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performance measurement
& management
Getting to Know the Most Important
Benefit Plan Measurements
By Russell Nash
To keep their plans on
track so they can deliver
promised benefits,
trustees and government
finance professionals
need practical
measurements they
can monitor.
48 Government Finance Review | April 2013
R
etirement 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.
can get you quickly acclimated to the
most important information about how
your plans are performing.
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
If the health insurance plan is selfinsured, 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
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.
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.
Several measurements can help
you manage your prescription
drug plan.
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.
Understand the fees being paid for the
services employees receive, and if you
are dissatisfied, challenge vendors to
do better or search for better terms in
the marketplace.
PRESCRIPTION DRUGS
Several measurements can help
you manage your prescription drug
plan. As with medical services, look at
both your expected prescription drug
cost trend and the cost sharing targets
between the plan and the employee or
retiree. Your professional staff should
be able to tell you the expenditures
for prescription drugs by drug or by
category. To set the cost sharing target,
understand what the plan paid and
what employees or retirees paid. A
good rule of thumb is for participants
to pay 30 percent of the cost.
Next, look at the generic substitution rate. Generic substitution refers to
the choice your members make when
a generic equivalent is available to
a brand-name drug. The plan should
encourage members to discuss generic
options with their doctor. Ask for a list
of the top 25 drugs by cost (the amount
your plan paid per drug) and by the
number of claims and or prescriptions
for a particular drug. This will tell you
which drugs are most costly to your
plans. Then, determine which of these
drugs have generic alternatives. Your
pharmacy benefit manager or the professionals who administer your plan
can provide generic alternative infor-
mation. You may also want to consult
with Consumer Reports, which provides information about generic drugs
online. You may even want to research
over-the-counter alternatives.
Finally, look at your agreement
with your pharmacy benefit manager.
Review administrative fees, prescription drug discounts, and rebates from
the manufacturer. You should be getting discounts for both generic and
brand-name drugs, and for drugs
obtained through mail order services.
Your Benefits Management
Dashboard
Medical Plan
Medical loss ratio (fully insured plans)
Medical claim trend
Network discounts
Cost sharing targets
Administrative fees (self-insured plans)
Prescription Drug
Prescription drug cost trend
Cost sharing targets
Generic substitution
Administrative fees
Discounts
Rebates
Defined Benefit
Annual required contribution
Funded ratio
Income replacement ratio
Defined Contribution
Investment options offered
to participants
Recordkeeping and administrative fees
Investment fees
Participant transaction fees
April 2013 | Government Finance Review 49
You should also be sharing rebates
from the drug manufacturer. Getting
information about how the rebates are
calculated is often difficult, but be
persistent and don’t hesitate to ask for
this information.
DEFINED BENEFIT
RETIREMENT PLAN
Most of the important measurements
of a defined benefit retirement plan
are calculated each year in an actuarial valuation. While new Government
Accounting Standards Board statements
have changed the role of the valuation,
it will remain an essential funding tool
for defined benefit plan trustees in the
future. The most important measurement from the actuarial valuation is the
annual required contribution. In addition
to investment income, your defined
benefit retirement plan is funded by
regular contributions from the employer
and, in most jurisdictions, the employee. The ARC has two components: the
normal cost of your plans benefits and
the cost to fund any unfunded liability
over a period of time. The components
are combined and expressed as a percentage of the employer’s payroll, and
this becomes the contribution rate for
the employer. Next, look at your plan’s
funded ratio. This is ratio of the actuarial value of assets over the actuarial
accrued liabilities for a given period of
time. Don’t focus on the funded ratio
alone; it should be viewed in the light
of other factors such as the sufficiency
of employer contributions. On the benefit payment side, look at the plan’s
income replacement ratio. This is the
ratio of how much income your benefit plan formula produces, compared
to salary, during the later years of a
50 Government Finance Review | April 2013
participant’s career. This measurement
shows the adequacy of the benefit. A
subcomponent of this measurement
is defining how many years of service
constitute a career. Knowing what you
want your plan to provide in benefits,
given other sources of possible retirement income, can help you set or
adjust the plan’s benefit formula multiplier if needed. (For more details about
pension funding, see “Understanding
Actuarial Information” in the issue of
Government Finance Review.)
Most of the important measurements of a defined benefit
retirement plan are calculated
each year in an actuarial valuation.
DEFINED CONTRIBUTION
RETIREMENT PLAN
Most of the monitoring of defined
contribution retirement plans focuses
on the performance of the individual
investment options, but other items
also require attention. Plan sponsors
and trustees need to keep a close eye
on fees and expenses, which can erode
the growth of account balances in the
plan over time. Look at the fees in three
areas: record keeping and administrative costs, costs associated with investment products, and the costs of participant transactions.
SERVICE DELIVERY
The point of benefit plans is to
improve the lives of the plan participants, so delivering high-quality service
is important. A variety of measurements exist for monitoring your service
delivery. You can count the number
of interactions you have with your participants by telephone and in person,
along with Internet access to account
information and group meetings. You
can also count the number of transactions handled over a period of time. In
addition, it’s a good idea to measure
the quality of those interactions through
some type of survey. For defined benefit pension plans, try measuring the
time between a request for a transaction (retirement or benefit estimate)
and the time the transaction occurred.
Also look at the number and types of
professional development opportunities provided to the employees who
provide these services; review the
training budget at least annually and
discuss possibilities for training.
CONCLUSIONS
Knowing a few of the most important measurements of the jurisdiction’s
benefit plans will help finance officers
and trustees quickly assess plan performance and aid in discussions and decisions about future benefits. Plan administrators need to identify key measurements and routinely report them to
decision makers, helping everyone be
sure the plan is on track to provide sustainable benefits to all participants. y
RUSSELL NASH is the chief operations
officer for the City of Austin Employees’
Retirement System and a member of
GFOA’s Committee on Retirement Benefits
Administration. Previously, he held healthcare and pension management positions
with the State of Oklahoma. Nash has a law
degree from Oklahoma City University.