan. So trend rates going up higher than normal, people living longer, and then lack of funding is really, uh, kind of driven us to where we are today.
Steve Schatt:
Yeah, I guess the only thing I'd add to that, Christian, is that the other development recently was the GASB, which is the, the accounting agency that oversees, uh, the reporting of these obligations has revised the way that these obligations are measured. We making them more prominent and upfront in the financial statements. It's not an indicator that those obligations are are larger than they otherwise would've been, but it does make them more prominent on the financial statements. So something that's more direct and, and something that needs to be addressed
Nina Krammer:
Beyond the financial numbers. What impact do unfunded OPEB liabilities have on taxpayers, retirees, and even on the credit worthiness of state and local governments?
Christian Goodman:
It's the tax dollars that come in to help fund a public employer and just the ability to even provide these benefits. If you don't have the money that is needed to provide the benefits on an annual basis, then it puts those benefits at jeopardy. The fact that, uh, as Steve noted earlier, the, the governmental accounting standards where GASB has said, look, you need to account for these plans, you need to publish them. They need to be reflected on your financial statements. It really impacts the, the, the financial standings of the employer. And for an example, as I get out and talk to a lot, lot of public employers, so like Christian, these, these liabilities are actually hurting our bond ratings, which impacts the ability for us to borrow money to buy snowplows. I live up in the Midwest, snowplows are very important. We gotta have the best snowplows. So, you know, to go out and borrow money, to buy a snowplow, to, to redo a road, to, to build a community. If your bond ratings are down, the cost to borrow money goes up.
Steve Schatt:
These public sector employers are already under a tremendous amount of, of budgetary strain. They're, they're constantly trying to manage taxpayers dollars coming in and how to spend those dollars and having these growing and, and uncontrolled, uh, OPEB obligations just creates difficult decisions around how to spend limited resources and in, in some cases, diverting, uh, funding away from other services like education, infrastructure, public safety. It also impacts how much they're able to, um, pay new employees. So it creates a situation where, you know, they might be, um, having trouble hiring new employees because there's budgetary financial strain on how much they can offer.
Nina Krammer:
Yeah. Thanks for helping us to understand the challenges. In your white paper, you describe the individual marketplace as a proven solution. Can you explain how it works in practice, both for retirees and plan sponsors?
Steve Schatt:
The individual marketplace basically redefines, uh, the benefit promise that an employer has made to their employees in terms of how they're gonna fund healthcare into retirement from an open-ended defined benefit promise, often, you know, just a percentage of the premium of, you know, a co-insurance approach to redefining it as a, as a defined contribution benefit, where the, the amount that they, uh, promised to pay is fixed. Effectively, what that provides the employer the opportunity to do is manage their exposure to, or even eliminate their exposure to healthcare inflation. So it puts a, a cap on how much future growth there is in their obligation, and at the same time take advantage of the financial efficiencies in the, in the marketplace to reduce how much they need to provide to provide a sustainable, but at the same time, valuable benefit to retirees.
Christian Goodman:
I'll take a a real life example on that. Um, Steve, is that when you're working with a municipality, our job isn't to go in and say, look, let's reduce the cost of your plan by diminishing the benefits for retirees. That's not what we're talking about here. You can do that all day long by making the retirees pay more, making the plan leaner, limiting those that have coverage. We're not talking about that. We're oftentimes employers will come to us, Steve and Christian, tell us about your solution that will continue to provide the, uh, the same level of benefits that we had prior to you talking to us. So in other words, we go in and potentially employers are gonna save 30, 40, 50, up to 50% in some cases while maintaining that same level of benefit for those retirees. And that really opens eye of these employers. 'cause how can you not win there? The employers still providing the same level of benefits while reducing the overall cost of the plans.
Nina Krammer:
And and this isn't a particularly new approach. The private sector's been doing this for more than 20 years. What can public sector employers learn from their experience?
Steve Schatt:
I would say what they can learn from the private sector is that this is a viable approach that retirees like and appreciate for a number of reasons. It provides a valuable and meaningful benefit. It allows 'em to take advantage of premiums in the marketplace that are often significantly lower than what a, what a group plan can offer. And if we focus in the Medicare space, there are reasons why premiums are so much more affordable compared to a group plan. First and foremost, a typical employer might have risk pool. Basically the group that's participating in the plan that might be several hundred, several thousand employees. There's still a fair amount of risk embedded in a a group of that size and, and insurers have to build in premiums to, to offset that risk and cover that risk. When an employer moves to the marketplace, they join a risk pool of 50 million plus lives.
Steve Schatt:
There's very little risk in that risk pool and insurance carriers don't need to build in a buffer to offset that risk so they can keep their premiums quite low. Uh, Medicare plan G, for example, from one carrier is gonna look exactly like Plan G from another carrier. So the only way that those carriers com compete and maximize their share of that 50 million, uh, life risk pool is to have the most affordable premium out there. And then the last thing to note is that the risk pool is constantly being replenished with young, healthy retiree lives. So unlike a group plan, which is often closed or grandfathered and continues to get older and effectively sicker as the population ages in the Medicare risk pool, there are constantly new people turning 65 every day and joining Medicare. So it keeps the, the cost low and retirees really like the ability to choose a plan that best meets their actual healthcare needs. Group plans tend to be fairly rich, especially in the public sector, but that's often not the right plan type for every retiree. You might have healthy retirees who would rather pay a much lower premium and get in something like a Medicare advantage plan where they have a lower, in many cases, a zero premium and they just pay when they, when they utilize the plan, the value of choice, the large stable risk pool allow retirees to maximize the value from this approach.
Christian Goodman:
This has been going on in the private sector for 20 years. Why isn't it really, why haven't we seen it maybe as prevalent in the public sector? If you go back to the early nineties, private companies went through this transformation of something called FAS 1 0 6 came out and said, you need to account for these liabilities. And we saw a phenomenon in the industry where 50% of those employers that were providing retire healthcare eliminated those plans. And so now you fast forward and then the public sector then had to do that. So the ones that still remained in the private sector that provided these benefits, they eliminated them, they scaled them back, or they moved to a solution like the retire exchange public sector has the reputation that they tend to lag behind the private sector a little bit. So we're starting to see this take place in, in the public sector where they're having to account for these liabilities.
Christian Goodman:
And like Steve said, rich, somewhat richer benefits in the public sector. The mantra is public sector employers tend to maybe pay their employees less, but the benefits are richer. Benefits are very important to the public sector, police officers, firefighters, ASFE union workers. It's very important that we maintain those benefits. So I think that's kind of the reluctancy kind of mess with those benefits, Nina, but now they're looking to ways to control them and when they've seen that this, those private employers kept their benefits around, but move this solution and, and it's been very viable now, I think the public employers are saying, yeah, we can't get rid of these benefits. We promise these benefits. What's a way to deliver these at a lower cost without losing them? And, and that's why this solution is becoming very popular. We've got five or six states that have gone to this solution and had great success. Many county cities, townships, road commissions that have moved to this and they've seen great success and I think the public sector will look to their colleagues and really put a strong consideration for this solution.
Nina Krammer:
Thanks Christian. Steve, I think earlier you had alluded to defined contributions in the form of health reimbursement arrangements or HRAs. In what way do HRAs change the way employers provide retiree healthcare benefits?
Steve Schatt:
Under a typical group sponsored employer plan, the financial subsidy provided by the employer is often just a premium offset. So the premium is defined and and the employer covers a percentage of that say 50% or 60%, and the rest is paid by the retiree along with all of their out-of-pocket expenses under the plan. So copays, co-insurance, deductibles, et cetera. When you move to an HRA design, you basically redefine that financial subsidy as a fixed dollar amount that is, goes into an HRA, it's a notional account, so it's not an actual, um, account that's funded like a 401k and and investments are managed, but effectively the dollars are there for the retirees to spend and get reimbursed for their premiums. The nice thing about the marketplace approach is that it gives retirees more flexibility and how to spend those dollars. So while the contribution is fixed, retirees have more control over how they're spending their employer's financial support. So they can use the HRA to pay their premiums, they can use it to reimburse themselves for their Medicare part B premium. They can use it to cover their out-of-pocket expenses for medical prescription drug. In many cases, retirees on a marketplace utilize the HRA to purchase additional coverage like dental or vision. So the HRA design not only eliminates, um, or reduces the employer's ex uh, exposure to to medical inflation, it gives retirees more control of how they're spending their financial dollars.
Christian Goodman:
The flexibility, I think is key. Steve, one of the, when I'm out talking to employers again, the, one of the things that a lot of employers don't think about is this flexibility approach where people have this pot of money and spend it how they wish tax free dollars is that employers can set this up. For example, maybe a, a retiree and a spouse have a joint account, maybe they're both getting $200 a month, they can pull that money together. And we all always know that retirees and spouses may not have that same healthcare needs so they can pull that money together. Maybe a retiree has a tough year and the bulk of that $400 needs to be funneled towards that retiree where maybe the spouse was healthy. The money can be allowed to roll over from year to year. So if they don't use it one year, that money can be there as a, essentially an HRA savings account that they can use for future years. So the flexibility, I think you said is Steve is very advantageous and it's something they don't have in today's current traditional plans.
Nina Krammer:
I like that flexibility and the control that you had mentioned too, Steve, that retirees have over it. Which actually answers my next question that I was going to ask. What protections or advantages do retirees gain when moving from group coverage to individual marketplace coverage? Is there anything else that you would add to that?
Steve Schatt:
For one thing, it makes the, the program itself more sustainable, right? So under a group environment, group plan environment today, uh, as Christian mentioned earlier, when public sector employers, um, do have budgetary strain or, or constraints, and they need to manage their cash flow outlay in a group environment, group plan design, really the only way to do that is to pass the, the cost increases onto retirees, whether that's through higher premiums, a higher premium cost share, uh, additional out-of-pocket expenses, think, you know, a higher deductible or higher copays. That's really the only way to control the cost under a group design under HRA program becomes more, um, sustainable and retirees, uh, have comfort knowing that, you know, I'm not gonna have this big increase in my premium next year because I'm in a group plan where that's really the only way the, the employer has the ability to manage costs. So they know exactly what they're gonna get once they're in the marketplace. They have experience with selecting plans and, and coverages that, that best meet their needs very often at a, a much lower price point than the group plan. And so that creates some peace of mind that, you know, they're gonna continue to receive this benefit that's gonna help them offset their costs of, of medical coverage into retirement.
Nina Krammer:
One concern some might raise is retiree confusion or fear of change. Christian, I'll ask you, how would you speak to this very real concern?
Christian Goodman:
I love this question because one of the parts of my job is to explain to employers the savings and how the retirees will be taken care of from licensed benefit counselors that take an unbiased approach. They don't work for the insurance companies. They're analyzing the retirees needs. Do they travel? How much money do they have to spend? What doctors, hospitals, pharmacies, drugs do they take? The best part of my job is I get to get out and talk to retirees during our retiree meetings, and that's where an employer makes the decision to move to a retiree exchange. And then they know there's gonna be confusion. So they invite the retirees to, to come out to in-person meetings where they can learn about the change from their employer because they wanna hear from the employer. They don't want to hear from the guy that sold the employer this solution.
Christian Goodman:
And then, uh, I get to get up and talk to these retirees, retirees come into these meetings pretty nervous, scared and, and somewhat upset. But after you talk through with these retirees, your employers providing you with money, we've ensured that in most cases all of the retirees are gonna be able to buy similar benefits to what they have. But better is the employer now isn't providing a plan to you that it's uncontrollable with cost. It's a one size fits all. We're gonna work with each one of you individually to make sure that you're able to buy the plan that best meets your needs at the lowest cost. You're gonna have this HRA to back these benefits and everybody's gonna be fine. They ask a lot of great questions like, can I change my coverage each year? What about my spouse? Do I have to change doctors? And when you answer their questions, you explain the process needed, they see that there's a, there's a very well thought through process that they'll be working with benefit advisors who are kind of one-on-one basis to make sure that all of their needs are satisfied and that they're gonna be just fine. And retirees walk out of these meetings feeling a lot better, not scared, then you're gonna know what they need to do and, and know that the employer hasn't abandoned them, but is actually supporting them in a better way than they had previously done.
Steve Schatt:
Proof is in the pudding, right? So retirees, there's some trepidation, there's concern and they, they go to the retiree meetings, they feel better, they've gotten their questions answered once they actually talk to a benefit advisor and understand what their options are and enroll in a plan. In many cases, retirees are able to see savings of, you know, two, three, $4,000 per year. It's not uncommon to see average savings of $3,000 or more. You kind of see the light go off and, and they, they realize, hey, not only am I a plan that's better aligned with what I actually need, but I'm saving some real dollars here that I can, that I can spend on other things. And, and we've had retirees come back to their employers after the implementation and say, why didn't you do this sooner? This has been fantastic. I got the support I needed, I got the one-on-one. My spouse is in a plan that lines up well with his or her needs and we're saving money at the same time.
Christian Goodman:
I work with a, a county in, in the Midwest and I always follow up with the county controller and I ask him, how are things going? And one time he told me, he said, Christian, I don't hear from the retirees anymore. And I said, is that a good thing or a bad thing? You know? And he goes, oh no, that that is exactly what we are looking for. 'cause trust me, if something weren't going right, yeah, I would definitely hear from them. So the fact that the administration goes away, that the, the retirees are not coming back to the county saying, what have you done? My benefits aren't at the level I'm paying too much. The fact that they're silent is, is music to their ears because they know that these retirees have been taken care of and are, are enrolled in some great plans.
Nina Krammer:
This is great. I just wanted to ask a couple of questions too around policy and just give some context around the market. How have federal laws like the Affordable Care Act and the Inflation Reduction Act reshaped the landscape for retiree healthcare? And Steve, I'll look to you for, to answer that one first.
Steve Schatt:
All of the significant legislation that has been passed in this country over the last 20 plus years has only gone to support and strengthen the individual marketplace, um, relative to, to group plans. So if you think about it, the Medicare Modernization Act introduced a prescription drug plan that didn't exist before. And really, you know, why do employers offer retire healthcare in the first place? Well, it's to, it's to fill a gap, right? It's to fill a gap in coverage that retirees need support and, and prior to this legislation and it, it didn't exist. So, you know, the, the Medicare Modernization Act created a prescription drug benefit that was available to everyone for the first time in the same way the ACA legislation created a marketplace for pre 65 retirees. So employers who wanted to support employees who'd like to retire early before they're Medicare eligible, there really wasn't a, you know, a guaranteed issue viable market out there for retirees to get coverage prior to Medicare eligibility.
Steve Schatt:
Well, the ACA fixed that and, and created a guaranteed issue marketplace where they can get coverage without underwriting. And the Inflation Reduction Act went further and created the enhancements to the prescription drug benefit that really make it a very valuable prescription drug benefit. You know, got rid of the donut hole that was first in place and, and made a very rich benefit. And I guess the question really comes down to employers is, you know, now that there's all these, uh, all these gaps in coverage have been filled and filled with really quite valuable benefits, is there really any incremental value and continuing to provide an employer sponsored group plan? I mean, the answer more often than not is no, there's, there's really no incremental value in continuing a group plan along with all the administration that goes with it when there's valuable rich benefits in the individual marketplace that are as rich, if not richer than what the employer was providing.
Christian Goodman:
You talk to these employers and these finance directors and the HR directors and you talk to them about the savings, about the plans. And they used to look at me and they'd say, alright, Christian, like this sounds way too good to be true. Like, what is the challenge? And before the Inflation Reduction Act, I used to have to look at them and say, well, you got this open-ended catastrophic level of coverage potential that you may have a handful of retirees that are still gonna have to come out of pocket on the drug plans because they're on 200, 300, $400,000 life saving drugs. As you said, Steve, all of the legislation that's come out has really supported the need, the, the reason to go to the individual exchange. You now have this hard cap dollar of $2,000 in 25, it's going to $2,100 in 26. But now, you know, I tell them, look, there really isn't a chin in the armor legislation has helped the individual plans solve this catastrophic level of coverage.
Nina Krammer:
What impact do Medicare Advantage in part D changes have on the viability of group retirement plans versus individual market, uh, marketplace options?
Steve Schatt:
It creates an environment where group employer plans are competing with individual marketplace plans that are very affordable and, and provide very valuable coverage. And as more and more employers recognize that the indoor marketplace, uh, is a competitive marketplace with real value and, and the ability to create a win-win, uh, outcome for both the employer and the retiree, it's gonna be tougher and tougher for these group plans to keep pace with the indoor marketplace plan offerings. We saw a significant impact last year and for this year in terms of the way CMS funds, employer sponsored group plans for the prescription drug benefit. And there's been a shift in the way that that funding is being allocated between group plans and individual marketplace plans, to the point where we have seen, uh, in many cases, group plan premiums for plans that cover, uh, prescription drug benefits going up by 30% or more. And so I don't wanna say it's a losing battle, but it's gonna be a tougher battle, um, each and every year as the government continues to, to fund these indoor marketplace plans to a great degree on top of the, you know, just the underlying risk pool and for all the reasons we've already talked about, plans that are variable affordable relative to what a group plan can provide.
Christian Goodman:
Yeah, Steve, you and I both look at these plans and we, we say, wow, you know, we're looking at these group plans provided by the employer, and we see that in some cases there are $0 plans on the individual market that are just as the plan design is just as rich as what's being offered maybe at the group rate of $200 or $300 a month, which is incredible. And then you may have some people that say, you know, Medicare Advantage just isn't for me. And that's where the choice option comes in. There's something called this Medigap plan, which, you know, amount of Medigap plans tend to really like it because of the lack of networks. They can go anywhere that Medicare is accepted and these plans are extremely rich. It's probably some of the richest plans on the planet to be honest, especially if you're looking at the, the Plan Gs and, and some of those plans.
Nina Krammer:
Christian, if you were advising a city or state government considering this transition, what are the first steps?
Christian Goodman:
Yeah, the first step is Steve or I would, would meet with, with an employer and we'd really wanna understand what's going on with the, with the city or, or the municipality in that we would take a look at what's being offered, what it cost, who's paying for it, right? And Steve and I are gonna take this look to say, okay, let's compare what you've got today to some plans that are out on the individual market, and we're gonna do a thorough analysis. It's possible that we come back and say, look, the plan you're providing is great. Uh, you know, the individual plans maybe aren't gonna save you a lot of money, but oftentimes what we see is that there are plans on the individual market that are 30, 40, 50% cheaper. So the municipalities that we work with, they are looking for that savings to continue to preserve and provide those benefits because the last thing they want to do is, is either push more costs to the retirees, or even worse, we can't afford to continue to provide these benefits. Let's, let's deliver them through an exchange which potentially is gonna save the employer a ton of money, preserve benefits, and keep the retirees in great valuable plans.
Nina Krammer:
My final question, if listeners were just to take one big idea away from this white paper from our conversation, what should it be?
Steve Schatt:
The landscape has changed dramatically over the last 20 years, and employers put these plans in place for a very valid and valued reason. It was to facilitate orderly retirement for employees who had reached the end of their working careers. And retirees really value these benefits. It's one of the biggest concerns of employees when they're approaching retirement is how am I gonna cover and pay for my, my medical coverage when I stop working? And the last thing you want to have is employees who continue to work for you year after year, just to maintain access to the active medical plan. The original promise that was made to these retirees when these plans were first put in place 30, 40, 50 years ago, the landscape has completely altered. There are plans in the individual marketplace that didn't exist, um, back then, the legislation that has evolved over the last 20 plus years has only strengthened that landscape and, and made these plans even more valuable, uh, and more rich and more affordable. And so if you haven't looked at the marketplace in any time in the last, you know, 10, 15 years, it's worth looking at and doing some, some analysis and evaluation because the chances are are very high that your retirees could be much better off in a marketplace program compared to what you're providing today. Take the time to do a thorough evaluation, understand the potential impact not only on your retirees, but on the uni municipality of taking advantage, uh, of this evolving landscape.
Christian Goodman:
I know that oftentimes we get out to employers and we can show them that there's a financial impact, but a, a lot of the HR directors will look at me and say, but Christian, we've always taken care of our retirees. I I don't want to put this on them and you gotta understand our entire existence at, at Via benefits is to, is to really make the transition for retirees to move from a group environment to an individual as smooth as possible. We do that through extensive communication. We do that for getting out in front of retirees in person. We do this through primarily working through telephonic 'cause we know retirees don't like to work with technology, and we also support that in an ongoing basis. So not only do we help them communicate, educate, enroll, but we also support them for the rest of their lives as long as they're enrolled with, with our exchange. Those employers would say, love the savings, but can't do this to retirees. I really think that you need to involve the retirees early, get them on board and let them understand the experience that their group would go through in order to become enrolled in an individual plan.
Nina Krammer:
Those are some great takeaways. Thank you both so much, Steve Christian, for taking time out of your day to be here with me today and with our listeners. Thanks so much for being here.
Christian Goodman:
Thanks Nina.
Steve Schatt:
Thank you for having me.
Nina Krammer:
You've been listening to The Via Benefits Exchange. For more information about via benefits and the solutions we provide, visit via benefits.com. That's V-I-A benefits.com.
