State Retiree Health Plan Spending
An examination of funding trends and plan provisions
This report, a first-of-its-kind effort, provides data on state OPEB liabilities—the cost in today’s dollars of benefits to be paid to current workers and retirees over future years—and funding trends and how they are affected by aspects of state retiree health plans.
All states, with the exception of Idaho, offer newly hired public workers access to certain retiree health care coverage as part of their benefits package.1 Thirty-eight of these states have committed to making contributions toward health care premiums for such coverage. Retiree health coverage for these state government workers stands in sharp contrast to the private sector, where the proportion of firms with 200 or more workers offering health coverage to retirees has plummeted from 66 percent in 1988 to 28 percent in 2013.2 Rising health care costs, changes in accounting standards for reporting the cost of retiree health benefits, competition from overseas firms and small startup companies, and the addition of prescription drug coverage to the Medicare program have contributed to this drop in private sector retiree health benefits. And although facing many of these same circumstances, most states continue to offer health benefits to their retired public workers, in an effort to help attract and retain a talented workforce.3
One of the most significant changes for the states was an adjustment the Governmental Accounting Standards Board (GASB) made to accounting standards that requires states to report liabilities for retiree benefits other than pensions—known as other post-employment benefits (OPEB)—in their financial statements. (See ”Glossary” box.)4 By December 2008, all state governments were required to implement these changes, and the increased financial transparency that resulted prompted states to take a closer look at OPEB obligations and how to fund and pay for them.5 Retiree health insurance benefits account for the majority of states’ OPEB obligations, so many states have implemented policy changes concerning these benefits to address looming OPEB obligations.6 As a result, most states provide varying levels of retiree benefits based on factors such as date of hire, date of retirement, or vesting eligibility. (See Appendices A and D for more information about which groups of retirees were included in this study and why.)
This report, a first-of-its-kind effort, provides data on state OPEB liabilities—the cost in today’s dollars of benefits to be paid to current workers and retirees over future years—and funding trends and how they are affected by aspects of state retiree health plans. Researchers collected and analyzed updated OPEB financial data and trends since 2010, as well as 50-state data on the eligibility criteria for retiree health plans. (To convey more clear and consistent trends, we report 50-state OPEB data only since 2010, because many states were adjusting to newly implemented GASB reporting standards in 2008 and 2009.) They found that states’ strategies for addressing OPEB liabilities vary greatly and that the methods states choose to contribute to their retirees’ health insurance premiums substantially affect the size of their OPEB liabilities. Specifically, the researchers found:
- States’ OPEB liabilities decreased 10 percent, to $627 billion, between 2010 and 2013, after adjusting for inflation. This drop resulted from lower rates of growth in health care costs and changes states made to their OPEB funding policies and retiree health plan provisions.
- State-funded ratios—representing the amount of assets states have set aside to fund their OPEB liabilities—increased from 5 percent in 2010 to 6 percent in 2013.7 However, this trend varied greatly among states—the funded ratio of eight states decreased, and Oregon increased its funded ratio by 25 percentage points.
- States’ actual expenditures for OPEB totaled $18.4 billion in 2013, or 1.6 percent of state-generated revenue.(See “Glossary” box.) If states had instead set aside the amount suggested by actuaries to pay for OPEB liabilities, their total payments that year would have more than doubled to $48 billion—4 percent of state-generated revenue—and spending to fully fund OPEB obligations would have outpaced what states contributed to active state employee health premiums.
- The states that automatically increased their retiree health insurance premium contribution when the total cost of the premium rose had higher OPEB liabilities relative to the size of their economies in 2013, while the states that paid a fixed amount toward retirees’ health insurance premiums had relatively lower OPEB liabilities.
- States varied in how they modified retiree health plan provisions. For example, between 2000 and 2015, Idaho eliminated retiree health coverage for newly hired employees; at least five states stopped making any health premium contribution for certain retirees; and over a dozen states changed the minimum age or the number of state service years required for retirees to be eligible for health benefits.
- 35 states have implemented Medicare Advantage or Employer Group Waiver Plans to provide health or prescription drug benefit coverage for Medicare-eligible retirees since these options were authorized as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.8 These cost-saving programs provide states with financial subsidies from the federal Medicare program to provide Medicare plus wraparound benefits.9 (See “Glossary” box.)
As state policymakers address challenges in providing retiree health care, this report is intended to help them better understand how their spending, long-term liabilities, and criteria for premium contributions and coverage eligibility compare with those of other states.
Annual required contribution. The ARC is an accounting metric and disclosure requirement
defined by the Governmental Accounting Standards Board and calculated by each state’s
actuary. Using the economic and demographic assumptions of the plans, the ARC calculation
includes the expected cost of benefits earned for the current year and an amount to reduce
some of the unfunded liability, called an amortization payment. The amortization payment is
calculated based on the number of years—or amortization period—assumed to fully pay for the
While most states pay only for current benefit costs each year, some of the states that pre-fund their other post-employment benefits (OPEB) liabilities include amortization payments based on ARC calculations.
- Dependent. For this analysis, our definition of dependent includes survivors, spouses, dependent children, and other retiree dependents as defined by individual states.
- Discount rate. The discount rate is the assumed interest rate used to account for the fact that money invested now will accumulate interest and be worth more later.11
- Employer Group Waiver Plan. An EGWP is an option employers have, through the Medicare program, to provide prescription drug coverage to retirees who would otherwise enroll in a commercial Medicare Part D prescription drug plan.12 Most states offering an EGWP contract with an insurer to provide prescription drug coverage to their retirees.13 The insurance provider contracts directly with Medicare and receives risk-adjusted capitated payments.14 Alternatively, a state can offer prescription drug coverage through a self-run (or self-insured) plan and receive risk-adjusted capitated payments directly from Medicare.15
- Other post-employment benefits. In addition to pension benefits, state governments offer other post-employment benefits. Expenditures for these benefits consist primarily of retiree health insurance expenses, but may also include a small percentage of expenditures for other insurance coverage such as dental, vision, life, or disability.16 This analysis focuses on state government OPEB expenditures; however, our source for OPEB financial data may include data on OPEB for local retirees or teachers in localities where those plans are administered by the state and the state maintains a financial interest in them. (See Appendix A: Methodology.)
- OPEB liabilities. OPEB liabilities reflect the expected cost of these benefits for current workers and retirees over the course of their lives. These liabilities are self-reported and calculated by each state’s actuary according to the standards set forth by the GASB.17
- Retiree Drug Subsidy Plan. An RDS Plan is a traditional prescription drug insurance plan that states can offer retirees who might otherwise enroll in a Medicare Part D prescription drug plan.18 As part of the RDS program, states may receive reimbursement of up to 28 percent for allowable prescription claims for RDS Plan enrollees, within a certain dollar threshold.19 The RDS program was created when Medicare Part D was enacted to encourage employers to continue offering traditional drug coverage to their Medicare-eligible retirees.20
- State-generated revenue. State-generated revenue is money that states raise on their own, primarily through taxes and fees, and does not include any federal revenue, such as matching dollars or grants.21
- Wraparound coverage. For the purposes of this analysis, wraparound coverage includes coverage that is secondary to Medicare Parts A and B and may cover Medicare copays, coinsurance, and deductibles. Wraparound coverage may also cover services not covered by Medicare and may reimburse providers for costs above Medicare reimbursement. States may also choose to offer a Medicare Advantage plan, which is partially paid for by the federal government. This coverage option allows states to coordinate with the federal Medicare program to offer comprehensive benefits to Medicare-eligible retirees.22
- Idaho does not offer coverage to Medicare-eligible retirees and does not offer coverage to retirees not yet eligible for Medicare who were hired after June 30, 2009, with less than 10 years of credited state service. However, it does provide coverage and a premium contribution to retirees who were hired before July 1, 2009, and are not yet eligible for Medicare. Most states provide varying levels of retiree benefits based on rules such as date of hire, date of retirement, or vesting eligibility.
- Frank McArdle, Tricia Neuman, and Jennifer Huang, Retiree Health Benefits at the Crossroads, Henry J. Kaiser Family Foundation (April 2014), http://kff.org/medicare/report/retiree-health-benefits-at-the-crossroads.
- Jerrell D. Coggburn, Dennis M. Daley, and Richard C. Kearney, “Public Sector Retiree Health Care Benefits: A View From the American States,” Public Personnel Management 41, no. 2 (2012): 219–40, http://ipma-hr.org/sites/default/files/pdf/ppm/ppmsum2012.pdf; and The Pew Charitable Trusts and the Laura and John Arnold Foundation, “Recruiting and Retaining Public Sector Workers: Views From State Personnel Executives” (2014), http://www.pewtrusts.org/~/media/Assets/2014/09/RecruitingandRetainingPublicSectorWorkersIssueBrief.pdf.
- Governmental Accounting Standards Board, “Summary of Statement No. 45,” accessed May 15, 2015, http://www.gasb.org/st/summary/ gstsm45.html. The GASB is an independent organization, not a government entity, that establishes and updates standards of accounting and financial reporting for U.S. state and local governments. Its standards do not have the force of federal law or regulation, nor does GASB have enforcement authority. Compliance with its standards, however, is enforced through the laws of some states.
- Ibid. Standards were issued in 2004, but implementation requirements for all applicable governmental entities were phased in between 2006 and 2008. Standard & Poor’s Ratings Services, “Diverging Trends Underlie Stable Overall U.S. OPEB Liability” (2014), 2, http://www.nasra.org/Files/Topical%20Reports/OPEB/SandP%20State%20OPEB%20report%2011-17-14.pdf.
- Standard & Poor’s Ratings Services, “Diverging Trends,” 2.
- Governmental Accounting Standards Board, Other Postemployment Benefits: A Plain-Language Summary of GASB Statements No. 43 and No. 45, 8, accessed May 15, 2015, http://www.gasb.org/resources/ccurl/553/517/opeb_summary.pdf; and Government Finance Officers Association, “Considerations for Prefunding OPEB Obligations,” accessed May 15, 2015, http://www.gfoa.org/considerations-prefundingopeb-obligations.
- Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173, 108th Congress (2003), http://www.gpo.gov/fdsys/pkg/PLAW-108publ173/html/PLAW-108publ173.htm.
- McArdle, Neuman, and Huang, Retiree Health Benefits; and Centers for Medicare & Medicaid Services, “What’s Medicare Supplement Insurance (Medigap)?” accessed May 15, 2015, http://www.medicare.gov/supplement-other-insurance/medigap/whats-medigap.html.
- Governmental Accounting Standards Board, Other Postemployment Benefits, 4.
- American Academy of Actuaries, “Measuring Pension Obligations” (2013), 1, http://www.actuary.org/files/IB_Measuring-Pension- Obligations_Nov-21-2013.pdf.
- Steven P. May and David M. Liner, “EGWP/Wrap: Why Now?” (2011), http://us.milliman.com/uploadedFiles/insight/research/health-rr/egwp-wrap-why-now.pdf.
- Jennifer Rak and Sarika Kasaraneni, “The Value of Medicare Advantage Employer Group Waiver Plans (MA-EGWPs) for Employers and Retirees,” Avalere Health (2014), http://avalere.com/expertise/managed-care/insights/employers-value-medicare-advantage-employergroup-waiver-plans-ma-egwps-as; and American Medical Association, “Capitation,” accessed Oct. 2, 2015, http://www.ama-assn.org/ama/pub/advocacy/state-advocacy-arc/state-advocacy-campaigns/private-payer-reform/state-based-payment-reform/evaluating-payment-options/capitation.page.
- Rak and Kasaraneni, “The Value of Medicare Advantage”; and American Medical Association, “Capitation.”
- Governmental Accounting Standards Board, “Summary of Statement No. 45”; and Standard & Poor’s Ratings Services, “Diverging Trends.”
- Governmental Accounting Standards Board, “Summary of Statement No. 45”; Standard & Poor’s Ratings Services, “Diverging Trends,” 2; and Governmental Accounting Standards Board, Other Postemployment Benefits, 2.
- Gail Levenson, email communication with The Pew Charitable Trusts, Sept. 22, 2015.
- Centers for Medicare & Medicaid Services, “About RDS,” accessed May 26, 2015, http://www.rds.cms.hhs.gov/about/; and Centers for Medicare & Medicaid Services, “Overview of Retiree Drug Subsidy Option” (2005), https://www.cms.gov/Medicare/Prescription-Drug-Coverage/EmployerRetireeDrugSubsid/Downloads/OviewoftheRDSrev1.pdf.
- Centers for Medicare & Medicaid Services, “About RDS.”
- U.S. Census Bureau, “Annual Survey of State Government Finances,” accessed Feb. 3, 2015, http://www.census.gov/govs/state.
- McArdle, Neuman, and Huang, Retiree Health Benefits; and Centers for Medicare & Medicaid Services, “What’s Medicare Supplement Insurance (Medigap)?”
Multiple factors contribute to improving picture in many states