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Managing the Faculty of the Future:

Retiree Health Insurance

TIAA-CREF Institute, NACUBO and ACE

November 10, 2004

INTRODUCTION:Health Insurance in Higher

Education

Dr. Robert ClarkProfessor, North Carolina State UniversityTIAA-CREF Institute Director of Research

Challenges Facing Higher Education

• Budgetary Shortfalls

• Aging Faculties

• Rising cost of health and retirement benefits

Budgetary Shortfalls

• Declines in state appropriations

• Declines in endowment earnings

• Affect of economy on giving

Faculty Age Structure

0

10

20

30

40

50

60

1987 1998

younger than 4040-5455 and older

Causes of Faculty Aging

• Slow growth in faculty size

• Low turnover rates

• Low retirement rates

Health Insurance

• Virtually all faculty have health insurance

• Many institutions provide retiree health insurance

• But costs of health insurance are soaring

Health Insurance

• Rapidly rising health care costs are placing financial pressure on colleges

• Faculty pay more but still institutional costs are rising

National Health Care Issues

• The cost of health insurance is influenced by national trends

• Medicare is important to faculty as a benefit, and as a cost

National Health Care Issues

• Cost of employer provided health insurance rising by over 10 percent per year

• Projections of the cost of Medicare are so large that they are not sustainable

Health Insurance

• Private sector firms are quickly dropping and scaling back RHI

• Many organizations are finding the costs unsustainable

• Need for policy changes and the development of RHI savings accounts

Today’s Program

1. Describes the national health insurance environment

2. Examines the future of Medicare

3. Highlights changes in RHI among non-educational employers

4. Presents evidence on health insurance trends at universities

Today’s Program

We begin with presentations by two nationally prominent experts on health insurance

• Dr. Marilyn Moon• Dr. Sylvester Schieber

Today’s Program

• Presentations will be followed by short replies then, by taking your questions.

Polling Question #1

• Does your institution provide retirees with health insurance benefits?

• Yes, past and present retirees• Yes, but only for prior retirees• No, retiree health insurance is not provided• Unsure

SECTION ONE:An Overview of Healthcare Costs and Medicare Trends

Marilyn Moon, Ph.D.Vice President and Program Director

American Institutes for Research

A Brief Overview of Medicare

• Has changed over time• Reliance on many kinds of supplemental coverage• Rising costs

Compares well with private insurance growth Higher burdens on beneficiaries over time

Medicare Expenditures by Type of Service: 1966 and 2003

1967: 70% Part A; 30% Part B2003: 46% Part A; 41% Part B; 13% Part C (Medicare+Choice)

Source: Health Care Financing Administration, 2000 and MedPac 2004

Source: MedPac analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2001

Sources of Supplemental Coverage

Among Noninstitutionalized Medicare Beneficiaries,2001

Out-of-Pocket Spending as a Share of Income Among Elderly Beneficiaries

Source: Urban Institute Calculations Using NHE, CPI, CPS, and Trustees Report, MCBS

Cumulative Growth RatesCumulative Growth in Per Enrollee Payments for

Comparable Services, Medicare And Private Insurers, 1970-2000*

0

500

1000

1500

2000

2500

Year

Gro

wth

(%)

Private health insurers

Medicare

Private Insurers

Medicare

Source: Boccuti and Moon 2003; Based on Marilyn Moon’s calculations

31.1%

68.9%

8.2%

85.2%

22%

78%

4.6%

89.9%

Health Fair or Poor

Health Excellent, VeryGood, or Good

3 or More ADL Limitations

No ADLs

Non-HMO Enrollees HMO Enrollees

Source: HCFA/Office of Strategic Planning: Data from MCBS, 1998

Relative Health Status of HMO Enrollees, 1998

New Drug Legislation

• Not help by as much as many think

• The donut hole

Beneficiary & Government Share of Spending in 2006, at Individual Expenditure Levels, Under the

New Medicare Drug Benefit

Source: Boccuti and Moon 2003; Based on Marilyn Moon’s calculations

The Future

• Demographics

• Higher costs of care per capita

• Unsustainable?

Growth in Medicare Spending as a Share of GDP and in Beneficiaries as a Share of Total

Population

Affordability

From 2003 to 2040• Increase in GDP per worker - 63%• Increase in GDP per worker if take out Medicare

burden - 55%• To do this requires tax increase

Hold Line on Spending?

• No tax increase approach 42% cut

• Growth proportional to income 33% cut

SECTION TWO:The Future of Retiree Health

Benefits in Higher Education in the United States

Sylvester J. Schieber, Ph.D.Vice President

Watson Wyatt Worldwide

Overview

• Background• Context for considering employer-sponsorship

of retiree health benefits• Health benefits for retired faculty from

institutions of higher education• Conclusions

Background

Personal Health Care Expenditure Patterns, 1960 through 2002

0

10

20

30

40

50

60

1960 1965 1970 1975 1980 1985 1990 1995 2000

0

2

4

6

8

10

12

14

% out-of-pocket

Spending as % of GDP

55.2 %

15.9 %

Percentage of expenditures from out-of-pocket

Personal health expenditures as percentage of GDP

Source: Office of the Actuary, Centers for Medicare & Medicaid Services, U.S. Department of Health and Human Services.

Total Health Care Expenditure Patterns, 1960 through 2002

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1960 1965 1970 1975 1980 1985 1990 1995 2000

Personal health expenditures

Out-of-pocket expenditures

Percent of GDP

2.5 %

2.0 %

5.1 %

14.9 %

Source: Office of the Actuary, Centers for Medicare & Medicaid Services, U.S. Department of Health and Human Services.

Employer-Sponsored Retiree Health Benefits in Perspective

The Private Sector Story

• Retiree health benefits were not carefully thought out • During the 1970s and 1980s, inflation soared • During the 1980s accounting standards raised

awareness of the costs• Also during the 1980s tax laws effectively precluded

funding

The Private Sector Story, Cont’d

• From 1980 to 1997—medium and large firms offering benefits dropped from 80 to 40 %

• In 1984, 90 % of plans required 5 years or service or less–by 2001 85 % required 10 years or more

• About 30 % of current retirees have service related premiums—for future retirees it is 65 to 70 %

• About one-quarter of current retirees face premium caps, 40 % of those close to retirement do & nearly 50 % of new hires do

Polling Question #2

• Has your university increased the share of retiree health care costs paid by faculty or are you considering it?

• Yes, already increased the share• Yes, we’re considering it• No, not considering at this time• Unsure

Why Should Employers Care About Health Care Benefits Costs?

0

20

40

60

80

100

   1948       1958       1968       1978       1988       1998   

Percent

Share of GDP paid as compensation

Employers' health benefit expenditures as % of wages

Source: Bureau of Economic Analysis, U.S. Department of Commerce, National Income and Product Accounts.

Increases in Employers’ Health Benefit Costs & Wages for Recent Years

Health cost WageYear increases increases Difference

2001 10.9 % 4.1 % 6.8 %

2002 12.9 3.2 9.7

2003 13.9 3.1 10.8

2004 11.2 2.3 8.9

Source: The Kaiser Foundation and Health Research andEducational Trust, Employer Health Benefits 2004 Annual Survey.

Employer Contributions to Private Health Benefit Plans as a Percent of Wages

(Assuming Wages Grow 4 % a Year)

0

5

10

15

20

25

30

   1950       1960       1970       1980       1990       2000    2010

Per

ecen

t of

Wag

e s

Employer costs grow 10 percent per year more than wages.

Employer costs grow 6% per year more than wages.

Projection assumes health plan cost growth exceeds wage growth by 6 or 10 percent per year.

Rough Characterization of Health Care Utilization Under Typical Employer Plan

~ 75 % ofcovered lives

Occasional useof health careservices

~ 15 % ofplan costs

~ 25 % ofcovered lives

Chronic users ofhealth-care services

~ 60 % of plan costs

< 1 % ofcovered lives

Catastrophicuse of health-care services

~ 25 % ofplan costs

Health Benefits for Retired Faculty

Issues Facing Colleges and Universities Different than Those for Private Employers

• Accounting issues FASB does not have domain on public entities GASB adopted rules for recognizing costs and obligations to

take effect for periods after December 15, 2006

• Funding issues Tax limitations on for-profit sector do not apply Still there has been little funding

• Benefit security issues Implications of failure to recognize costs Assuring benefits that are not funded

Private Schools in Survey Providing Retiree Health Benefits to Retired Faculty

Current Eligible New retirees to retire hires

Pre-65 coverage Retiree 34 34 27 Spouse 34 34 27

Post-65 coverage Retiree 30 29 21 Spouse 30 29 21

Source: Watson Wyatt Worldwide.

Public Schools in Survey Providing Retiree Health Benefits to Retired Faculty

Current Eligible New retirees to retire hires

Pre-65 coverage Retiree 21 21 20 Spouse 21 21 19

Post-65 coverage Retiree 21 21 19 Spouse 21 20 19

Source: Watson Wyatt Worldwide.

Sharing of Health Insurance Premiums for Pre-65 Retired Faculty

Pre-65 plan Current retirees Eligible to retirePrivate Public Private Public

Number reporting 31 18 32 18

Percent of total Percent of totalRetiree pays all 16.1 27.8 18.8 27.8

Share expenses 54.8 37.9 65.6 44.4

Employer pays all 29.0 33.3 15.6 27.8

Source: Watson Wyatt Worldwide.

Sharing of Health Insurance Premiums for Post-65 Retired Faculty

Post-65 plan Current retirees Eligible to retirePrivate Public Private Public

Number reporting 29 20 29 19

Percent of total Percent of totalRetiree pays all 13.8 20.0 13.8 21.1

Share expenses 51.7 45.0 65.6 47.4

Employer pays all 34.5 35.0 20.7 31.6

Source: Watson Wyatt Worldwide.

Level and Sharing of Health Insurance Premiums for Pre-65 Retired Faculty

Pre-65 plan Current retirees Eligible to retirePrivate Public Private Public

Number reporting 31 18 32 18

Average spending Average spendingRetiree pays all $5,030 $5,030 $4,890 $5,030

Share expenses Retiree share 2,023 950 1,958 1,432 Employer share 2,717 3,480 2,574 3,345

Employer pays all 4,006 4,134 4,508 4,274Source: Watson Wyatt Worldwide.

Level and Sharing of Health Insurance Premiums for Post-65 Retired FacultyPost-65 plan Current retirees Eligible to retire

Private Public Private Public

Number reporting 31 18 32 18

Average spending Average spendingRetiree pays all $3,725 $3,562 $3,725 $3,562

Share expenses Retiree share 1,817 679 1,866 679 Employer share 1,781 3,062 1,735 3,062

Employer pays all 3,625 3,513 3,644 3,644

Source: Watson Wyatt Worldwide.

Polling Question #3

• How does your institution budget for the cost of retiree health insurance?

• Costs commingled with active employees• Separate line item in budget • Unsure

Other Results

• Retiree health benefits for faculty are being curtailed but not as rapidly as in the for-profit sector

• Private institutions use service requirements to greater extent than public

• Public institutions vary premiums by service to greater extent than private ones but neither do so at rates that exist in the profit sector

• Ten to 15 percent of private institutions have implemented premium caps compared to one quarter of public ones, comparable to for-profits

Looking to the Future

• Retiree dependency ratios will increase in the future—driving up pay-as-you-go costs

• GASB rules signaling and budgeting effects in the public sector

• Rationalization issues the same in higher education as elsewhere Recognizing costs as they accrue Securing obligations with funding

• The implementation of the Medicare drug benefit will alter the needs and benefits from employer-sponsored retiree health insurance

Additional ResourcesAvailable on Resource Page

• Research Dialogue #81 TIAA-CREF Institute:“The Outlook of Retiree Health” by Dr. Syl Schieber

• Recruitment, Retention, and Retirement in Higher Education: Building and Managing the Faculty of the Future Edited by Robert L. Clark and Jennifer Ma Forthcoming, Summer 2005, Edward Elgar Publishing www.e-

elgar.co.uk Chapters of the manuscript are available on the TIAA-CREF

Institute’s Web site (link on Resource Page)

Managing the Faculty of the Future:

Retiree Health Insurance

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