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University of Kentucky
Health Insurance Task Force Meeting
August 8, 2001
Agenda

Who is Mercer?

History of self-insurance

Development of group medical rates – overview

Insurance vs. self-insurance

Tier factor development

Rates for Medicare-eligible retirees

Factors influencing UK rates
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Who is Mercer?

William M. Mercer, Incorporated – international employee
benefits consulting firm

43 U.S. offices

Primary consulting services:
 Retirement Plans
 Healthcare and Group Benefits
 Compensation (Performance and Rewards)
 Communications

Largest U.S. healthcare consulting practice

Louisville, Kentucky office hired to assist UK in managing
health insurance program
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Why are we (Mercer) here?

Hired in late February 1998 to produce self-insured rates
for the 1998-1999 plan year – two-week deadline

Previous RFP process resulted in formal Mercer proposal

Towers Perrin (Stamford, Connecticut office) advised UK
during conversion to self-insurance

Mercer goal: Partner with UK staff to provide “best value”
health insurance program
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Why are we (Mercer) here? - cont.

Sample listing of Mercer-Louisville clients
 Commonwealth of Kentucky
 University of Louisville
 Murray State University
 (new) Western Kentucky University
 Ashland, Inc.
 Lexmark International
 Tricon Global Restaurants
 Brown and Williamson
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Development of Group Medical Rates –
Overview
Step 1:
Develop per capita claims experience for most recent
period (claims cost divided by exposures)
Step 2:
Plan value adjust historical experience to current
(plan design, network, vendors, etc.)
Step 3:
Apply medical trend (inflation) assumption to develop
projected per capita experience
Step 4:
Plan value adjust to include any design, network, etc.
changes
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Development of Group Medical Rates –
Overview (cont.)
Step 5:
Load for expenses
Step 6:
Multiply by expected enrollment to get needed total
premium
Step 7:
Allocate premium among coverage tiers (single,
employee plus spouse, etc.) to get total rate on
monthly basis
Step 8:
Employee cost = Total needed premium minus
employer subsidy/credit
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Insurance vs. Self-insurance
Key Rating
Differences
Medical trend assumption
Profit/risk charge
Administrative expenses
Total
Insurance Self-Insurance Difference
16 – 20%
12 – 14%
4 - 6%
2 – 6%
0%
2 – 6%
% of
premium
per employee/
month
2 – 3%
10%?
Note: Insurance and self-insurance rating models typically use the same general
methodology. Based on the differences in standard assumptions, insured rates should be
higher, since the same basic claims experience information is used for projection purposes.
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Tier Factor Development

Discussion applies to total premium rate only, NOT employee
contribution levels.

Some basic facts/assumptions
 morbidity (as measured by expected medical claims)
increases with age
 morbidity “curve” is steeper for males than females
 calculation of accounting liabilities associated with retiree
medical programs requires recognition of this morbidity curve
 non-workers are less healthy than workers

Historically, employers used 2-tier rates (single, family). Some
still use the 2-tier structure.

Now, most employers use a 4-tier structure (single, employee
plus spouse, employee plus children, full family). This is
typically viewed as more equitable.
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Tier Factor Development – 4-Tier
Structure

Employee plus spouse factor
 Typically 2 - 2.25 times single rate
 Not usually based on actual employer’s claim experience,
but can be
 Standard actuarial factor is 2.16

Employee plus children factor
 Typically 1.6 - 1.9 times single rate
 Recognizes that a child is much less costly than an adult
(standard assumption is 45% of adult cost)
 Average of 1.5 - 2 children covered
 Many employers want this factor to be low to make coverage
more affordable for single parents
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Tier Factor Development – 4-Tier
Structure (cont.)

Full family factor
 Typically 2.75 - 3.25 times single rate
 Includes cost for both spouse and assumed number of
children

Tier factors are often manipulated algebraically to produce
desired employee contribution results
 to “mask” the absence of a dependent subsidy
 in transitioning to a 4-tier structure
 to assist a particular group (such as single parents)
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Post-65 (Medicare-eligible) Retiree Rates

Morbidity curve continues through retirement ages, but
less steep after age 65.

Pre-65 retirees cost 2.5 - 3 times typical active employee
(average age 35-40).

Medicare-eligible retirees experience even higher total
claims, but Medicare covers 65-70% of cost.

If employer provides coverage, employer plan pays after
Medicare. Primary benefit to retiree (from employer plan)
is unlimited prescription drug coverage.

Prescription drugs typically comprise 50-70% of employer
cost for Medicare-eligible retirees.
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Post-65 (Medicare-eligible) Retiree Rates
(cont.)

For post-65 retirees:

Prescription drug claims cost averages $1,000 - $1,500
per person per year.

Scripts per year per person are 4-5 times that of a
30-40 year old.
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Comparison of UK Retiree Rates to
Medicare Supplement Plan J
Company
Monthly
Rate
A
$309.00
B
$239.00
C
$355.00
D
$220.00
E
$385.00
F
$216.00
G
$227.50
UK
$230.00
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Factors Influencing UK Rates Versus
State Benchmarks

Level of employer subsidy

Coverage of retirees

Location of employees in higher cost areas

Medical Center employees expected to have higher
utilization (40% manual rate load)

“Richness” of UK HMO plan design
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