Arizona retiree health insurance study

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December 1,2004
Arizona Retiree Health
Insurance Study
Arizona Legislative Council
MERCER
Human Resource Consulting
~ Marsh & Mclennan Companies
3. Summary of Contents and Exhibits .12
5. Conclusion 27
• Advantages of the Proposed Options 27
• Disadvantages of the Proposed Options 27
• Conclusion 28
2. Introduction 9
• State of the Current Retiree Health Care System for Arizona's Public Employees 9
• System Complexity 9
• Premium Benefit l 0
• Rural Retirees 11
1. Executive Summary 1
• Study Description l
• Keeping Pre-Medicare Retirees with their former Employers .4
• Retiree Contribution Rate to Defray Health Insurance Premium Expenses 5
• Review Contribution Rates and Benefits Under Arizona's Retirement System
Compared to National Average and other State Retirement Systems 6
• Federal or State Legal Restrictions on any of the Recommendations 7
• Conclusion 8
Arizona Legislative Council
JAN 1 2 2005
STATE DOCUMENTS
ARIZONA STATE LIBRARY
ARCHIVES & PUBLIC RECORDS
Arizona Retiree Health Insurance Study
Contents
4. Key Issues and Considerations 14
• Option One: Allow Retired and Disabled Members of ASRS, PSPRS, CORP, and
EORP to Participate in ADOA Health Insurance Program 14
• Option Two: Establish a Single Health Insurance Program For All Employees of
These Groups l 7
• Option Three: Require Public Employers to Allow Retirees Under Age 65 (i.e.
Pre-Medicare Retirees) to Remain in Their Active Health Insurance Plans ......... 19
• Option Four: Dedicating an Existing Part of the Retirement Contribution Rate or a
Portion of an Increased Contribution Rate to Defray Part of the Cost of Health
Insurance Premium Payments 22
• Review of Contribution Rates and Benefits Under Arizona's Retirement System
Compared to National Average and other State Retirement Systems 24
Mercer Human Resource Consulting
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Mercer Human Resource Consulting
2. The feasibility and cost impact to the State and retirees of establishing a single health
insurance program for all retirees of these groups. The study shall provide
information, including costs and benefits, from at least five other states that
administer a single retiree health insurance plan. The cost impact shall consider
immediate and future costs and cost shifting to all affected parties.
1. The feasibility and cost impact to Arizona and all state employees and political
subdivisions of allowing all retired and disabled members and their dependents of the
ASRS, the PSPRS, the CORP, and the EORP to participate in the health insurance
program that is administered by the State of Arizona Department of Administration
(ADOA) for State employees. The cost impact shall consider immediate and future
costs and cost shifting to all affected parties.
3. The feasibility and cost impact to this State and its public employers of requiring all
public employers to allow their retirees who are under sixty-five years of age to
remain in the same health insurance plan as their active employees. The study shall
provide cost data from at least ten public employers in this State representing a range
of size, geographic locations, and political jurisdictions. The cost impact shall
consider immediate and future costs and cost shifting to all affected parties.
Arizona Legislative Council
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Arizona Retiree Health Insurance Study
Executive Summary
Study Description
Mercer Human Resource Consulting (Mercer) was retained by the Arizona Legislative
Council to conduct a study with recommendations relating to health insurance for retired
and disabled members of the Arizona State Retirement System (ASRS), the Public Safety
Personnel Retirement System (PSPRS), the Corrections Officer Retirement Plan (CORP),
and the Elected Officials' Retirement Plan (EORP). The options we have been asked to
study are as follows:
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6. An analysis of any federal or state legal restrictions on any of the recommendations.
5. A review of the contribution rates and benefits under the State's retirement system
compared with the national average and other state retirement systems.
Consolidation of Retiree Health Plans and Administrators
Options One and Two offer consolidation of health plan alternatives and the potential
consolidation of plan administrators. Advantages to these options include:
It is also important to point out that none of the options proposed for study under this
legislation addresses the root causes of escalating retiree health care costs. The cost
savings achievable under some of these options are through benefit plan reductions and
potential administrative efficiencies gained through consolidation.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
The primary difference between options one and two is whether or not the retiree group is
aggregated with active employees. Aggregation with active employees, even if the risk
pools are not blended for rate-setting purposes, will provide the State with an added
advantage of allowing for a fully insured option since carriers are more likely to insure
• consolidation of administration;
• efficiencies of staffing, systems, accounting, and participant communication;
• potential for substantial simplification of the currently extremely fragmented retiree
health care environment, making it easier for retirees to understand and compare the
health care options available to them;
• consolidation of the retiree risk pool for greater leverage in the setting of provider
reimbursement rates, fees, and other plan expenses; and
• elimination of duplicative second tier service providers (i.e., brokers, consultants,
third-party-administrators, and insurance companies).
4. The feasibility of dedicating an existing part of the retirement contribution rate or a
portion of an increased contribution rate to defray part of the cost of health insurance
premium payments, including a recommendation for the amount that should be
dedicated. The cost impact shall consider immediate and future costs and cost shifting
to all affected parties.
Mercer Human Resource Consulting
It is important for readers of this study to understand that the complexities involved with
each of these options do not allow for a quick study to be done in which the issues are
fully explored to the extent necessary to implement any of these options. The
requirements of this legislatively mandated study requested only that various options be
analyzed and to identify the considerations that would surface in implementing any of
these options. Mercer encourages the readers of this study to use it as a tool to narrow
down and further refine the options. Once a more focused approach or approaches are
identified, further analysis should be undertaken to understand the potential impacts and
to assess and answer the questions and issues mentioned in this study.
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Key areas the State will need to resolve in order to implement this type of option
successfully include:
the group on a favorable basis because of the profit opportunity presented by the active
population.
Most states do some form of blending of the premiums for their actives and retirees and
this was borne out by the survey completed for this study. All six of the states surveyed in
this study (Montana, Oregon, Utah, Washington, Georgia, and Alabama) currently blend,
to some extent, the active and retiree health insurance premiums for pre-Medicare
retirees.
Another key consideration under Option One, and possibly under Option Two, is what the
ultimate plan design will be for retirees. Currently, Mercer estimates that the ADOA
retiree health care plans provides approximately 26 percent more value in terms of overall
benefits than the health care plans offered by ASRS. Moving the public employer retirees
onto a much more valuable plan will significantly increase costs.
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Arizona Legislative Council
implementation strategy and eligibility
prospective-implement only for future retirees going forward or
retroactive-include both current and future retirees or
voluntary-allowing retirees to participate vs. mandatory-requiring retirees to
participate;
whether or not to include active populations;
whether or not to blend active and retiree rates (an implicit subsidy) in addition to the
explicit premium benefit subsidy;
whether to insure or self-fund the new plan;
how to handle benefit changes or contractual impairments;
revision of the appropriate state statutes to allow for changes in the operation of the
affected retiree plans; and
selection of the appropriate administrative entity (ADOA, ASRS, or some third
entity).
Arizona Retiree Health Insurance Study
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A consideration under Option One involves State Statute ARS 38-651.011. The effect of
this statute prohibits providing benefits to classes of employees or retirees who would
normally not benefit under the ADOA's retirement programs, such as retirees of
municipalities or school districts. Specifically, the benefit of blending active and retiree
premiums would give non-ADOA retirees a prohibited benefit. Therefore,
implementation of Option One would need to take this into consideration. It appears a
separate rate structure would need to be implemented for non-ADOA retirees to avoid
violation of this statute.
•
The immediate costs associated with these consolidation options would include
appropriate staffing of the selected administrative entity, and communications to all
affected retirees and public employer entities. Other costs would include funding for
appropriate technology and systems to effectively administer the consolidated retiree
Mercer Human Resource Consulting
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Currently, 293 of the 514 employers with retirees eligible for the ASRS health plans
allow their retirees to remain on their employer's plan indefinitely.
health care plan. Since it is not clear whether an existing agency or a completely new
agency would be administering this new plan, Mercer cannot easily estimate these "start­up"
costs.
Future costs depend on several factors such as the comparative value of the new retiree
health plans versus the plans in which retirees are currently enrolled and the
administrative efficiencies gained. Plan funding decisions, whether to fully or partially
insure or self-fund and the financial arrangements made with carriers and service
providers will also have significant impact on the future costs associated with these
consolidation options.
Keeping Pre-Medicare Retirees With Their Former Employers
Option Three of this study, requiring employers to keep their pre-65 retirees (non-Medicare
eligible retirees) on the active plans, is an option that many states employ. For purposes of our
analysis, Mercer has assumed that all pre-Medicare retirees currently enrolled in ASRS
would move back to their employer plans effective in 2005, and that the decision would
be retroactive. Implementing this option retroactively would have the greatest impact to
the employer plans which might not be what the Legislature intended. However, it is the
cleanest way to calculate the option's impact.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
A major disadvantage of this option is that, with GASB looming, many governmental
entities may be driven to shed their retiree health plans altogether. Because of the
potential costs associated with retaining their retirees, the unintended consequence of
implementing this option for Arizona retirees could be that some employers will actually
cut back retiree health benefits severely, compared to current options available under the
ASRS or ADOA, and render this option not only a futile effort but also an ill-conceived
approach.
Mercer Human Resource Consulting
The Governmental Accounting Standards Board (GASB) Statements 43 and 45 will play
a key role in how governmental employers are able to account for this retiree health care
liability. GASB will require governmental employers to recognize and disclose unfunded
accrued liability for retiree health plans, just as they must do for their pension plans
today. These new reporting and disclosure requirements will go into effect for fiscal years
beginning after December 15,2006 for governments with revenues over $100 million;
fiscal years beginning after December 15, 2007 for governments with $10 to $100
million; and fiscal years beginning after December 15,2008 for governments with
revenues less than $10 million.
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Key issues the State and/or former employers would need to resolve to implement this
option include:
The immediate costs associated with keeping non-Medicare retirees with their employer
health plans include communications to all affected retirees and public employer entities.
Other costs include public employer funding for appropriate technology and systems and
possibly additional staff to effectively administer the health care plan that includes
retirees. Other cost impacts to public employers include the cost of additional time from
employer staffs to successfully enroll pre-Medicare retirees in their plans and the revision
of contractual arrangements with carriers to allow coverage for this group.
• whether the requirement would be voluntary (could remain with active employer
plan) or mandatory (must remain with active employer plan);
• whether to offer any exceptions to smaller public entities, either in the form of direct
subsidations and/or changed Department ofInsurance statues;
• whether to blend the rates of actives and pre-Medicare retirees; and
• whether or not to require public employers to offer a minimum level of benefits to
pre-Medicare retirees.
Retiree Contribution Rate to Defray Health Insurance Premium
Expenses
Mercer has analyzed the national data pertaining to other state retirement systems
regarding system or state-provided retiree premium contributions. The options range from
states that are extremely generous, offering to pay most if not all of the retiree premium,
to those states offering only the blended rate between actives and retirees as a benefit, to
those who offer no premium assistance at all.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
The ASRS plan would experience future cost savings due to the loss of this high-risk,
high-cost group. Future costs depend on the comparative value of the employer's retiree
health plans versus the ASRS plans in which retirees are currently enrolled. As
mentioned, there would be no administrative savings gained since all administrative
agencies existing prior to the change would continue to exist. There would continue to be
a multiplicity of plan funding arrangements, plan designs, and second tier service
providers, such as brokers, consultants, third party plan administrator, and insurance
carriers, involved the administration of the public employer retiree health plans.
In June of2003, the combined pension and premium benefit contribution for employees
and employers participating under ASRS was 2.0 percent. In July of2003, that increased
to 5.2 percent. In July of2005, this contribution is set to increase to 7.75 percent,
inclusive of the 1.1 percent premium benefit 401 (h) contribution. Introducing another
incremental increase on top of the already scheduled increase will probably not be met
with enthusiasm.
Mercer Human Resource Consulting
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Because employee contributions to a 40 I (h) account are not allowed under the Internal
Revenue Code, the options to increase the funding level, and thereby the premium benefit
amount, include:
• increase the employer 40 I (h) contribution;
• decrease the employer 401(a) contribution and increase the 401(h) contribution so that
the total employer contribution remains the same; and
• increase the employee 401(a) contribution, decrease the employer 401(a) contribution,
and then increase the employer 401(h) contribution.
For Arizona to provide a premium benefit that is roughly equal to the average of those 34
states that provide financial assistance to public employer retirees, the 40 I (h) contribution
would need to increase from 1.1 percent to 1.6 to 1.8 percent. This meets the
subordination limit rules which restrict the amount of 40 I (h) contributions to 25 percent
of the total employer contributions to the pension fund, exclusive of past service
contributions.
Mercer was asked to recommend a dedicated contribution amount to defray part of the
cost of health insurance premium payments. This dedicated contribution amount is driven
by what level of premium benefit the State would make to its retirees. In order to make
this recommendation, Mercer took into consideration the data from item number five on
page two of the requested study: the review of contribution rates and benefits of
Arizona's retirement systems compared with the national average.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
Arizona
ASRS Montana Utah Georgia Alabama
Avg. PEPM $342.96 $461.25 $50.84 $63.00 $138.00
Pre-Medicare Retiree
Avg. PEPM $187.80 $0.00 $763.06 $231.0 $366.00
Pre-Medicare State
Avg. PEPM $139.57 $277.89 $0.00 $63.00 $0.00
Medicare Retiree
Avg. PEPM $133.85 $0.00 $348.64 $231.00 $243.00
Medicare State
Review Contribution Rates and Benefits Under Arizona's Retirement
System Compared to National Average and other State Retirement
Systems
Mercer conducted a brief survey of six other states' retirement systems, the benefits under
those systems, and the contributions rates, both from the system and from the retirees for
those benefits. Exhibit 4 charts the results of the survey. Below is a summary of the net
costs for the retirees and systems for the states that were able to provide these numbers:
Mercer Human Resource Consulting
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Mercer's illustration with respect to a possible premium benefit for Arizona retirees
lengthens the service requirement for full benefits (for those retirees subject to a vesting
schedule), increases the full benefit, ties the benefit to the lowest cost plan, and, by nature
of the link to the local low-cost plan, offers an inherent subsidy to rural retirees. Below is
an illustrative schedule for this sample Premium Benefit (see page 24 for a full discussion
of this benefit).
In addition, Mercer utilized the data from Watson Wyatt's Premium Benefit Supplement
Survey dated December 3, 2003. It is important to note that while the Watson Wyatt
survey discloses the state or agency premium contributions, some states provide these
contributions on top of the inherent subsidy provided by blending active and retiree
premiums, and some provide premium relief without premium blending. This makes the
true value of these benefits elusive without knowing the actual claims experience of the
retirees in these states, which is beyond the parameters of this study.
Ofcourse, many states do not provide any premium relief at all. According to the recently
released results of the Mercer 2004 National Survey of Employer Sponsored Health
Plans, for governmental employers 16 percent of state retiree health plans pay the entire
pre-Medicare retiree premium, 38 percent share the cost, and 46 percent require retirees
to pay the full premium. The results are similar for Medicare retirees with 19 percent of
states paying the full premium, 32 percent sharing the cost, and 49 percent requiring full
payment by the retiree. The survey result for government retirees is included in Exhibit 6.
Mercer Human Resource Consulting 7
Arizona Legislative Council
0%
30%
43%
82 %
69 %
56 %
Medicare Premium
Benefit - as a Percent of
Lowest-Cost Plan Premium
0%
26%
34%
42 %
50%
18 %
Non-Medicare Premium
Benefit - as a Percent of
Lowest-Cost Plan Premium
0-4
5-7
Years of Service
11 - 13
Over 17
8 - 10
14 - 16
Arizona Retiree Health Insurance Study
Federal or State Legal Restrictions on any of the Recommendations
Mercer conducted a review of the appropriate state statutes, tax law, and federal statutes
that might influence any of the options or recommendations. These legal impacts are
included in the discussions of the Key Issues and Considerations section as well as
Exhibit 2, Arizona Legislative Council Considerations.
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Conclusion
This study was intended to be an initial review of several proposed options for increasing
the viability and benefits of the Arizona public employer retiree health plans. Once a
directional decision has been made, more work needs to be done to delve into the
contingencies and results of that particular path or paths. Mercer encourages all readers of
this report to proceed carefully with the next steps and keep in mind all known
implications and also keep in mind that any changes to a system as complex as the
Arizona public employer retiree health care system will undoubtedly has unintended
consequences and unanticipated ripple effects. Only through public deliberations,
statewide discussions, and careful study can these consequences and effects be potentially
minimized.
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Arizona Retiree Health Insurance Study
Mercer Human Resource Consulting
Arizona Legislative Council
8
Introduction
State of the Current Retiree Health Care System for Arizona's Public
Employees
The objective of providing health care to the State's eligible retired and disabled members
and their dependents in a cost-effective and efficient manner becomes more challenging
as health care costs rise, the population ages, and available public funds become more
scarce or restricted. There are several issues resulting from Arizona's current system that
have been highlighted over the past several years.
System Complexity
The responsibilities for the negotiation, purchase, administration, communication,
eligibility verification, and funding of the current structure is divided between many
political subdivisions. A large percentage of the approximately 65,000 retirees eligible for
the ASRS participate in its health care plans. Approximately 23,587 or thirty six percent
were enrolled in ASRS' health care plans as of April I, 2004. 1 Another 15,2451
participate in employer-sponsored plans, with approximately 8,754 of those under the
ADOA health care plans. Another 4,855 participate through the PSPRS, the EORP, or the
CORP in an employer plan, ASRS, or the ADOA plan. Ofthose eligible for ASRS, over
21,000 are not tracked. This means they do not participate in an employer-sponsored plan
or the ASRS plan. These retirees may be covered under a spouse's plan, an individual
plan, or Medicare without any supplemental coverage. It is unknown how many of the
21,000 non-enrolled retirees may not have elected any form of coverage and are currently
uninsured. However, all ASRS retirees may enroll in the ASRS retiree health care
program during any annual open enrollment or if they have a qualifying life event. This
flexibility makes the offering of retiree health care even more complex.
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Arizona Retiree Health Insurance Study
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1 Watson Wyatt, June 18,2004 presentation to the Arizona State Retirement System Board
Mercer Human Resource Consulting
Arizona Legislative Council
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Ofthe 514 employers actively participating in the ASRS health care plans, 293 allow
non-Medicare retirees to remain on their employer plan.2 Two-hundred and eleven
employers give the eligible retiree under age 65 the option to continue COBRA (if
available) and/or to join the ASRS plan.
In addition, there are several public employers who do not participate with ASRS at all,
such as the City of Phoenix, City of Tucson, or La Paz County. These systems have their
own health care programs, contribution strategies, and administration. Exhibit 1 illustrates
some of the complexities of Arizona's current system.
Adding to this complexity, each political subdivision provides multiple plan choices to
the retiree. For example, under the ASRS, retirees generally have a choice of two plan
options for pre-Medicare, two for Medicare, and four for mixed Medicare and
non-Medicare families. ADOA offers up to five options for non-Medicare, six for
Medicare, and six for mixed Medicare and non-Medicare families.
Premium Benefit
The Premium Benefit is the employer premium contribution for eligible retirees under the
ASRS, PSPRS, CORP, and EaRP programs. Unfortunately, this aspect of the system is
no less complex than the administration. For all four of these systems, the benefit varies
depending on whether the retiree and/or dependents are eligible for Medicare. ASRS has
a vesting schedule for the benefit based on years of service with a five-year requirement
for the minimum benefit and ten years required for the full benefit. EaRP's service-based
vesting schedule also has a five-year minimum with only eight years of service required
for the maximum benefit. Both PSPRS and CORP provide the maximum benefit without
a service requirement.
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4,855
6,491
8,754
64,697
23,587
21,010
Arizona Legislative Council
ASRS Eligible Retirees - Plan Participation
Arizona Retiree Health Insurance Study
Total Retirees Eligible for ASRS
Other
ADOA Plans
PSPRS/EORP/CORP
Unknown
ASRS Plans
2 ASRS Memo from Anthony Guarino and Pat Klein to Health Insurance/Long Term Disability Committee Members
adapted July 31, 2003
Mercer Human Resource Consulting
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Rural Retirees
Retirees in limited service areas in the State of Arizona receive a rural subsidy that is
scheduled to expire on June 30, 2005. These retirees currently do not have access to lower
cost HMO plans, so their premiums and out-of-pocket costs for services are higher than
costs for their urban counterparts. Some systems, like the ASRS, have blended their rates
to bring the cost of the rural plans down. Most, like ADOA or the City of Phoenix, blend
their active and retiree risk pools so that the younger, lower-cost active employees' rates
subsidize the retiree premium rates. For 2005, both the ASRS and the ADOA have used
their buying influence to expand the service areas of managed care into new counties to
assist rural retirees with these costs.
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Arizona Retiree Health Insurance Study
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Arizona Legislative Council
11
Summary of Contents and Exhibits
It is clear from the Scope of Services description in the legislation enacting this study that
the State is interested in finding a potential solution or series of potential solutions to the
cost and complexity of the current system. Mercer has been retained to provide an
objective review of the feasibility of various proposed solutions.
Exhibit 1, the "Current Systems Chart," is an at-a-glance illustration of the various
administrative components of the current health care programs for State retirees. Note,
unlike the ASRS, PSPRS, CORP, and EORP do not provide the health care benefits for
their respective members. Members of these three organizations enroll in their employer
plan, the ASRS plan, or the ADOA health care plan. The PSPRS administers all three of
these programs in terms of member communication, premium benefit, eligibility and
enrollment, and deduction of premium from pension payments. Members of these
programs are still part of their employer, ASRS or ADOA plans. Think of these three as
an "overlay" to the underlying programs.
The options proposed as part of this study have been analyzed in terms of feasibility by
categories, such as, administration, benefit plan design impacts, contractual issues,
efficiencies, demographic risk, stakeholder opposition, and legal and regulatory issues.
Exhibit 2, the "Considerations Chart," outlines the four options proposed by the study
request in summary format. A more extensive analysis of some of the key issues involved
with each of these options is included with this study under the "Key Issues and
Considerations" section. In addition, the Mercer estimated amount of additional
contribution in order to increase the premium benefit to a sample amount and its
associated impacts is included with this discussion, as is the comparison of Arizona's
contributions to other states' contributions. Exhibit 7 provides a detailed chart of how
other States' premium benefit programs would look if applied to the current ASRS
premium structure.
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Arizona Legislative Council
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Finally, the study concludes with a summary of the major advantages and disadvantages
of the proposed options.
Exhibits 3 - 5 provide statistical data comparing the current structure to that of the new
structure under each of the three proposed structural options. These charts track the
shifting of participants, demographics, and costs from one entity to another.
An overview ofthe other surveyed states' benefits is included in Exhibit 4. The
government sector results summary data of the Mercer 2003 National Survey of
Employer-Sponsored Health Plans is Exhibit 6.
It is important for readers of this study to understand that the time and budget constraints
on this study make it only a preliminary review of possible options. The requirements of
this legislatively mandated study requested only that various options be analyzed and to
identify the considerations that would surface in implementing any of these options. Once
a more focused solution or series of solutions is identified, further analysis should be
undertaken to understand the full impacts and to assess and answer the questions and
issues mentioned in this study. Additionally, it is important for readers to understand that
none of the options proposed for study under this legislation address the root causes of
escalating retiree health care costs. These options only shuffle the funds and
responsibilities around to different parties. The only true cost savings achievable under
some of these options are through benefit plan reductions resulting from the changes and
through any administrative efficiency gained through consolidation.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
Mercer Human Resource Consulting
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Option One: Allow Retired and Disabled Members of ASRS, PSPRS,
CORP, and EaRP to Participate in ADOA Health Insurance Program
While on the surface this option may appear administratively simple, there are many
complexities that need to be explored in order to make this a viable option.
Mercer Human Resource Consulting
For purposes of Mercer's analysis, we have assumed that this would be a mandated
re-enrollment of all members ofASRS, PSPRS, CORP, and EORP out of their current
plans and into the ADOA insurance plan. We have also assumed that it would occur in
2005 and that it would apply to current and future retirees.
This section of this study's narrative explores some of the key considerations of the four
options and the contribution and benefits review. Analysis of any Federal or State legal
restrictions is incorporated into this section. For a more complete listing of
considerations and policy decisions relating to these options, please see Exhibit 2.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
4
If this were not so, then multiple systems would continue to exist which would diminish
the administrative efficiency to be gained from this option. Of course, assuming full and
immediate transfer of these groups into ADOA would have a full and immediate impact
on the ADOA plan and its ability to administer this new, much larger group of
participants.
Key Issues and Considerations
Implementation and Eligibility Issues
Several questions arise upon reading the language of this option in H.B. 2542. First, by
"allowing" retirees and disabled members into ADOA, does this mean all participants in
the other programs would be moved into the ADOA insurance plan, or would it be a
voluntary choice for the participant? If it is all or nothing, when will the state "flip the
switch?" Would it affect all current enrollees or just future retirees after a certain date?
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The ADOA is currently not sufficiently staffed to handle the huge influx of retirees and
disabled participants that would convert to their plan. Additionally, ADOA staffwould
suddenly have a number of retiree health plan customers about whom they knew nothing
in terms of prior history, prior benefits, and prior employment. The transfer of data and
information would be a substantial task.
Because of the subsidy to retirees inherent in the blending of active with retiree
premiums, non-ADOA retirees would receive this financial advantage. Therefore, barring
changes to the statute, there would either need to be two premium structures (one for
active and one for retirees), or there could be a separate subsidy provided to retirees by
the state for ADOA retirees only, possibly accompanied by a separate subsidy for the
non-ADOA employees paid for by their participating employers.
Insured Pool
Adding the retiree populations of the other groups - ASRS, PSPRS, EORP, and CORP ­would
significantly alter the size and demographics of the ADOA risk pool. The new
group would consolidate the two largest retiree health insurance pools for the State.
However, the other groups are coming from a fully insured environment into a
self-funded plan. The State will need to carefully consider whether moving a volatile risk
pool of retirees into a self-funded plan is a cash-flow risk it is willing to take undertake.
Funding
Moving the ASRS, PSPRS, CORP, and EORP retirees onto the ADOA plan would
increase costs to ADOA in that the ADOA would become the provider of the Premium
Benefit for these retirees. The ADOA would not be able to take on these new expense
obligations without receiving funding from the plans from which these retirees originated.
The ADOA would therefore need to bill participating public employers for their share of
these costs. Establishing a new contribution structure would be complex and would need
to be implemented carefully.
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Arizona Retiree Health Insurance Study Arizona Legislative Council
Active Employee Subsidy
One of the perceived advantages of moving the retirees onto the ADOA plan would be to
blend them with ADOA's active employees for rate-setting purposes. Currently, this
practice would be proscribed due to a State Statute ARS 38-651.011 that states "Public
funds shall not be expended to pay all or any part of the premium of insurance pursuant to
this section except for monies authorized to be paid for any insured from the retirement
plan from which the insured is receiving benefits." The effect of this statute prohibits
providing benefits to classes of employees or retirees who would normally not benefit
under the ADOA's benefit programs, such as retirees of municipalities or school districts,
if the benefits provided by ADOA are not made available to all State citizens.
Mercer Human Resource Consulting
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This would also limit the second tier services such as brokers, consultants, advisors, and
carriers, resulting in additional administrative savings.
Even if no contractual protections were found, retirees would negatively perceive any
resulting benefit reductions.
Additionally, this option would provide for consistency of benefits for all participating
groups.
However, administrative staff would need to be added to the Department of
Administration to handle the larger, more complex group.
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Immediate and Future Costs
The immediate costs associated with this option would include adding additional staff to
the Department of Administration, communications to all affected retirees and public
employer entities. Other costs would include funding for appropriate technology and
systems to effectively administer the consolidated retiree health care plan. Since it is not
clear whether an existing agency or a completely new agency would be administering this
new plan, Mercer cannot easily estimate these "start-up" costs. An accurate estimation of
these start-up costs would need to include an assessment ofADOA's cun'ent staffing
levels and technology.
State Statutes
ASRS sections 38-782, 783, 817, 857, 651, 906, and §15-628 would need to be amended
to allow for changes in the operation of the affected retiree plans.
Economies and Efficiencies of Scale/Second Tier Services
Moving the PSPRS, EORP, and CORP retirees onto the ADOA plan would result in
greater administrative efficiency. The PSPRS and ASRS staff would no longer handle
retiree health care emollment and communication and ASRS would no longer be the plan
provider, handling insurance renewals and the like.
The new group would have greater leverage with regard to handling negotiations for
Medicare reimbursement as well as provider fees. This would most likely result in lower
cost overall for the retired group.
Benefit Reductions and Contractual Impairment Issues
A review of all current health plan arrangements for the PSPRS, EORP, and CORP
retirees would need to be made to evaluate whether moving them to the ADOA plan
would result in any benefit reductions. If any retirees under these plans have contractually
protected health benefits, these benefit levels would need to be "grandfathered" under the
new arrangement. Another option, which would be administratively easier, but more
costly, would be to raise the new ADOA retiree plan up to these contractually protected
levels for all retirees.
Mercer Human Resource Consulting
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Exhibit 3 charts the current system's statistics and costs as well as the immediate and
future plan costs of implementing this option.
Future costs depend on several factors: the comparative richness of the ADOA retiree
health plans versus the plans in which retirees are currently enrolled and the
administrative efficiencies gained; and, possible savings gained by utilizing a self-funded
health plan. Currently, Mercer estimates that the ADOA retiree health care plans are
about 26 percent richer in terms of overall benefits than the health care plans offered by
the ASRS. Moving the public employer retirees onto a much richer plan will
significantly increase costs.
Implementation and Eligibility Issues
Similar to Option One, Option Two raises questions as to whether the new single plan
would require all retirees to re-enroll, or whether retirees would be allowed to continue
under their current arrangement with the single plan as an additional option. Another
policy decision would be whether to require all new retirees to enroll in the single plan as
of a certain cut-off date. In addition, would retirees who are currently not enrolled be able
to enroll in this new plan and for how long? What would the new plan's benefits be?
Would the plan look like the current ASRS plans? Who would be the new administrator
for this plan?
Option Two: Establish a Single Health Insurance Program For All
Employees of These Groups
This option requests that a single health insurance program be established for all retirees
ofthe ASRS, ADOA, PSPRS, CORP, and EORP. Mercer was asked to provide costs and
benefits from at least five other states that administer a single retiree health plan. It is
important to note that all eight states Mercer approached for participation in this survey
allow their retirees to continue in their active plans in addition to offering a plan for
retirees. Utah only allows pre-Medicare retirees to participate in its Public Employee
Health Program (PEHP) benefits if the participating employer has adopted such a
program in the employer contract with PEHP. Oregon offers a PPO and an HMO for their
retirees that are also offered to their part-time work force. Benefit information about
Colorado's retiree health plans was included because it is a state that administers a single
retiree health plan. However, Colorado did not respond to our data request.
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Mercer Human Resource Consulting
For purposes of Mercer's analysis, we have assumed that this would be a mandated
re-enrollment of all members of ASRS, PSPRS, CORP, and EORP out of their current
plans and into the new single insurance plan. We have assumed that it would occur in
2005 and that it would apply to current and future retirees. Mercer has also assumed the
new plan design would have the same benefit values as the current ASRS plans.
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To the extent that retirees of these groups are currently participating in plans that blend
active and retiree premiums, this inherent subsidy would be lost.
Other active plans, such as ADOA, would lose retirees that would benefit their
demographic risk. For example, the average age of these active plans would decrease and
premiums would likely go down. Conversely, the new plan could inherit a higher risk
demographic, and its premiums could be higher.
Funding
Depending on the entity responsible for establishing a single retiree health insurance
program, the State might need to make a funding decision about whether to insure this
new plan, or self-fund. Insurance carriers would require a profitable relationship with the
plan in order to take on this high-risk group.
If the new plan was optional and retirees could choose to remain under their active health
care plans until Medicare eligibility, it is likely that many would choose the plan with the
lower out-of-pocket premium and benefit costs. Ifthe new plan was not cost-competitive,
it would only capture those retirees whose employers did not provide retiree health
coverage. Eligibility, enrollment, and pre-existing conditions exclusion provisions would
need to be carefully designed to avoid adverse impact to the new plan.
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23,405
30,769
54,174
Arizona Retiree Health Insurance Study
Insured Pool
Moving all of these groups into one retiree plan would result in a new plan with the
following enrollment:
Pre-Medicare Retirees:
Medicare Retirees:
Total:
Benefit Reductions and Contractual Impairment Issues
Similar to Option One, a review of all current health plan arrangements for the ADOA,
PSPRS, EaRP, and CORP retirees would need to be made to evaluate whether moving
them to the ASRS plan would result in any benefit reductions or contractual impairment.
If certain benefit promises have been made via a benefit contract or union agreement, the
move to a single health plan would have to be examined carefully to make sure these
agreements were intact after the move. Grandfathering of these special arrangements
would be a possible, though complicated, way to avoid contractual impairment issues.
Mercer Human Resource Consulting
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Exhibit 4 charts the current system's statistics and costs as well as the immediate and
future plan costs of implementing this option.
For purposes of our analysis, Mercer has assumed that all pre-Medicare retirees currently
enrolled with the ASRS would move back to their employer plans effective in 2005, and
State Statutes
ASRS sections 38-782, 783, 817, 857, 651, 906, and §15-628 would need to be amended
to allow for changes in the operation of the affected retiree plans.
Future costs depend on several factors: the comparative richness of the new retiree health
plans versus the plans in which retirees are currently enrolled and the administrative
efficiencies gained. Plan funding decisions, whether to fully or partially insure or
self-fund, and the financial arrangements made with carriers and service providers will
also have significant impact on the future costs associated with this option.
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Mercer Human Resource Consulting
Option Three: Require Public Employers to Allow Retirees Under Age
65 (i.e. Pre-Medicare Retirees) to Remain in Their Active Health
Insurance Plans
A key question under this option would be whether pre-Medicare retirees would have to
stay in their employer health care plans for active employees, or whether this would be a
choice in addition to their current options. If retirees had to stay in their employer plans,
would this be retroactive or prospective?
Economies and Efficiencies of Scale/Second Tier Service
Providers
Like Option One, this option would result in administrative efficiency and reduction in
second tier service providers and processes such as negotiations for insurance contracts,
brokers, consultants, third party administrators, and insurance carriers.
This new group would have the greatest leverage with regard to handling negotiations for
Medicare reimbursement as well as provider fees. The new plan could be structured to
integrate with Medicare that would most like result in lower cost overall for the Medicare
eligible retired group. Additionally, this option would provide the most consistency of
benefits for all participating groups.
Immediate and Future Costs
The immediate costs associated with this option would include appropriate staffing of the
selected administrative entity, and communications to all affected retirees and public
employer entities. Other costs would include funding for appropriate technology and
systems to effectively administer the consolidated retiree health care plan. Since it is not
clear whether an existing entity or a completely new entity would be administering this
new plan, Mercer cannot easily estimate these "start-up" costs.
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that the decision would be retroactive. The implementation of this option, in order to be
viable, would need to be on a prospective basis. Clearly, implementing this option
retroactively would have the greatest impact to the employer plans, which might not be
what the Legislature intended.
Implementation and Eligibility Issues
The impact on the employer plan would depend on the employer's overall employee
population, the capacity of its benefits staff, and the number of retirees returning to its
plan. As mentioned in the Introduction, 293 of the 514 employers actively participating in
the ASRS system allow non-Medicare retirees to remain on their employer plan.
Employer plans would inherit high-risk retirees as well and the demographic risk would
most likely increase costs to their plans. Another possibility to consider is that retirees
who previously did not have access to their employer plans, and did not choose the ASRS
plans, might "come out of the woodwork" to emoll in their employer plans if this option
is implemented. It is not possible to accurately quantify the possible costs of this
"woodwork" effect.
Active Employee Subsidy
An advantage of moving pre-Medicare retirees back to their employer plans is the
opportunity to blend the rates of actives and retirees. Would the legislation enacted under
this option require premium blending? If not, employers could charge retirees their actual
cost, which would most likely be significantly higher than that of active employees.
Mercer estimates that pre-65 retirees are usually about 1.65 times more expensive than
the active, non-retired population.
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Insured Pool
The flow of pre-Medicare retirees away from ASRS would decrease its overall pool of
covered lives, but would also decrease its demographic risk. The pre-65 group is the most
medically expensive group statistically. However, if the election to emoll or stay in the
employer plan was optional, many pre-65 retirees might choose to remain covered under
the ASRS because of out-of-area or out-of-state service needs. These would be the
highest cost retirees as their ability to participate in managed care contracts would be
restricted.
Mercer Human Resource Consulting
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Some retirees might have reduced benefits under their former employer plans that would
not be favorably received by these retiree groups.
Immediate and Future Costs
The immediate costs associated with this option would include communications to all
affected retirees and entities, and public employers. Also, employers would incur costs
from additional staff time spent to successfully enroll pre-Medicare retirees in their plans
and revise contractual arrangements with carriers to allow coverage for this group.
Employers who currently do not have retiree health coverage will not want to take on this
additional liability and, in the case of some small public employers or public employers
with large returning retiree populations, this option may not be financially viable. Many
governmental entities may be driven to shed their retiree health plans altogether. The
effect of implementing this option for Arizona retirees could be that some employers will
cut back retiree health benefits severely, compared to current options available under the
ASRS or ADOA, and render this option not only a futile effort but an ill-conceived
approach.
GASB
The requirement for governmental employers to recognize and disclose unfunded accrued
liability for retiree health plans may drive many of the employer plans to carve retirees
out of their active plans and reduce their benefits. These new reporting and disclosure
requirements will go into effect for fiscal years beginning after December 15,2006
for governments with revenues over $100 million; fiscal years beginning after
December 15, 2007 for governments with $10 to $100 million; and fiscal years beginning
after December 15,2008 for governments with revenues less than $10 million.
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Legal and Contractual Issues
ARS §38-782 provides that group accident and health coverage be provided to "members
who are receiving retirement benefits from ASRS or long-term disability benefits
pursuant to section 38-651.03 or article 2.1 of this chapter and who elect not to obtain
health and accident insurance through their former employer." If the pre-Medicare
coverage under the former employer were made mandatory, this statute would need to be
revised. Additionally, the state statute provides an opportunity for continued health
coverage for an insured member's dependent beneficiary or an insured surviving
dependent in the event of the insured member's death. The former employer plans may
not provide this beyond the opportunity to elect COBRA. Employers under 20 employees
would not have to offer COBRA to these surviving dependents.
The ASRS plan would experience future cost savings due to the loss of this high-risk,
high-cost group. Future costs depend on the comparative richness of the employer's
retiree health plans versus the ASRS plans in which retirees are currently enrolled.
Mercer Human Resource Consulting
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Mercer Human Resource Consulting 22
The allocation of employer and employee pension plan contributions is as follows:
Employee Contribution 5.20% 0.00% 5.20% 7.75% 0.00% 7.75%
Rates
Exhibit 5 charts the current system's statistics and cost as well as the immediate and
future plan costs associated with this option.
July 2005
Arizona Legislative Council
Current
Arizona Retiree Health Insurance Study
Employer Contribution Rates 4.10% 1.10% 5.20% 6.65% 1.10% 7.75%
Total Contribution Rates* 9.30% 1.10% 10.40% 14.40% 1.10% 15.50%
* Contribution rates exclude the LTD contribution of .5 percent each from employee and employer.
Premium Premium
Pension Benefit Pension Benefit
401 (a) 401 (h) 401 (a) 401 (h)
Account Account Total Account Account Total
There would be no administrative savings gained since all administrative entities existing
prior to the change would continue to exist. There would continue to be a multiplicity of
plan funding arrangements, plan designs, and second tier service providers, such as
brokers, consultants, third party administrators, and insurance companies.
In June of2003, the combined pension and premium benefit contributions for employees
and employers was 2.0 percent. In July of2003, that increased to 5.2 percent. In July of
2005, this contribution is set to increase to 7.75 percent, inclusive of the 1.1 percent
premium benefit 401 (h) contribution.
According to the government sector summary of the recently released results of the
Mercer 2004 National Survey of Employer Sponsored Health Plans, 16 percent of the
states pay all of the pre-Medicare retiree premium, 38 percent share the cost, and 46
percent require retirees to pay the full premium. The results are similar for Medicare
retirees with 19 percent of states paying the full premium, 32 percent sharing the cost, and
49 percent requiring full payment by the retiree. The survey results for government sector
retirees is included in Exhibit 6.
Option Four: Dedicating an Existing Part of the Retirement
Contribution Rate or a Portion of an Increased Contribution Rate to
Defray Part of the Cost of Health Insurance Premium Payments
Currently, participating employers in ASRS, PSPRS, CORP, and EaRP contribute 1.1
percent to a 401 (h) account to fund the current premium benefit. This premium benefit
vests based on years of service with a minimum of 5 years and with the maximum benefit
available at 10 years for ASRS members and 8 years for EaRP members. PSPRS and
CORP participants are fully vested in the maximum benefit without a service
requirement.
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Medicare Retirees Premium Benefit
Non-Medicare Retirees Premium Benefit
Introducing another incremental increase on top of the already scheduled increase will
probably not be met with enthusiasm.
For Arizona to provide a premium benefit that is roughly equal to the average of those 34
states who provide financial assistance to public employer retirees, the 401 (h)
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increase the employer 401 (h) contribution;
decrease the employer 401(a) contribution and increase the 401 (h) contribution so that
the total employer contribution remains the same; and
increase the employee 401(a) contribution, decrease the employer 401(a) contribution,
and then increase the employer 401(h) contribution.
Arizona Retiree Health Insurance Study
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Because employee contributions to a 401(h) account are not allowed under the Internal
Revenue Code, the options to increase the funding level, and thereby the premium benefit
amount, include:
Mercer was asked to make a recommendation as to what the new subsidy amount should
be. Based on a table provided by Watson Wyatt for the ASRS Presentation to ASRS
Executive Management and Health Insurance/LTD Board Committee by Patrick Klein,
Contracts Manager for ASRS, dated December 9,2003, Mercer calculated premium
benefits provided by other states to get a rough national average by different years of
service. The full table is at the end of this section. Below is a summary of this data. The
full chart can be found in Exhibit 7.
For those states that provide a benefit as a percent of premium, Mercer used the Arizona
Non-Medicare PacifiCare HMO rates and Medicare Advantage rates (the two lowest
costs options) under the ASRS plan to calculate a dollar amount. In addition, Mercer used
the ASRS PPO and Medicare Supplement rates to show the benefit for rural retirees under
this system.
Mercer Human Resource Consulting
5 Years 10 Years 15 Years 20 Years
Single Family Single Family Single Family Single Family
Average $149.48 $253.73 $232.89 $402.53 $277.59 $484.77 $304.76 $533.74
Median $102.05 $201.90 $220.64 $403.79 $302.84 $514.00 $323.03 $565.31
Arizona $75.00 $130.00 $150.00 $260.00 $150.00 $260.00 $150.00 $260.00
5 Years 10 Years 15 Years 20 Years
Single Family Single Family Single Family Single Family
Average $80.11 $149.39 $111.02 $203.70 $132.41 $239.95 $146.57 $263.24
Median $50.00 $85.00 $102.35 $164.98 $109.98 $206.22 $129.00 $239.76
Arizona $50.00 $85.00 $100.00 $170.00 $100.00 $170.00 $100.00 $170.00
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In conducting the survey of the six states participating in this study, Mercer attempted to
uniformly quantify the active subsidy and any other premium benefits to show the net
per-retiree-per-month average cost. Only four of the states surveyed gave Mercer enough
data to do this calculation. Their results are as follows:
contribution would need to increase from 1.1 percent approximately to 1.6 to 1.8 percent.
An illustrative premium benefit upon which this suggested amount is based is discussed
in the next section. This 401(h) contribution meets the subordination limit rules which
restrict the amount of 401 (h) contributions to 25 percent of the total employer
contributions to the pension fund, exclusive of past service contributions.
Review of Contribution Rates and Benefits Under Arizona's
Retirement System Compared to National Average and other State
Retirement Systems
Reviewing the Contribution rates of retirees of other states nationally compared to
Arizona's retirement system retirees is complex and does not provide very meaningful
data. Some states blend active and retiree rates producing an inherent subsidy for retirees
that cannot be quantified without obtaining detailed claims data broken down by covered
demographic - which many states do not even track. Additionally, the premium benefit
schemes across the country combined with the multiplicity of plan designs make the
resulting data apples-to-oranges and therefore, not very meaningful.
A major offset to the retiree's out-of-pocket cost for premium is any premium benefit the
retiree receives from the State or public employer. There are several premium benefit­setting
methods Arizona could adopt. While the benefit Arizona provides is not in the
upper 50th percentile of the 34 states analyzed, the years of service requirement for the
maximum benefit is relatively low (10 for ASRS and 8 for EORP). Generally, the higher
the years of service required for the maximum benefit, the higher the maximum benefit.
For example, Kentucky and West Virginia pay 100 percent of the lowest cost plan after
20 years of service. If the State of Arizona would like to get to the median or even
average levels of benefit compared to the other 34 states that make these contributions,
the service requirement should also be increased. Other benefit-setting methods include
assigning a flat dollar amount per year of service like North Dakota and Virginia
currently do.
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$0.00
$0.00
$63.00
$277.89
$139.57
$316.27
Net Medicare Retiree Premium
Costs After Subsidies/Benefits
$50.84
$63.00
$138.00
$461.25
$342.96
$331.17
Net Pre-Medicare Retiree
Premium Costs After
Subsidies/Benefits
Alabama
Utah
Georgia
Arizona ASRS
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Montana
State & Plan
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Using the same assumptions as above, this would generate the following benefits.
Current Medicare $85.00 $100.00 $170.00 $100.00 $170.00 $100.00 $170.00
* These premium benefit levels would only be available where the HMO and Medicare Advantage plans were not
available
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Arizona Legislative Council
30 %
0%
82 %
43 %
56 %
69 %
15 Years
Medicare Premium
Benefit....,... as a Percent of
Lowest-Cost Plan Premium
10 Years
26 %
0%
34%
50%
42 %
18 %
5 Years
Non-Medicare Premium
Benefit - as a Percent of
Lowest-Cost Plan Premium
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0-4
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Years of Service
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Arizona Retiree Health Insurance Study
One way to set the premium benefit so that it continues to be relevant to the actual
premium amount is to set the benefit as a percent of the lowest cost in-state plan available
to the retiree. This percentage could always be revisited annually based on available
funds. This methodology gives retirees an incentive to enroll in the lowest cost plan,
while maintaining a sense of equity for those in rural areas where there is only one plan
choice.
The two tables below represent a possible structure based on years of service (for those
retirees subject to a vesting schedule) and percent oflowest-cost plan. The benefit for
Medicare eligibles, as a percent of premium, would be more generous, as it is under the
current premium benefit structure. For purposes of this illustration, we have used a years­of-
service banding methodology. The state could always choose to associate an
incremental percentage increase by year of service, if desired.
Mercer Human Resource Consulting
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Under this new method, looking at the percentages applied to the HMO and Medicare
Advantage plans, benefits stay relatively stable, decrease slightly for retirees with ten
years of service, but become much more generous for greater lengths of service. It is
important to note that this analysis is applied to 2005 ASRS premiums and any embedded
subsidies should be revisited if the premium contribution change is implemented.
The approximate incremental increase required to the 401(h) contribution would be
approximately 0.5 to 0.6 percent for a totaI401(h) contribution of 1.6 to 1.8 percent. This
valuation assumes that PSPRS and CORP retirees would continue to be 100 percent
vested in the premium benefit at retirement. This meets the subordination limit rules
which restrict the amount of 401(h) contributions to 25 percent of the total employer
contributions to the pension fund, exclusive of past service contributions. A much more
detailed actuarial analysis would need to be conducted to know the exact 401(h)
contribution required under this example.
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The ultimate and best solution will incorporate these features into its design.
Advantages of the Proposed Options
Looking globally at the various options, there are several positive features of each.
Unfortunately, no single option studied provides a perfect solution for Arizona's public
entity retirees. Some positive features include:
Disadvantages of the Proposed Options
Looking globally, again, at the options in this study, there are considerations and policy
decisions which must be made in order for any of the options to be viable. In addition,
there are some disadvantages which could be avoided in any future proposal.
• Administrative burden given to an unequipped agency - the ADOA or other public
employers may not be able to take on the additional administration required of
Options One, Two, or Three.
• Moving retirees to a far richer plan design. The impacts of this would only be higher
costs. (i.e. the ADOA's retiree plans are 26 percent richer than those ofASRS)
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Arizona Legislative Council
5
Arizona Retiree Health Insurance Study
Conclusion
• blending of active and retiree premiums;
• consolidation and simplification of the administration of Arizona's various retirement
systems;
• elimination of duplicative second tier service providers;
• consolidation of the various risk pools to provide greater contracting and negotiating
leverage across the State;
• simplification of the current premium benefit method;
• establishing an equitable contribution to retirees living in rural areas; and
• appropriate funding methodology for the premium benefit.
Mercer Human Resource Consulting
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Ridding the system of administrative inefficiencies and controlling benefit provisions for
retirees will help. But the next steps will need to include some focus on the actual health
of public employees and retirees as well as the other drivers of health care cost increases.
• Moving retirees to government employers who will cut retiree benefits when GASB
sections 43 and 45 become effective. The Legislature will need to strike a balance
between overly-rich and inadequate retiree plan benefits.
• Administration is made more complex, or does not simplify the system. For example,
Options Three and Four do nothing to streamline the current Arizona retiree system.
Also, Options One and Two, unless implemented retroactively, would not simplify the
current system.
As indicated earlier in this report, none of the proposed options truly addresses the root
causes of the escalating costs of retiree health care. The United States is in a health care
crisis with many causes. Americans eat too much and too many of the wrong kinds of
food, smoke, exercise too little, work in sedentary jobs, for the most part, and have little
incentive to change life styles. Our litigious society drives up malpractice insurance costs
for medical providers. Technology saves our lives, but also continues to drive up our
medical costs. There are certainly other causes, but the main point is that the Arizona
State Legislature is not going to be able solve the health care crisis in Arizona alone.
Conclusion
This study was intended to be an initial review of several proposed options for increasing
the viability and benefits of the Arizona public employer retiree health plans. Once a
directional decision has been made, more work needs to be done to delve into the
contingencies and results of that particular path or paths. Mercer encourages all readers of
this report to proceed carefully with the next steps and keep in mind all known
implications. Any changes to a system as complex as the Arizona public employer retiree
health care system will undoubtedly have unintended consequences and unanticipated
ripple effects. Only through public deliberations, statewide discussions, and careful study
can these consequences and effects be potentially minimized.
28
Arizona Retiree Health Insurance Study Arizona Legislative Council
Mercer Human Resource Consulting
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II Arizona Legislative Council Current Public Employer Retirement Plan Systems
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Name DeHription H••lth C.... Plan Eligibility H••lth C.,. Plan Enroll....nt H••lth Ca.. Plan Contribution Strategy Premium "nefit Rural Subsidy H••lth Plan Administrator
ASRS: Arizona State The Arizona State Retirement System now encompasses the Retirees of ASRS, PSPRS, EORP, CORP, or UORP can ASRS, PSPRS, EORP, CORP, UORP, or previous employer The empk>yer contributes to fund the Premium Benefit. The Premium Benefit is based on years of service. ASRS Qualified retirees who are participating in a medical p'an provided by ASRS and who live ASRS
Retirement System state, including all state agencies. the 3 state universities, all participate; a member who began l TO from ASRS and isn't if offered and eligible. Retired members pay the balance of premium after any retirees must have 5 years of service for the minimum in areas of Arizona where no managed care program is offered (Le., non-service areas)
10 community colleges, 14 out of 15 counties (all except La enrolled in employer's health plan. premium benefit. benefit and 10 years of service to receive the maximum are entitled to receive a temporary premium benefit (rural subsidy). This subsidy is due to
Paz), most cities and towns, most school districts and charter premium benefit. expire on June 30, 2005.
schoots, and other political subdivisions.
PSPRS: Public Safely Provides statewide retirement program for certain full Retirees who were full-time pakt firefighters or peace officers, A) Employer might offer an extension of the insurance in The employer contributes to fUnd the Premium Benefit. The Premium Benefit requires has no service Retired PSPRS members Who participate in a qualified health care plan and who live in Employer, ADOA, or ASRS
Personnel Retirement System time fire fighters and peace officers assigned to hazardous regularly assigned to hazardous duty of the type normally expected which the member is enrolled, Le.. City of Phoenix or Pima Retired members pay the balance of premium after requirement.The maximum premium benefit is available to areas of Arizona where no managed care program is offered (Le., non-service areas) are
duly. of firefighters and peace officers, employed with a participating County. premium benefit. all eligible members. entitled to receive a temporary premium benefit (rural subsidy). This subsidy is due to
employer. Surviving spouses are also eligible for benefits. B) ASRS Retiree Group Insurance Program. expire on June 30, 2005.
C) Most state employees are eligible for ADOA; human
resources verifies eligibility.
CORP: Corrections Officers' Provides statewide retirement program for certain state and A. For a county, a county detention officer, or a non-uniformed A) Employer might offer an extension of the insurance in The employer contributes to fUnd the Premium Benefit. The Premium Benefit requires has no service Retired CORP members who participate in a qualified health care plan and who live in Empfoyer
Retirement System county full-time detention officers. employee of a sheriff's department whose customary empfoyment which the member is enrolled, Le.. City of Phoenix or Pima Retired members pay the balance of premium after requirement.The maximum premium benefit is available to areas of Arizona where no managed care program is offered (i.e., non-service areas) are ADOAorASRS
is at least forty hours per week and whose primary duties require Counly premium benefit. all eligible members. entitled to receive a temporary premium benefit (rural subsidy). This subsidy is due to
direct inmate contact, if the county elects to join the Plan. B) ASRS Retiree Group Insurance Program expire on June 30, 2005. Contribution and Premium
B. For the State Department of Corrections, correctional service C) Most state employees are eligible for ADOA; human Benefit - PSPRS
officers, state correctional program officers, and certain other resources verifies eligibility
designated positions within the department that are prescribed by
statute and whose customary employment is for at least forty hours
per week.
C. For the State Department of Juvenile Corrections, youth
corrections officers, youth program officers, and certain other
designated positions within the department that are prescribed by
statute and whose customary employment is for at least forty hours
per week.
D. For a city or town, a city or town detention officer whose
customary employment is for at least forty hours per week, if the /
city or town elects to join the Plan.
E. For an employer in the Pubtic Safety Personnel Retirement
System, full-time dispatchers whose customary employment is for
at least forty hours per week, if the employer elects to join
the Plan.
EORP: Elected Officials Provides retirement program for State elected officials. term All elected officials are members of the Plan, except that an In order to qualify for payment pursuant to this subsection, the The employer contributes to fund the Premium Benefit. The Premium Benefit is based on years of service. ASRS Employ...
Retirement Plan elected officials can choose not to participate elected official who is subject to term limits may elect not to retired member or survivor shall elect single coverage and Retired members pay the balance of premium after retirees must have 5 years of service for the minimum ADOAorASRS
participate in the Plan for that specific term of office. An elected must have elected to participate in the coverage provided in § premium benefit. benefit and 8 years of service to receive the maximum
official means every stected official of this state, every elected 38-651.01 or 38-782 or any other health and accident premium benefit. Contribution and Premium
official of each county of this state, every justice of the supreme insurance coverage provided or administered by a Benefit-court,
every judge of the court of appeals, every judge of the participating employer of the elected officials' retirement plan. PSPRS
superior court, every full-time superior court commissioner, the
administrator of the fund manager if the administrator is a natural
person and each elected official of an incorporated city or town
whose employer has executed a proper joinder agreement for
coverage of its elected officials.
UORP: University Optional Alternative to ASRS for University personnel DC Plan. Employees appointed for 20 hours per week or more for 5 months Generally, a member will be informed of eligibility to Retiree pays full premium. No benefit available. No subsidy available. Employer, ADOA, or ASRS
Retirement Plan or more. participate in the OR? at the time of initial employment.
Eligibility is strictly detennined by the job performed and is not
based on years of service or salary level. The retirement plan
participation defaults to the ASRS plan UNLESS the member
chooses to participate in the ORP within 30 days of eligibility
date/notice of eligibility. After the 3Q-day enrollment period,
the retirement plan choice is irrevocable for the duration of
employment with the Arizona University System.
ADOA: Arizona Department of Arizona Benefit Options (AzBO) program designed by and A) State employees with 20 hours or more each week (not All State employee who retire and are receiving income from a Retiree pays full premium, unless eligible for the premium No benefit available unless retiree is eligible under one of Qualified retirees who are participating in a medical plan provided by ADOA and who live ADOA
Administration designed for State employees. temporary, emergency, or clerical pool; patients or inmates recognized retirement program of this state and opt upon benefit under PSPRS, ASRS, CORP, or EORP. the other programs. in areas of Arizona where no managed care program is offered (i.e., non-service
employed in State agency institutions; non-State employee officers retirement to enroll or continue enrollment in the Benefit areas) are entitled to receive a temporary premium benefit (rural subsidy). This subsidy is
and enlisted personnel of the National Guard of Arizona as well as Options Program (group health plan for active employees) are due to expire on June 3D, 2005.
employees in positions established for rehabilitation purposes). eligible. Retirees must enroll no later than 30 days after
B) Eligible retirees collecting a pension from a recognized State of retirement. If the member does not elect medtcal and/or
Arizona retirement system or plan. dental coverage through ADOA at the time of retirement, or
C) Long-Term Disability (LTD) participants collecting benefits from later disenrolls from medical and/or dental coverage through
VPA and/or Standard. ADOA's Benefit Options Program, that member may not
D) Eligibte former elected officials. return to the ADOA plan for that type of coverage (medical
E) Surviving spouses and qualified dependents provided they were and/or dental).
covered at the time of the retiree's death.
other Public EmDlova,. ExamDI_
La Paz County La Paz County Health Plan County determines eligibility. Eligible retirees can enroll in the County's health plan for
active employees. Eligible public safety employees can enroll
in plans offered through PSPRS.
COPERS: City of Phoenix City of Phoenix Health Plan City's benefits office detennines eligibility. Eligible retirees can enroll in the City's health pian for active Both the City and the Retiree contribute toward the City contributes to medical premiums based on age and No subsidy available. City of Phoenix
Employee Retirement System employees. Eligible publk; safety employees can enroll in premium. credited service.
plans offered through PSPRS.
City of Tucson City of Tucson Health Plan City's benefits office determines eligibility. Eligible retirees can enroll in the City's health plan for active Both the City and the Retiree contribute toward the The City of Tucson contributes 75% of full cost of premium. No subsidy available. City of Tucson
employees. Eligible public safety employees can enroll in premium.
plans offered through PSPRS.
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II Arizona Legislative Council Current Public Employer Retirement Plans
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ASRS Participating Entities
Public Schools
Agua Fria UHS District 216
Aguila Elementary District 63
Ajo Unified District 15
Alhambra Elementary District 68
Alpine Elementary District 7
Altar Valley District 51
Amphitheater Unified District 10
Antelope UHS District 50
Apache Elementary District 42
Apache Junction Unified District 43
Arlington Elementary District 47
Ash Creek Elementary District 53
Ash Fork Unified District 31
Avondale Elementary District 44
Bagdad Unified District 20
Balsz Elementary District 31
Beaver Creek Elementary District 26
Benson Unified District 9
Bicentennial UHS District 76
Bisbee Unified District 2
Blue Elementary District 22
Blue Ridge Unified District 32
Bonita Elementary District 16
Bouse Elementary District 26
Bowie Unified District 14
Buckeye Elementary District 33
Buckeye UHS District 201
Bullhead City Elementary District 15
Camp Verde Unified District 28
Canon Elementary District 50
Cartwright Elementary District 83
Casa Grande Elementary District 4
Casa Grande UHS District 82
Catalina Foothills Unified District 16
Cave Creek Unified District 93
Cedar Unified District 25
Chandler Unified District 80
Chevelon Butte Elementary District 5
Chinle Unified District 24
Chino Valley Unified District 51
Chloride Elementary District 11
Clarkdale-Jerome Elementary District 3
Clifton Unified District 3
Cobre Valley Institute
Cochise Elementary District 26
Cochise Technology District 01
Colorado City Unified District 14
Colorado River Union H.S. District 2
Concho Elementary District 6
Congress Elementary District 17
Continental Elementary District 39
Coolidge Unified District 21
Cottonwood oak Creek Elementary District 6
Crane Elementary District 13
Creighton Elementary District 14
Crown King Elementary District 41
Dan Hinton School
Deer Valley Unified District 97
Double Adobe Elementary District 45
Douglas Unified District 27
Duncan Unified District 2
Dysart Unified District 89
Eagle Elementary District 45
East Valley Institute of Technology
Elfrida Elementary District 12
Eloy Elementary District 11
Esperanza Academy Accommodation School
Ruth Fisher Elementary District 90
Flagstaff Arts and Leadership Academy
Flagstaff Unified District 1
Florence Unified District 1
Flowing Wells Unified District 8
FI. Huachuca Accom School
FI. Thomas Unified District 7
Mercer Human Resource Consulting
Fountain Hills Unified District 98
Fowler Elementary District 45
Fredonia Moccasin Unified District 6
Gadsden Elementary District 32
Ganado Unified District 20
Gila Bend Unified District 24
Gila County Special Services
Gila Institute for Technology
Gilbert Unified District 41
Glendale Elementary District 40
Glendale UHS District 205
Globe Unified District 1
Grand Canyon Unified District 4
Greenlee Co Accommodation Sch
Griffin Foundation
Hackberry Elementary District 3
Hayden Winkelman Unified District 41
Heber Overgaard USD No.6
Higley Elementary District 60
Hillside Elementary District 35
Holbrook Unified District 3
Hope Schools
Humboldt Unified District 22
Hyder Elementary District No. 16
Indian Oasis Baboquivari 40
Isaac Elementary District 5
J.O. Combs Elementary District 44
Joseph City Unified District 2
Juniper Tree Academy
Juvenile Justice System Sch
Kayenta Unified District 27
Kingman Elementary District 4
Kirkland Elementary District 23
Klondyke School District 09
Kyrene Elementary District 28
Lake Havasu Unified District 1
Laveen Elementary District 59
Liberty Elementary District 25
Litchfield Elementary District 79
Littlefield Elementary District 9
Littleton Elementary District 65
Luz Academy of Tucson
Madison Elementary District 38
Maine Cons. Elementary District 10
Mammoth San Manuel Unified District 8
Marana Unified District 6
Maricopa Unified District 20
Mary O'Brien Accommodation Sch
Mayer Unified District 43
McNary Elementary District 23
McNeal Elementary District 55
Mesa Unified District 4
Miami Unified District 40
Mingus UHS District 4
Mobile Elementary District 86
Mohave Educational Svcs Coop
Mohave UHS District 30
Mohave Valley Elementary District 16
Mohawk Valley Elementary District 17
Morenci Unified District 18
Morristown Elementary District 75
Murphy Elementary District 21
Naco Elementary District 23
Nadaburg Elementary District 81
Navajo County Accommodation Schools
Nogales Unified District 1
Oracle Elementary District 2
Osborn Elementary District 8
Owens Whitney Elementary District 6
Page Unified District 8
Palo Verde Elementary District 49
Paloma Elementary District 94
Palominas Elementary District 49
Paradise Valley District 69
Parker Unified District 27
Patagonia Elementary District 6
Patagonia UHS District 20
Payson Unified District 10
Peach Springs Elementary District 8
Peach Springs High School 7
Pearce Elementary District 22
Pendergast Elementary District 92
Peoria Unified District 11
Phoenix Elementary District 1
Phoenix UHS District 210
Picacho Elementary District 33
Pima County Adult Education
Pima Unified District 6
Pine Elementary District 12
Pinon Unified District 4
Pomerene Elementary District 64
Prescott Unified District 1
Quartzsite Elementary District 4
Queen Creek Unified District 95
Rainbow School
Ray Unified District 3
Red Mesa Unified District 27
Red Rock Elementary District 5
Riverside Elementary District 2
Roosevelt Elementary District 66
Round Valley Unified District 10
Rural Education Alternative Program
Sacaton Elementary District 18
Safford Unified District 1
Sahuarita Unified District 30
SI. David Unified District 21
SI. Johns Unified District 1
Salome Cons. Elementary District 30
San Carlos Unified District 20
San Fernando Elementary District 35
San Simon Unified District 18
Sanders Unified District 18
Santa Cruz Elementary District 28
Santa Cruz Valley District 35
Santa Cruz Valley UHS District 840
School To Work Programs
Scottsdale Unified District 48
Sedona Oak Creek School District 9
Seligman Unified District 40
Sentinel Elementary District 71
Show Low Unified District 10
Sierra Vista Unified District 68
Skull Valley Elementary District 15
Small Schools Service Program
Snowflake Unified District 5
Solomonville Elementary District 5
Somerton Elementary District 11
Sonoita Elementary District 25
Stanfield Elementary District 24
Sunnyside Unified District 12
Superior Unified District 15
Tanque Verde Unified District 13
Tempe Elementary District 3
Tempe UHS District 213
Thatcher Unified District 4
Tolleson Elementary District 17
Tolleson UHS District 214
Toltec Elementary District 22
Tombstone Unified District 1
Tonto Basin School District 33
Topock Elementary District 12
Tuba City Unified District 15
Tucson Unified District 1
Union Elementary District 62
Vail Elementary District 20
Valentine Elementary District 22
Valley UHS District 22
Vernon Elementary District 9
Villa Oasis Inter SChool
Walnut Grove School District
Washington Elementary District 6
Wellton Elementary District 24
Wenden Elementary District 19
Whiteriver Unified District 20
Wickenburg Unified District 9
Willcox Unified District 13
Williams Unified District 2
Williamson Valley Elementary District 2
Wilson Elementary District 7
Window Rock Unified District 8
Winslow Unified District 1
Yarnell Elementary District 52
Yavapai County Accommodation School District 99
YESS Small Schools
Young Elementary District 5
Yuma County Accommodation School
Yucca Elementary District 13
Yuma Elementary District 1
Yuma UHS District 70
Charter Schools
Accelerated Learning Center
Accelerated Learning Center Laboratory
Acclaim Charter SChool
Academy of Excellence, Inc
Academy of Tucson
Adalberto Guerrero Middle School
Aha McCav High School
American Heritage Academy Charter School
Amerischools
Arizona Career Academy
Arizona Charter Academy
Arizona Community Development
Arizona Montessori Charter School
Arizona School for the Arts
Arizona Southwest Preparatory Academy
AZ Agribusiness and Equine Center Charter School
AZ Institute of Business and Technology (AIBT)
Aztec Academy
Aztlan Academy, Inc
Ball Charter School
Basis Middle School
Benchmark Elementary
Benjamin Franklin Charter School
Burke Basic Charter School
Canyon Rose Academy
Career Pathways Academy
Carmel Comm. Arts and Technology Charter School
Carpe Diem Collegiate High School Charter
Casey Country Day Charter School
CAVIAT School
Central Arizona Valley Inst of Technology
Challenge School, Inc
Charter Foundation, Inc
Children Reaching for the Sky
Chester Newton Charter and Montessori School
Choice Education and Development Corp
CI Wilson Academy
Clearview Central Arizona Charter School
Country Gardens Charter School
Davis Education Center
Desert Mosaic School
Desert Technology High School
Desert Rose Academy
Desert Springs Academy Charter School
Destiny Schools, Inc
Discovery Academy of SI. Johns
Discovery Plus Academy Charter School
Dobson Academy
Dragonflye Charter School
EAGLE Academy Charter School
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Eagles Aerie Schools
East Valley Academy Charter School
Ecotech Agricultural Charter School
Edge Charter School
EDU Preneurship Charter School
EDU-Prize Charter School
Enterprise Academy Charter School
Esperanza Montessori Academy
Excalibur Charter SChool
Excel Educations Centers Inc
Entity Z Accounts
Flagstaff Arts and Leadership Academy
Flagstaff Jr. Academy Charter School
Franklin Phonetic Primary School
Future Development Corp
Gan Yaladeem, the Looking Glass
Genesis Academy Charter School
Gila County Transition Charter School
Gila Preparatory
G.R.A.D.E. Charter School
Great Expectation Charter School
Happy Valley School, Inc
Ha:San Preparatory and Leadership School
Heritage Academy Inc
Horizon Community Learning Center
Humanities and Science Institute Inc
Intelli-School Charter School
International Commerce Institute Inc
JWJAcademy
James Sandoval Preparatory High School
Juniper Tree Academy
Khalsa Charter School
Killip Dual Language Charter School
Kingman Academy of Learning
Lake Havasu Charter School
Lake Powell Academy Inc
Learning Crossroads Basic Academy
Learning Institute
Life Skills Center of Arizona
Masada Charter School, Inc
Metropolitan Arts Institute
Mexicayotl Academy
Mingus Mountain Academy
Mingus Springs Charter School
Mohave Accelerate Learning Center
Mountainaire Academy
Mountain Rose Academy, Inc
Mountain Oak School Charter School, Inc
Multi-Dimensional Literacy Corp
New School for the Arts Middle School
New West Charter School
Noah Webster Basic School
Northern Arizona Voc. Institute of Technology
Northland Preparatory Academy
North Point Prepatory
North Star Charter School
Painted Pony Ranch Charter School
Paradise Education Center
Paramount Academy
Park View Middle School
Pathfinder Academy
Pathways Charter Schools, Inc
Paulden Elementary School
PCAE-Edge
Pinnacle Education Schools
Peak School, Inc
Phoenix Academy of Performing Arts South
Phoenix School of Academic Excellence
Pima Prevention Partnership
Pimeria Alta Learning Center
Pine Forest Charter School
Point Educational Services
Presidio High School
Project YES Middle School, LLC
Redwood Education Academy
Renaissance Education Consort, Inc
Rolling Hills Charter
Salt River Pima-Maricopa Indian Charter Sch
Scholars' Academy Charter School
Scottsdale Educational Enrichment School
Scottsdale Institute for the Arts
Sedona Charter School
Self Development Charter School
Sequoia Charter School
Sequoia Choice School, LLLP
Sequoia School LLC Charter School
Sequoia Ranch School
Sequoia School for the Deaf and Hard of Hearing
Sequoia Village School
Sierra Oaks Schools
Skyline Technical High School
Skyview Charter School
Sonoran Desert School
Southern AZ Community Academy Charter SChool
Southside Community School
Stepping Stones Academy
Sunnyside Charter and Montessori School
Superior School
Tag Elementary Inc
Tolani Lake Elementary Sch Academy
Telesis Center for Learning, Inc
Tertulia Charter SChool
Tolchi' Kooh Charter School Inc
Tri-Gity Prep High School
Tri-City Vo-Tech High School
Tucson Country Day School
Tucson Preparatory School
Triumphant Learning Center
Valley Academy Inc
Valley Academy for Career and Technology Ed
Ventana Academic SChool
Visions Unlimited Academy Inc
Westmark High Schools
Westwind Academy
Wilson High SChool
Young Scholars Academy Charter School Corp
Colleges and Universities
Arizona Western College
Central Arizona College
Cochise College
Coconino County Community College
Eastern Arizona College
Maricopa County Community Colleges
Mohave Community College
Northland Pioneer College
Pima Community College
Yavapai College
Arizona State University
Northern Arizona University
University of Arizona
Cities and Towns
City of Apache Junction
City of Avondale
City of Benson
City of Bisbee
City of Camp Verde
City of Carefree
City of Casa Grande
City of Chandler
City of Coolidge
City of Cottonwood
City of Douglas
City of Eagar
City of EI Mirage
City of Eloy
City of Flagstaff
City of Glendale
City of Globe
City of Goodyear
City of Holbrook
City of Kingman
City of Lake Havasu
City of Litchfield Park
City of Mesa
City of Nogales
City of Oro Valley
City of Peoria
City of Prescott
City of Safford
City of San Luis
City of Scottsdale
City of Show Low
City of Sierra Vista
City of Somerton
City of South Tucson
City of Surprise
City of Tempe
City of Tolleson
City of Tombstone
City of Willcox
City of Williams
City of Winslow
City of Yuma
Town of Buckeye
Town of Camp Verde
Town of Carefree
Town of Chino Valley
Town of Clarkdale
Town of Clifton
Town of Duncan
Town of Eager
Town of Florence
Town of Fredonia
Town of Gila Bend
Town of Gilbert
Town of Guadalupe
Town of Hayden
Town of Keamy
Town of Miami
Town of ParadiseValley
Town of Parker
Town of Patagonia
Town of Pima
Town 01 Queen Creek
Town of Sahuarita
Town of Snowflake
Town of Springerville
Town of Superior
Town of Taylor
Town of Thatcher
Town of Wellton
Town of Wickenburg
Town of Youngtown
Counties
Apache County
Cochise County
Coconino County
Gila County
Graham County
Greenlee County
Maricopa County
Mohave County
Navajo County
Pima County
Pinal County
Santa Cruz County
Yavapai County
Yuma County
Miscellaneous
Apache Jct. Fire District
Arizona Association of Counties
Arizona City Sanitary District
Arizona Counties Insurance Pool
Arizona Interscholastic Association
Arizona Prosecuting Attorney Advisory Council
Avra Valley Fire District
Buckeye Valley Fire District
Buckeye Water Conservation and Drainage District
Bullhead City Fire District
Central Arizona Project
Central Yavapai Fire District
Chino Valley Fire District
Christopher Kohls Fire District
City of Eloy Housing Authority
City of Yuma Housing Authority
Colorado River Sewage System
County Supervisors Association of Arizona
Crown King Fire District
Diamond Star Fire District
Drexel Heights Fire District
EI Frida Fire District
Fire District of Sun City West
Flagstaff Housing Authority
Fort Mojave Mesa Fire Department
Gila Resources
Grand Canyon Airport Authority
Green Valley Domestic Water
Golder Ranch Fire District
Harquahala Valley Irrigation District
Heber-Qvergaard Fire District
Kino Community Hospital
Lakeside Fire District
Marana Domestic Water Impr District
Maricopa Integrated Health System
Maricopa Water District
Metropolitan Domestic Water Impr Dist
Montezuma-Rimrock Fire District
New Magma Irrigation and Drainage District
Northern Apache Co. Special Healthcare
Northwest Fire District
Picture Rock Fire District
Pima Home Health
Pinewood Fire District
Pinewood Sanitary District
Pinewood Volunteer Fire District
Ponderosa Domestic Water Impr District
Posada del sol Health
Puerco Valley Fire District
Queen Valley Domestic Water Impr District
Queen Valley Sanitary District
Roosevelt Irrigation District
San Carlos Irrigation and Drain
Sedona-Qakcreek Airport Authority, Inc
State of Arizona
Sun City Fire District
Sun Lakes Fire District
Summit Fire District
Superslilion Mtn Community Facilities Dist
Tourism and Sports Authority
Tucson Airport Authority
Tusayan Fire District
Verde Valley Fire District
Water Utilities Community District
Western Arizona Council of Governments
Whetstone Fire District
Williams Gateway Airport Authority
Yuma County Airport Authority
Yuma Mesa Irrigation District
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I PSPRS Participating Entities Gilbert Fire
State Government Gilbert Police
Arizona State University Campus Police Glendale Fire
Arizona State Attorney General Glendale Police I Arizona State Capitol Police Globe Fire
Department of Emergency and Military Affairs Globe Police
Department of Game & Fish Goodyear Fire
I Department of Public Safety Goodyear Police
Department of Liquor License and Control Guadalupe Fire
Northern Arizona University Campus Police Hayden Police
Tucson Airport Authority Fire Holbrook Police
I Tucson Airport Authority Police Kearny Police
University of Arizona Campus Police Kingman Fire
Kingman Police
Lake Havasu Fire
County Government Lake Havasu Police I Apache County Sheriffs Mammoth Police
Cochise County Sheriffs Marana Marshals
Coconino County Sheriffs Mesa Fire
Gila County Sheriffs Mesa Police I Graham County Sheriffs Miami Police
Greenlee County Attorney Investigators Nogales Fire
Greenlee County Sheriffs Nogales Police
La Paz County Attorney Investigators Oro Valley Police I La Paz County Sheriffs Page Fire
Maricopa County Attorney Investigators Page Police
Maricopa County Sheriffs Paradise Valley Police
Mohave County Sheriffs Parker Police
I Navajo County Attorney Investigators Patagonia Marshals
Navajo County Sheriffs Payson Fire
Pima County Attorney Investigators Payson Police
Pima County Community College Police Peoria Fire
Pima County Sheriffs Peoria Police I Pinal County Sheriffs Phoenix Fire
Santa Cruz County Deputies Phoenix Police
Yavapai County Attorney Investigators Pima Police
Yavapai County Sheriffs Pinetop-Lakeside Police
I Yuma County Sheriffs Prescott Fire
Prescott Police
Prescott Valley Police
Quartzsite Marshals
I City Government Safford Police
Apache Junction Fire District Sahuarita Police
Apache Junction Police San Luis Fire
Avondale Fire San Luis Police
Avondale Police Scottsdale Police I Benson Police Sedona Fire District
Bisbee Fire Sedona Police
Bisbee Police Showlow Fire
Buckeye Police Showlow Police
I Bullhead City Fire Sierra Vista Fire
Bullhead City Police Sierra Vista Police
Camp Verde Marshals Snowflake Police
Casa Grande Fire Somerton Fire
I Casa Grande Police Somerton Police
Chandler Fire South Tucson Fire
Chandler Police South Tucson Police
Chino Valley Fire Springerville Police
Chino Valley Police SI. Johns Police
I Clarkdale Police Superior Police
Clifton Fire Surprise Fire
Clifton Police Surprise Police
Coolidge Police Tempe Fire
I Cottonwood Fire Tempe Police
Cottonwood Police Thatcher Police
Douglas Fire Tolleson Fire
Douglas Police Tolleson Police
Eager Police Tombstone Police I EI Mirage Fire Tucson Fire
EI Mirage Police Tucson Police
Eloy Police Wellton Marshals
Flagstaff Fire Wickenburg Police
I Flagstaff Police Wilcox Police
Florence Fire Williams Police
Florence Police Winslow Fire
Fountain Hills Marshals Winslow Police
Fredonia Marshals Youngtown Police I Yuma Fire
Yuma Police
I Memer Human Resource Consulting
Tribal Government
Fort McDowell Tribal Fire
Fort McDowell Tribal Police
Gila River Fire
Gila River Police
Salt River Pima-Maricopa Fire
Salt River Pima-Maricopa Police
Fire Districts
Avra Valley Fire District
Buckskin Fire District
Central Yavapai Fire District
Daisy Mountain Fire District
Drexel Heights Fire District
Fort Mojave Mesa Fire District
Fry Fire District
Golden Valley Fire District
Golder Ranch Fire District
Green Valley Fire District
Hualapai Valley Fire District
Lakeside Fire District
Mayer Fire District
Mohave Valley Fire District
Northwest Fire District
Picture Rocks Fire District
Pine-Strawberry Fire District
Pinetop Fire District
Sun City Fire District
Sun City West Fire District
Sun Lakes Fire District
Three Points Fire District
Tubac Fire District
CORP Participating Entities
State Government
DEPARTMENT OF CORRECTIONS
DEPARTMENT OF JUVENILE CORRECTIONS
County Government
APACHE COUNTY
COCHISE COUNTY
COCONINO COUNTY
MARICOPA COUNTY
MOHAVE COUNTY
NAVAJO COUNTY
PIMA COUNTY
PINAL COUNTY
PINAL COUNTY - DISPATCHERS
SANTA CRUZ COUNTY
YAVAPAI COUNTY
YUMA COUNTY
City Government
TOWN OF ORO VALLEY
2012
EORP Participating Entities
State Government
STATE OF ARIZONA
County Government
APACHE COUNTY
COCHISE COUNTY
COCONINO COUNTY
GILA COUNTY
GRAHAM COUNTY
GREENLEE COUNTY
LA PAZ COUNTY
MARICOPA COUNTY
MOHAVE COUNTY
NAVAJO COUNTY
PIMA COUNTY
PINAL COUNTY
SANTA CRUZ COUNTY
YAVAPAI COUNTY
YUMA COUNTY
City Government
CITY OF APACHE JUNCTION
CITY OF AVONDALE
CITY OF CHANDLER
CITY OF FLAGSTAFF
CITY OF GLENDALE
CITY OF GLOBE
CITY OF MESA
CITY OF PEORIA
CITY OF PHOENIX
CITY OF SCOnSDALE
CITY OF SAFFORD
CITY OF SOUTH TUCSON
CITY OF TEMPE
CITY OF TOLLESON
CITY OF TUCSON
CITY OF YUMA
TOWN OF THATCHER
UORP Participating Entities
Arizona State University
The University of Arizona
Arizona State University West
Northern Arizona University
Arizona Board of Regents
G:IWORK\AZLC01IProjecIlFinaJ_DeliverablesICurrent Retirement Plans.xls
• • • • • • • • • • .' . • • • • • • • • • Arizona Legislative Council Considerations Commenrs In Red indicate policy decIsions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
Administrative
Implementation • Are retirees mandated Into these plans. or would they be merely an option? • Need to consider
Issues & • Would thiS be retroactive or prospective? philosophy for premium
questions • Would retirees previously opting for IndiVidual coverage or spouse plans be allowed benefit amount:
In? - Service
• Would retirees not enrolled be allowed to enroll at a specified date? - ProfeSSion or nsk
• If an option, numerous other systems still exist and complexity is not solved. exposure
• Need to address complexity of gathering data from multiple entities to assess eligibility, - Tie to lowest cost plan
premium benefit vesting, etc. - % of premium
• Pension and premium • Would there be an contributions have
exception for public increased from 2% each
employers under a employer/employee to 5.2%
certain size? each on 7/1/2003 and go to
• Moderate-to-high effort 7.75% each on 7/1/2005.
to implement Introducing another
depending on employer increase on top of this will
size, and number of not be well received.
retirees enrolling in • Current statutes require
employer plan. equal employer match of
any employee contribution.
Insured Pool • ADOA is self-funded. Would thIS'POOI be-- • Pool would increase, Not Applicable
Pool would increase, but 'etirees Jnl~ • actives but so would
so would demographic illended wltn elrree5~ demographic risk for
risk (see below). • If this option is employer plan (see
retroactive, pool would below).
become the largest • ASRS would
state retiree plan. experience decreases
• Other pools would in non-Medicare
shrink (ADOA) or be enrollees.
replaced. (See
Demographic Risk
below.)
Mercer Human Resource Consulting 1 of 12 Arizona Legislative Council Considerations I.doc
• • • • • • • • • • •• • • • • • • • • • Arizona Legislative Council Considerations Comments In Red indicate policy decIsions
Option #1 Option #2 Option #3 Option #4
! Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
Funding • Currently, ADOA IS self- State ....rlulO neeo to • State would need to • A contribution of % to
funded State would eva.. ,ate :lnqolng decide whether or how % would be needed to
need to evaluate ongoing funding approac~ with much of a premium increase the average
funding approach with new'iltTangerTlent: e. benefit retirees would premium benefit for retirees
new arrangement ,elf'mdlng .: • llf' continue to receive If under 65 to $ for
• Contributions from In: lIe( left to the employer, single and $__ for family;
participating employers • Contributions from retiree contributions and for 65 and over to $
would need to be participating employers could vary substantially _ single and $_family.
established to offset cost would need to be • Some employers would • If this becomes an offset to
of their retirees. established to offset most likely demand the pension contribution
cost of their retirees. financial assistance rather than an addition
from the State in paying contribution, this would
for retiree health care. increase the unfunded
pension liability.
Administration • ADOA is not currently • State would need to • Employers would take • Minimal additional
staffed to administer select appropriate on additional administration issues.
influx of retirees admlnlstrallve entity 6. administrative burden.
• ADOA staff focus would assure capacity Would
be divided between this oe ASRS?
ADOA actives and
retirees, and other public
employer retirees.
Benefit Plan Design Impacts
Benefit Design • For ease of administration, number of benefit plan • Employer retiree Not Applicable
options would need to be consolidated benefits plan design
may need modification,
depending on cost
Impact.
Benefit Reductions • Evaluation of any benefit reductions would have to be made to prevent impairment of Not Applicable
any contractually protected health benefits.
• Even if no contractually protected benefit provisions exist, any reduction in benefits
would have an adverse impact on retirees.
Mercer Iluman Resource Consulting 2 of 12 Arizonu Legislmivc Council Considerations I.doc
• • • • • • • • • • •• • '. • • • • • • • Arizona Legislative Council Considerations Comments In Red Indlcare policy decIsions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
Benefit • State should evaluate any resulting benefit enhancements which would increase plan • Only to the extent that the
Enhancements costs and reduce or eclipse expected cost savings or administrative savings. contribution for future
• Unless contractual impairment issues are dealt with by grandfathering certain health benefits curbs the
participants, the resulting plan design would be the highest level of contractually necessity to reduce future
obligated plan designs, Additionally, there would be restrictions on future plan design health plan benefits,
chanqes.
Eligibility Changes • ADOA would be reqUired • ' "a-rtlclparlng entities • Employers would be Not Applicable
to change eligibility rules would transfer eligibility required to change
to allow participation of to the state plan for eligibility rules to allow
employees of other retirees participation of early
enlilles retirees
Contract Issues
Employer Benefit • The nature of the current plans' benefit promises should be reviewed to determine • Evaluation must be made of
Obligations whether there are any contract rights that are protected from modification. If so, then pension funding obligations
steps will need to be taken to have the new plan designed to prevent the impairment of before any decision to
contractually protected retiree health benefits of active employees and retirees. convert any portion of the
pension funding
contribution to health plan
contributions.
Insurance • ADOA would need to • If the single health • Employer Insurance NA
contracts review any impact on insurance program is contracts would need to
contracts with health plan for retirees only, some be reVised to Include
administrative services carriers may not want retirees
organizations, stop loss to take on the • Some contracts might
carriers, and pharmacy demographic risk not renew if
benefit managers, unless they also insure demographic risk is too
actives under a great
• separate insurance
contract
Mercer Human Resource Consulting 3 of 12 Arizollfl Legislative Council Considerations I.doc
• • • • • • • • • • •• • • • • • • • • • Arizona Legislative Council Considerations Comments In Red Indlcaee policy decIsions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
Cost Shift • If actIve employees were • Cost shift impact to new • Employees would need • In order to fund both current
Included, state would retirement system to decide whether to health plan obligations and
need to decide whether to would be unless blend active and retiree future obligations, costs
blend active and retiree participating entities rates would be increased to
rates make supporting • To the extent that employers and/or active
• Changes to eXisting contributions to the employers were employees.
(legislation/state retiree health plan. Cost allowing early retirees
constitution) would need shift from other public to elect COBRA and
to be made to allow employee retiree health were charged 102% of
blending of non-state systems varies by active premium, any
retirees with state active system. See Exhibit ( reduction in retiree
employees ). contributions would be
• Loss of active an additional expense
employee subsidy to the plan.
raises average PEPM
by__.
• The cost shift to ADOA • If retirees are blended
would be unless with active employees,
participating entities cost shifting could
make supporting affect active employee
contributions to the DOA. contributions
The cost shift impact to negatively.
active ADOA employees
is approximately__if
premiums are blended.
Cost shift from other
public employee retiree
health systems varies by
system. See Exhibit ( i.
Mercer I-lulllan Resource Consulting 4 of 12 Arizona Legislative Coutlcil Considerations I.uoc
• • • • • • • • • • •• • • • • • • • • • Arizona Legislative Council Considerations Commenrs In Red Indlcare policy decIsions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All inADOA All Retirees in One Until 65 Healthcare
Economies and • ADOA health plan • Larger plan, with • No administrative • No change to size or
Efficiencies of becomes larger with more greater leverage. efficiencies achieved administration.
Scale leveraging power for • Greater benefit since all current retiree
pricing, etc. consistencies. health care systems
• Greater benefit • Some insurers may be continue.
consistencies. hesitant to cover • No real leverage for
• If this is the only retiree-only population. employers since
retirement health care Premiums will be higher population only grows
plan, administration than for blended with less desirable risk.
would be more efficient. population.
• Greater administrative
efficiencv.
Federal and State • Retiree health insurance coverage provided by the new plan will need to be reviewed to make sure the taxation of such is
Tax Law Issues acceptable under federal and State law.
• Federal law may limit the ability to transfer assets held in retiree health benefits trusts under the existing plans if such are
established under IRC §501(c)(9) or §401(h).
• If an IRe §501 (c)(9) trust is used for any of the existing plans, any amendment implementing this option may require
federal filings to take place.
�� If pre-tax employee contributions are desired as part of the option, legal counsel's opinion and possibly and IRS ruling
request should be considered before implementation.
Funding NA NA NA Contribution strategy &
Methodology implications; pre or post-tax;
pension actuarial funding
issues.
Mercer Human Resource Consulting 50f12 Amona Legislative Council Considerations l.doc
• • '. • •• • • • • • • • • • • • • • • • Arizona Legislative Council Considerations Commenrs m Red mdlcate policy decIsions
Option #1 Option #2
". "_.. Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
Other Economic Impacts
Demographic Risk 0 This option increases the 0 This option produces a 0 This option increases Not Applicable
retiree-to-active ratio in plan with the highest the retiree-to-active
the plan as well as the risk group. Without any ratio in the employer
average participant age. active employee plans as well as the
Overall per- subsidization, average participant
employee/retiree costs premiums would trend age. Overall per-would
increase to the at a higher rate than employee/retiree costs
extent that the those of plans which would increase to the
demographic factors were blend the actives and extent that the
affected. retirees. demographic factors
were affected,
0 Integration with Medicare offers an opportunity to lower 0 Depending on whether
premiums because of lower costs for Medicare-eligible this option was
retirees, prospective or
retrospective, the
impact would be
qradual or immediate,
Existing Purchasing 0 Other blended plans or 0 Other blended plans or Not Applicable Not Applicable
Pools purchasing collectives purchasing collectives
which include retirees which include retirees
would end up with a would end up with a
better demographic risk if better demographic risk
all retirees were moved to if all retirees were
the ADOA plan. moved to the new plan.
0 To the extent that these 0 To the extent that these
existing blended plans existing blended plans
had a better demographic had a better
risk profile than the demographic risk profile
resulting ADOA plan, than the resulting new
costs would be shifted plan, costs would be
from these shifted from these
collectives/plans to the collectives/plans to the
ADOA plan, new plan,
Mercer Human Resource Consulting 6 of 12 Arizona Legislative Council Considerations I.doc
• • • • • • • • • • • • • • • • ••• • • Arizona Legislative Council Considerations Comments m Red mdlcate policy decIsions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
Second Tier • These options would promote greater administrative • The same number of plan administrators and options
Services efficiency by limiting the market for second-tier service would continue to exist, having limited effect on second
providers such as brokers, consultants and advisors, tier services.
plan administrators, and possibly even carriers.
Stakeholder Opposition
Employers • ADOA will most likely not • Most employers and • Employers will have • Employers will have strong
want to take on the added administrative entities strong resistance to this resistance to higher
demographic risk and will probably agree to option. contribution amounts.
administration required of "let go" of their retiree
this option. population. However,
• Most employers and
, some, with very
administrative entities will paternalistic cultures,
probably agree to "let go" may resist.
of their retiree population.
However, some, with very
paternalistic cultures,
mav resist.
Employees • To the extent that • To the extent that • If premiums are • Employees will have strong
premium or trend is premium or trend is blended between resistance to higher
reduced for reduced for active retirees and active contribution amounts.
non-ADOA entities, employees, they will employees, employees
employees will benefit benefit from lower out- will resist higher
from lower out-of-pocket of-pocket costs. premium contributions.
costs.
• If premiums are blended
between retirees and
ADOA employees, ADOA
employees will resist
higher premium
contributions.
Mercer Human Resource Consulting 7 of 12 Arizona Legislative Coullcil Considerations I,doc
• • • • • • • • • • • • • • • • • • • • • Arizona Legislative Council Considerations Comments In Red indicate policy decIsions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Ret~rees in. One Until 65 Healthcare
Retirees • Change in current system will be a difficult adjustment. • Remaining in the same • Funding future health plan
• If premiums and benefits are enhanced or at least less system until 65, may be benefits will help hold
costly, retirees should react favorably. an easier adjustment overall out-of-pocket costs
than other options. down for retirees.
• If employer plans have
to reduce benefits or
increase premiums to
afford retirees, there
will be a negative
impact to retirees.
Retirement • Consolidation of current public employee retiree health • Current public • Limited impact to current
Systems administration systems could occur (ASRS and employee retiree health retirement systems.
PSPRS). administration systems
would still be needed
for the post-65 retirees.
Federal and State Legal & Regulatory Issues
Medicare Effective January 1, 2006, plan design implications for Medicare retirees are: Not Applicable
Modernization 1. Fill in gaps (the "donut hole") in Part D as defined by law.
2. Provide actuarially equivalent or richer Prescription Drug Plan.
3. Reduce plan benefits by amounts payable under Part D (whether or not retirees are
enrolled in Part D).
4. Subsidize all, some, or none of Part D premium.
There are possible plan savings consequences for 1 and 3.
COBRA • Allows qualified beneficiaries to continue health coverage because of certain Not Applicable
"qualifying events" that would otherwise result in the loss of coverage
• Would need to resolve whether the new plan be required to take over responsibility of
providing COBRA health insurance continuation coverage provided by the existing
plans.
• If yes, would need to analyze whether the new plan would be required to match the
prior COBRA benefits and oremium levels offered by the existing plans.
Mercer Human Resource Consulting 8 of 12 Arizona LegIslative Council Considerations I.doc
• • • • • • • • • • • • • • • • • • • • • Arizona Legislative Council Considerations Comments In Red indIcate polIcy decIsions
Option #1 Option #2_ Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Reti~ees in One Until 65 Healthcare
HIPAA • If any of the eXisting plans are self-funded have any of them exercised the opt-out Not Applicable
election exempting them from compliance with the HIPAA requirements?
• How will the new plan handle HIPAA and related law coverage If such IS different than
that offered by the eXisting plans?
• Helps individuals moving from one employer to another to access and maintain health
coverage; limits pre-existing condition limitations by new employers; and sets privacy
and security obligations for protected health information.
• Applies to all insured programs and to State and local government self-funded plans
unless the government entity exercised its "opt-out" election.
• The new plan will need to take steps to secure compliance with participant health data
protected under federal privacy laws - particularly for the transition phase as the new
plan is implemented.
Federally • Public Health Services Act §2207: Coverage for pediatric vaccines may not be reduced Not Applicable
Mandated Benefits below the coverage provided as of May 1, 1993
• Mental Health Parity Act: (MHPA) Annual or lifetime dollar limits for medical/surgical
benefits must also apply to mental health benefits.
• Women's Health and Cancer Rights Act (WHCRA): Coverage for mastectomies to
provide for required breast reconstruction benefits
• Newborns' and Mothers' Health Protection Act of 1996 (NMHPA): Establishes
minimum hospital coverage benefits after childbirth.
• The new plan(s) will need to complv with these federal mandated benefit laws.
Medicare • Specifies when a group health plan may pay primary and when it may pay secondary Not Applicable
secondary payer when an individual is also covered Medicare. The MSP rules also limit the ability of a
(MSP) rules retiree medical plan to take into account an individual's eligibility for end-state renal
disease (ESRD) coverage under Medicare.
• The MSP rules will not generally apply to retired employees except for the ESRD
coveraqe requirements.
USERRA • Uniformed Services Employment and Reemployment Rights Act (USERRA) • May require ability to make
Establishes rights of eligible veterans returning to covered employment to up contributions missed
reinstatement to emDlover provided health insurance coveraqe. while serving.
Mercer Human Resource Consulting 9 of 12 Arizona Legislative Council Considerations l.doc
• • • • • • • • •• • • • • •• • • • • • ArizDna Legislative CDuncil CDnsideratiDnS CDmments In Red mdlcate policy deCISions
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
ADEA • Age DiscriminatiDn in Employment Act (ADEA): Prohibits discriminatiDn against NDt Applicable
individuals who are age 40 years or older.
• The Third Circuit in the Erie County Retirees AssDciatiDn v. County of Erie,
Pennsylvania) has ruled that an employer may have violated the ADEA by cDDrdinating
its retiree health plans with Medicare, SD that retirees Dver age 65 (and Medicare-eligible)
received inferior coverage than those under age 65.
• The EEOC has issued proposed regulations that would exempt plans from having to
cDmply with the Erie County decision. However, the EEOC position is nDt yet final.
• If the EEOC exemption positiDn does not become final, the new plan may need to be
redesigned to comply with the Erie County decision.
• If required, how will the new plan comply with the Erie County decision for the
Medicare eliaible retirees cDmina from the existina plans?
GASS • Requires that governmental employers measure their retiree medical liabilities, was • Under GASS, if a retiree
issued in August 2004. The largest organizations will need to comply for accounting plan is not funded,
periods beginning after December 15,2006 (or one year earlier if they pre- employer must use current
fund) earnings rate Dn employer
• Accrual of postretirement benefit cost during period of active employment. general assets as discount
• Disclosure of unfunded actuarial accrued liability in Required Supplementary rate in calculating liability.
Information (RSI) similar to repDrting for pension benefits. • If the plan is funded with
• ODes nDt require funding, only expense accrual and disciDsure. However, partial plan assets accumulated in
funding provides for advantageous discount rate. a trust, employers can use
• Liability for health care includes "implicit employer subsidies": If retirees pay same a higher discount rate, up to
premium rate as active employees, there is an implicit employer subsidy due to the rate of return on plan
blending of claims experience. assets for at least some of
• Will cause employers to now recognize the significant cost of current and future retiree the liability.
medical. obligations. As a result, some employers may look to reduce post-retirement
benefit obligations.
Mercer I-Iuman Resource Consulting IOor 12 Arizona Legislative Council Considerations I.doc
••••••••••••••••••••• Arizona Legislative Council Considerations Commenrs m Red md,care policy decIsIons
Option #1 Option #2 Option #3 Option #4
Stay in Employer Plan Contribution Rate to
Category All in ADOA All Retirees in One Until 65 Healthcare
State Statutes • ARS Title 20 and related regulations: Establishes • This option requires Legal considerations analysis
requirements for issuance and coverage for health employers to maintain
insurance contracts in the State coverage for under
• The new plan will need to comply with State insurance age 65 retirees.
law and regulations. • Will State Insurance
laws need to be
amended to help
employers add retiree
health coverage to the
eXisting Insurance
contracts?
State Constitution • Current State Not Applicable Not Applicable Not Applicable
constitutional provision
prohibits giving non-state
employees any benefit
that is not available to all
state residents. This
would prohibit rate
blending of public
employer retiree
premiums with active
ADOA employees.
Federal and Federal Internal Revenue Code (IRC)
State Tax Law • IRC §§ 105 and 106 governs taxation of employer provided health insurance contributions and benefits
• IRC §501(c)(9) tax-exempt employee benefits trusts
• IRC §115 tax-exempt intergovernmental benefits trusts
• IRC §401 (h) pension plan retiree medical accounts
• IRC §414(h) pre-tax employer pickup of employee contributions
• IRC constructive receipt doctrine
ARS Title 43, Taxation of Income
Taxation of employer and employee contributions to pay for retiree health benefits and coverage will be determined under
federal and State income tax laws. Generally, employer provided health coverage and benefits are not taxable to the
recipient.
Mercer llurnan Resource Consulting 11 of 12 Ari701l<l Legislative Council ComidcratJOns 1 doc
••••••••••••••••••••• Arizona Legislative Council Considerations Comments m Red mdlcare policy decIsions
Category
Federal and
State Tax Law
(continued)
Option #1 ~ Option #2 I Option #3 I Option #4
Stay in Employer Plan I Contribution Rate to
All in ADOA I All Retirees in One ~ Until 65 Healthcare
If retiree health care assets are held in trust under federal law [either IRC §50 1(c)(9), or §401 (h) trusts), such may not be
used for other purposes without affecting the tax protected status of the contributions.
IRC §401 (h) medical account requirements may affect the tax qualified status of the underlying pension plan of which it is a
part.
Federal rulings under standard IRC constructive receipt doctrine and with regard to IRC §414(h) pickup provisions may
provide' an opportunity for pre-tax payment of employee contributions to fund retiree health benefits.
Arizona State income tax laws will also affect the taxation of retiree health contributions and benefits
• Retiree health insurance coverage provided by the new plan will need to be reviewed to make sure the taxation of such is
acceptable under federal and State law.
• Federal law may limit the ability to transfer assets held in retiree health benefits trusts under the existing plans if such are
established under IRC §501 (c)(9) or §401 (h).
• If an IRC §501(c) (g) trust is used for any of the existing plans, any amendment implementing this option may require
federal filings to take place.
• If pre-tax employee contributions are desired as part of the option, legal counsel's opinion and possibly and IRS ruling
request should be considered before implementation.
Related Arizona ASRS
State retiree health • ARS §38-782, 783
plan laws: EaRP
• ASRS • ARS §38-817
• PSRS PSRS
• CORP • ARS §38-857
• EaRP CORP
• Higher • ARS §38-906
Education Higher Education ORP
ORP • ARS §15-628
• ADOA health ADOA Health Plan
plan • ARS Article 4, §38-651 et seq
These existing State laws authorize and govern the operations of the existing retiree health benefit plans provided for their
eligible retirees. For each existing plan there may exist trusts or other fund accounts that hold assets and liabilities relating to
the benefits each is designed to provide.
• These State laws may require amendment to allow Implementation of the option
• What happens to current assets and liabilities held by the retiree health trust funds or accounts of the eXisting plans?
• Will such funds be available to pay for benefits/premiums under the new plan?
• If not, what happens to these separate retiree health care trust assets?
Mercer Human Resource COllsuhing 12 of 12 ArIZona Legislative Council Considerations I.doc
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Arizona Legislative Council Retiree Health Insurance Study
1. Feasibility and cost impact to Arizona and all state employees and political subdivisions of allowing all retired and disabled members and
their dependents of the ASRS, the PSPRS, the CORP and the EORP to participate in the health insurance program that is administered by the
ADOA for State employees. The cost impact shall consider immediate and future costs and cost shifting to all affected parties.
Current System
ADOA ASRS PSPRS/EORP/CORP
Active Participants 50,615 0 0
Retired Non-Medicare 3,383 16,623 3,183
Retired Medicare 5,371 23,552 1,672
Active Averaae Aae 44.42 N/A N/A
Retired Medicar