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PM2 Connections 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.