HR Finds New Ways to Cut Retiree Health-Care Costs

November 1, 1999
One way human resources managers can contribute to their company’s bottomline is by finding new ways to reduce the cost of providing health-care benefitsto retirees.

Since 1973, the Financial Accounting Standards Boards (FASB) has been thedesignated organization in the private sector for establishing standards offinancial accounting and reporting. These standards govern the preparation of acompany’s financial reports. They’re officially recognized as authoritativeby the Securities and Exchange Commission and the American Institute ofCertified Public Accountants.

In 1993, FASB 106 changed the way companies record their retirees’health-care costs as a liability. Now, health-care benefits provided to retireesmust be charged to the company’s balance sheet as an expense, thus creating anegative impact on the bottom line, regardless of who you use as a provider. Andit has placed HR managers in the precarious position of identifying solutionsthat reduce the impact on balance sheets, while still providing the benefitsguaranteed to retirees. One solution is to provide employees with the chance toselect from a menu of benefit plans. The more cost-effective plan the retireechooses, the smaller the negative impact on the company’s bottom line.

To learn more about FASB rule 106 and how it impacts your company’s bottomline, Workforce interviewed Wanda A. Lee, senior vice president of humanresources for Santa Ana, California-based PacifiCare Health Systems, a managedhealth-care services company.

How does the FASB 106 rule affect a company’s bottom line?
Regulation rule 106 requires that companies with more than 20 employeesrecord their retirees health-care costs as a liability. There are two waysemployers can keep compliant: (1) They can take a one-time charge for all theircurrent benefit commitments and set aside estimated funds for future retirementcosts or (2) They can account for their current benefit commitments, spread itover a 20-year period and set aside funds every year with a forecast of theirfuture retiree health-care costs. Both treatments will achieve compliance.

Bottom line: FASB 106 increases the expenses that an organization mustreport. Employers who didn’t plan on this really need to look at the situationfrom a financial-strategy perspective, as well as figure out how they cancontain these costs.

At what point should HR managers begin identifying solutions that reduce theimpact on its company’s balance sheets?
If not yesterday, then immediately. Your large employers are well aware ofthis regulation, but small or newer employers who have grown to more than 20employees may not be aware of it. There are ways of decreasing the amount ofyour liability or obligation, and you want to quickly look into thosealternatives to bring down the impact on your company’s balance sheet. Somecompanies are shifting their retiree population into other programs to savemoney. If a company wasn’t paying too much attention before the FASB 106 rule,they’re definitely going to pay attention in the future.

What type of financial information will need to be gathered to make thesedecisions?
You need census data to forecast potential liability. Data about your currentretirees and all other employees who are on the payroll. This data shouldinclude such things as age, gender, marital status, date of hire, eligibilityfor health-care coverage, employer contribution, termination rates andretirement rates.

How much work actually goes into this process?
It isn’t a fun process, because in addition to liability, there are majorrecord-keeping requirements. A lot depends on the size of the employer and thedegree of automation. Larger companies have the technology, and smallercompanies have, obviously, a smaller workforce. Mid-size companies will probablyhave the most difficulty because there’s the additional expense to handleprocess, and then there’s the cost of the product. You have no choice but toincur another layer of expense, which in the long run should give you even morereason to bring down the cost of the product.

Where does one go -- and who should be involved -- in researching thisinformation and developing solutions?
You definitely should have your CFO involved or at least someoneknowledgeable about your finance department, because they’re the ones who haveto calculate the liability. Then someone has to calculate the administrationexpenses to do the census. This is why it’s important that HR and finance worktogether to look at viable solutions that work for the organization and fortheir retirees and future retirees.

There are several products on the market, from indemnity to PPOs to Medicare+ Choice. How can HR managers know which one is right for them?
Some programs don’t have the same level of coverage. Seniors are a bigpiece of our market. By offering a Medicare + Choice plan, for example, we canoffer our group retirees the benefits they want, and save the company money.Then again, we have a large network of providers that we contract with, so it’seasier for us to leverage our quality controls and cost controls over a verylarge book of business.

Sure, it’s an HMO product, and there’s always the argument: If it’scheaper for the employer, how can it be better for the employee? But I can onlytell you that one of our clients that went with a Medicare + Choice productshifted 17 percent of its 5,500 retirees into that product, and saved $1.7million in the first year. Another client with a much larger base of retireesshifted 8 percent of its 113,000 retirees and their dependents into thatproduct, and is looking at a $17 million savings on a $120 million annualretiree health-care expenditures.

How do you communicate this information to retirees?
Of course, as an employer, you can give your retirees as much data aspossible to help them make informed decisions, but you can’t guide them. Soyou provide as much consumer information as you can. The basic tool is anenrollment kit that shows the benefits they’re entitled to, and compares thedifferent plans on several different major categories. Various levels of care,co-pays, other out-of-pocket costs. Then the next level is the wholesales/information meeting. We also found that one-on-one contact receives ahigher rate of retirees moving into a different plan. You’re answering theirindividual questions, and addressing their individual concerns.

What questions should an HR manager be prepared to ask themselves beforedeciding to undergo this whole process?
The business questions, and then the financial questions. How much liabilitydoes my company have? Which of the two accounting treatments should we select?What is going to be our level of difficulty in meeting this liability? Whatkinds of packages do we need to offer in order to attract, engage and retain ahigh-caliber workforce? And what specifically are you looking for in the way ofbenefits, education and services? And then you’ve got to monitor the costs,monitor the retiree population and current population response to what you’redoing as a company. Always take the pulse of your workforce before sitting downfor a discussion on providing health-care coverage for retirees.

What types of questions should be asked of plan providers?
How long have they had group retiree plans? How many members do they serve?Who are some of their current clients? What type of consulting support can theysupply to help you look at your strategy? How would they actually conduct theadministration portions of open enrollment? What’s the quality of theirprovider network? What kind of medical providers do they contract with? Aboveall else, you want to make sure you’re paying for quality benefits for yourretirees.

Workforce, November 1999, Vol. 78, No. 11, pp.78-79 -- Subscribenow!