Health Care Legislation Frequently Asked Questions http://www.strsoh.org/whatsnew/hc-faqs.html There are six categories that most questions asked about the health care initiative fall under. Select a category below to view the relative questions or just scroll down to read all the questions and answers. Funding Priorities How can school districts afford this, given the problems with school funding in Ohio? Without a dedicated revenue stream for health care, the STRS Ohio Health Care Program will end. The issue of funding and providing health care for retired educators will continue to be a challenge whether STRS Ohio remains the provider, or not. In many ways this is a matter of pay now or pay later. If STRS Ohio does not provide health care, the liability for that coverage does not go away. Should the STRS Ohio Health Care Program end, many more educators will likely teach longer because they can t afford health care coverage in retirement. This translates into higher medical costs and higher wages increased costs that will have to be absorbed by their employers. Should the STRS Ohio Health Care Program end, efforts at the bargaining table to increase educator salaries significantly will undoubtedly intensify because educators will know they will be responsible for 100% of their health care costs in retirement. The other alternative will be bargaining with employers to continue health care coverage beyond retirement. The legislative proposal proactively involves employers in managing their workforce and accompanying payroll and health care expenses. The impact on employers payroll of educators working longer due to the unaffordability of retiree health care can be significant. These educators are at the top of the salary schedule and thus cost more than less experienced educators, and the higher health care costs that often accompany an aging population can also start to impact employers medical premiums. While there is a cost to employers for this increase in contributions, there is also a cost for employers of an aging workforce. The costs of the legislative proposal are known, can be budgeted for and are gradually phased-in. Why fund health care when the pension plan is not fully funded? Due primarily to excellent investment returns during the past four fiscal years, STRS Ohio projects that the funding period for the pension fund will be close to 30 years on June 30, 2007. (The actuarial valuation report is issued in October 2007.) The funded ratio should also improve. Future projections show continued decreases in the funding period and increases in the funded ratio. This legislative initiative is for the Health Care Stabilization Fund, which is a separate fund from the pension fund. The 5% increase in contributions also puts the health care fund on a 30-year funding basis. Why should public sector retirees get to keep a benefit that some private sector retirees
are losing? Funding retirement benefits for career public sector employees helps put public sector employers on an even playing field with private sector businesses when it comes to recruiting and retaining a qualified workforce. Public sector salaries are often lower over an entire career than what is experienced in the private sector for individuals with similar backgrounds and education. The long-term benefit of a career in the public sector is often realized through retirement benefits. Recently, some private sector companies have taken steps to reduce, or discontinue, retiree health care benefits. However, their doing so does not suggest that such an approach is a superior approach for addressing the problem of affordable health care for retirees. Rather, it simply shifts the financial liability associated with retiree health care from the company s bottom line to the individual retiree. When pension plans go out of the health care business and our state s older retirees and disabled retirees cannot attain health care in the open market, the liability for their health care expenses does not simply go away. The liability ultimately shifts directly to taxpayers through increases in public assistance programs such as Medicaid, and indirectly through inflation in health care costs and increased demand for social services. Currently, only employer contributions not needed to fund pensions can be used to pay for health care coverage. With the STRS Ohio proposal, for the first time active educators will be contributing to their own future coverage. Ultimately, with the STRS Ohio proposal, retiree health care coverage will be primarily self-funded by educators. The proposal increases employee and employer contributions to create a dedicated revenue stream to fund the health care program. These contributions from active educators, along with the premiums, coinsurance and other out-of-pocket costs paid by retirees, makes the health care program primarily funded by educators. Health Care Program Funding and Expenditures Is 5% enough to fund the health care program? GASB reporting shows a higher percentage. Based on the January 2007 valuation of the health care fund, the proposed 5% contribution increase is still adequate to fund the health care program on a full-reserve basis. However, based on the current funding status of the health care fund, GASB 43 requires that a 5.5% assumed investment return rate for the existing health care funds be used. (STRS Ohio has been using an 8% rate, the same rate it assumes for its pension fund.) This lower assumed investment return rate, in turn, raises the annual required contribution, or ARC as it is called, to 6.55%. If the legislation passes and an annual contribution of 5% of payroll is ultimately contributed to the health care fund, GASB 43 allows the investment return rate to be 8%. If STRS Ohio can fully fund the ARC, which it could do if the legislative initiative is successful, the ARC is lower (4.13%) because it is based on an 8% investment return rate. In short, the 5% legislative initiative increase in contributions is adequate to fund the ARC at this time. If STRS Ohio is only able to partially fund the ARC (if the total 5% of the legislative initiative
is not received), the ARC is higher because it will be based on a 5% investment return rate. Does this proposal guarantee health care coverage? This initiative generates approximately $94 million in the first year, and, at the end of five years, it will generate about $500 million for the health care fund on an annual, ongoing basis. There is no guarantee with this proposal, as it is impossible to predict how fast health care costs will rise. However, based on available data, this contribution increase should enable STRS Ohio to keep pace with increasing costs to ensure that affordable health care coverage continues for thousands of current and future retired Ohio public educators well into the future. In coordination with this dedicated revenue stream, STRS Ohio will continue making plan design changes to the health care program and pursue other cost-containment measures. Have those who raise concerns about the STRS Ohio proposal provided an alternative solution? No. Have alternative approaches been considered? Yes. STRS Ohio and the Health Care Advocates for STRS have together, and independently, researched and studied several alternative approaches to the challenge of funding retiree health care coverage. Unfortunately, none of the alternatives provide a long-term solution. Many of the alternatives have been incorporated into the STRS Ohio Strategic Plan for Health Care and are currently benefiting the health care program. These alternatives address everything from cost containment and trend management strategies, to plan design and administration. Together, the result of implementing all of these alternatives has led to a health care program that is better managed, but has only extended the solvency of the Health Care Stabilization Fund by a couple of years. Currently STRS Ohio spends more than $1.3 million each day on health care coverage more than $490 million per year. No alternative approach will generate the level of revenue needed to fund the program. What about health savings accounts? Health savings accounts (HSAs) are certainly one way for active members to save for health care expenses in retirement. However, research shows that it is difficult to save enough to cover the projected out-of-pocket costs during retirement. For example, if a member sets aside $2,700 per year in an HSA starting at age 25, in 30 years the member will have $183,600 in that account (assuming a 5% rate of return). This total assumes the maximum amount is contributed and the member never made any withdrawals to help cover medical expenses not covered by the high-deductible health care plan the member must have to qualify for an HSA. (If the member takes distributions averaging only 10% of the end-of-year account balance each year, then the HSA accumulation drops to below $50,000.) The average age of active STRS Ohio members is 44, which does not allow enough time for current members to save a significant amount. Compare this information with recent projections that show a couple age 65 today living to an average life expectancy could need as much as $295,000 to cover premiums for supplemental Medicare coverage and out-of-pocket medical costs. These projections show that few, if any, of today s educators can save enough to pay for the cost of health care in retirement. Why don t you just turn the whole health care program over to somebody like AFLAC?
STRS Ohio covers more than 90% of the health care program enrollees through its selfinsured plans. In a nutshell, that means STRS Ohio collects the money and pays the enrollees health care costs with money from the Health Care Stabilization Fund. Administrative costs are lower, which means lower costs for members, plus STRS Ohio has more flexibility in plan design (such as determining copayments and deductibles) and in developing customer services. Can t STRS Ohio reduce health care costs by making everyone use generic drugs? Can t STRS Ohio reduce health care costs by making everyone participate in a wellness program or practice preventive medicine (lose weight, stop smoking, etc.)? Cost containment is extremely important. We have to do everything we can to reduce the rate of growth in health care costs, and cost-containment practices help. Certainly, the use of generic drugs, participation in wellness and disease management programs, and practicing preventive medicine can be beneficial to both the retirees and the Health Care Stabilization Fund but these savings cannot sustain the health care program for the long term, which is what we re discussing with this proposal. Is the STRS Ohio Health Care Program a rich coverage plan? The STRS Ohio Health Care Program provides a quality level of coverage, but is far from what would be considered a Cadillac plan. In recent years there have been a number of changes to the health care program. Retirees have borne the cost of increased premiums, deductibles and copayments on prescription drugs. On average, STRS Ohio retirees contribute 48% of their total health care costs. Currently, after an entire career of service (30 years of teaching), a non-medicare eligible benefit recipient will pay a health care premium of $163 per month. This figure increases as years of service decrease. To cover a non-medicare spouse, an STRS Ohio benefit recipient will pay an additional $580 per month. STRS Ohio s goal is to provide a health care program that is competitive in both coverage and premiums. Why haven t retired educators accessed coverage on the open market? A few have been able to do this, but obtaining health care coverage on the open market that is not part of a group plan can be very expensive. And for those who are under age 65 and have preexisting chronic conditions, coverage is often not available. In the case of STRS Ohio, we have about 38,000 retirees and their family members enrolled in the program that are under age 65. If the health care program ended, it is estimated that between 20% 25% of them would not be able to find coverage due to preexisting conditions. These individuals would join the ranks of Ohio s uninsured or, if low enough in income, qualify for Medicaid. Forcing the STRS Ohio Health Care Program enrollees into the open health insurance market at a time when their income is less than when actively employed and when health care needs naturally begin to increase, undermines the financial security of retirees. When retirees direct a greater proportion of their income into health care, their general purchasing power is reduced. The overall economic effect is that greater numbers of older Ohioans move from being moderate-income Ohioans to low-income Ohioans. Why not eliminate coverage for those under age 65? As noted above, a full 20% 25% of these individuals would not be able to find coverage due to preexisting chronic conditions. The other 75% 80% of the non-medicare retirees would
likely qualify for insurance provided by private vendors, but may not be able to afford the coverage based on their pension income. These retirees would either have to return to work or continue to work, if possible. When teachers who are eligible to retire continue to work beyond the traditional 30 to 35 years because they cannot afford the cost of health care, school district costs go up. School districts with older workforces experience higher costs in two ways: higher base salaries for senior teachers and higher health care costs due to an aging workforce. Regular, predictable teacher turnover resulting from retirement is beneficial for both teachers and school districts. Doing away with health care coverage for teachers of retirement age, but not yet eligible for Medicare, creates a disadvantage for both career teachers and school districts. Creating a dedicated revenue stream for the health care program provides a way for school districts to better predict their workforce costs (payroll and benefits) and supports accurate budget management. Why not provide coverage only until retirees are eligible for Medicare at age 65? According to a Government Accountability Office report published in 2001, 10.7 million Medicare beneficiaries more than one-fourth of all beneficiaries rely on Medicare supplemental insurance, known as Medigap coverage, to pay for some out-of-pocket expenses and services that Medicare does not fully cover. Federal law requires the standardization of benefits in Medigap plans; however, premium costs can vary widely on the open market. The STRS Ohio Health Care Program serves as a supplemental plan for Medicare-eligible beneficiaries. Currently, two-thirds of the program enrollees are age 65 or older. For this group, Medicare is the primary payer of their medical health care costs; the STRS Ohio plans provide secondary medical coverage and primary prescription drug coverage. If this supplemental coverage was discontinued for STRS Ohio retirees when they reach age 65, their level of coverage would be substantially reduced. It s likely that many would not be able to afford the badly needed supplemental plans like Medigap or be able to afford their out-ofpocket costs. Why don t you just provide coverage to career teachers with 30 or more years of service? When changes were made to the STRS Ohio Health Care Program for 2004, we raised the number of years for eligibility to 15 from five. Also, current retirees with less than 15 years are required to pay the full cost of their health care. The Retirement Board provides the largest amount of subsidy to the career teachers. Subsidy amounts are then scaled downward. Since the vast majority of members retire with 30 or more years of service about 75% eliminating coverage for members with less service would not have a significant financial impact on the health care program. Why don t you require reemployed retirees to get their health care from their employer, instead of STRS Ohio? In May 2007, the Retirement Board did make changes to its administrative rules that only allow STRS Ohio to provide secondary coverage to any health care plan enrollees who are employed in a public or private position and are eligible for health care coverage through their employer. The effective date of the change is Jan. 1, 2009. However, any savings incurred from this change cannot sustain the health care program for the long term, which is what we re
discussing with this proposal. There was talk at the Statehouse about creating a pooled health care program for all public school educators in Ohio. Could retired teachers join this pool? There is no mandatory pooling for school employees in Ohio. The School Employees Health Care Board (SEHCB) was established to conduct a study. Its study recommended against the idea of mandatory pooling (statewide or regional) and, instead, recommended that statewide standards/best practices be developed for all school district health plans. Language removing the pooling requirements and allowing the SEHCB to develop statewide standards was adopted in the budget bill (H.B. 119) signed by Gov. Strickland on June 30, 2007. It is unlikely that a public school or schools would want to include a retired population in its pool, due to the higher health care costs older, retired workers tend to have versus younger, active workers. Why do participants in OPERS health care program pay less for their health care premiums than STRS Ohio retirees? This is a common misperception. OPERS is also facing a funding challenge for its health care program. As a result, it implemented a Health Care Preservation Plan in January 2007. This plan divides its membership into three groups, based on when an individual is eligible to retire and/or when they were first hired. The initial health care premium subsidy for each of these groups varies depending on whether the enrollee is a retiree or a dependent and years of service. Annual increases in the subsidy are based on general cost inflation, not medical and drug trends. Further, the percentage of this subsidy decreases over time. So, for example: A 30-year OPERS retiree in 2007 pays a $0 premium that first year. However, that premium could increase to $264 per month in just five years. What happens if this legislative proposal does not succeed? If this contribution increase is not approved, the Retirement Board will have to reduce the amount it spends on retiree health care. Options to reduce spending include: Having retirees pay more out-of-pocket for premiums, copayments and deductibles; Limiting eligibility for the program; and/or Making plan design changes. Even with changes such as these, subsidized health care will eventually end probably within 15 years. From that point on, current and future retirees and disabled teachers will be on their own when it comes to obtaining and paying for health care coverage. Contribution Increase What if the entire 5% isn t needed? Will STRS Ohio still collect it? No. The legislation allows for up to a 5% increase. If a portion of this increase is not needed to fund retiree health care, it will not be collected. Will my additional contributions be refunded to me if I leave STRS Ohio? The additional member contributions received by STRS Ohio for the Health Care Stabilization Fund will not be refundable. However, the current practice allowing members to receive a
refund of their pension contributions plus interest if they leave STRS Ohio will continue. If they have five or more years of service, an additional percentage of teaching contributions and interest is included in the withdrawal amount. I participate in the Defined Contribution Plan, so I m not eligible for the health care program when I retire. Do I still have to pay the extra contributions? Yes, you and your employer will pay the additional amount. In return, you will be able to participate in the STRS Ohio Health Care Program like your colleagues enrolled in the Defined Benefit and Combined Plans, when you meet eligibility requirements. Do the 2.5% additional contributions you want to collect from me go into an individual account for me or a pooled account? They go into the Health Care Stabilization Fund, which is a pooled account that provides health care premium subsidies for all eligible STRS Ohio retirees. If these additional contributions are received, will premium subsidies for spouses and dependents be restored? No. However, additional contributions will help keep premiums competitive for benefit recipients, and out-of-pocket costs that all plan participants pay (e.g., copayments and deductibles) also competitive with the marketplace. Why should I approve additional contributions to go into a fund that may not even exist when I retire? Why don t I just start saving now on my own? It is important that you start saving for health care in your retirement because, regardless of the health care plan you are in, you will be responsible for out-of-pocket costs such as premiums, copayments and deductibles. And you are right, there is no guarantee that the Health Care Stabilization Fund will exist when you retire because we cannot control health care costs. However, if this contribution increase goes into effect, it will create a dedicated revenue stream for health care that should enable STRS Ohio to continue subsidizing premium costs for retired and disabled educators well into the future. Is the $8 per paycheck figure you quoted in the presentation pretax? Yes, assuming your employer has an employer pickup program for STRS Ohio contributions. Most employers do. When will the increased contributions begin? With the introduction of the legislation in 2007, the earliest possible implementation date would be July 1, 2008. Member and Employer Support What kind of support have you received for this proposal from members? Before taking a proposal to the Legislature, the Retirement Board and the Health Care Advocates for STRS wanted to see if support existed among active members for the contribution increase, as their pocketbooks would be directly affected. A Member Education and Engagement Campaign was conducted in fall 2005. More than 10,000 STRS Ohio members were actively engaged in the campaign and voiced their opinions through postcard
surveys, online surveys and surveys distributed at meetings held throughout the state. In addition, another 1,052 active members participated in random sample telephone surveys. All data was collected and analyzed by Saperstein Associates (a Columbus-based research firm). In all instances, majority support was expressed for the proposal even among educators who are 15 years or more away from retirement. Majority support among actives and retirees has not changed since then, as demonstrated by the results of the October 2006 telephone surveys of active and retired members. Do employers support the proposal? The Ohio School Boards Association has voiced its opposition to any contribution increase. However, STRS Ohio has more than 1,000 reporting employers not just the K 12 schools, but also, for example, the state universities and community colleges. Representatives from the Health Care Advocates for STRS and STRS Ohio continue to offer to meet with any employers to discuss the proposal in greater detail; in addition, regional meetings with employers are planned for later this year. In meetings held to date, there is recognition on all sides that retiree health care is a critical issue that needs to be addressed. In our discussions with employers, we are encouraging them to think not in the context of today vs. 2.5%, but the future vs. 2.5%. The HCA and STRS Ohio are making every effort to involve all affected parties in conversations about this proposal. What organizations are represented on the Health Care Advocates for STRS (HCA)? The HCA includes: American Association of University Professors (AAUP) Buckeye Association of School Administrators (BASA) Inter-University Council of Ohio (IUC) Ohio Association of Community Colleges (OACC) Ohio Association of Elementary School Administrators (OAESA) Ohio Association of Secondary School Administrators (OASSA) Ohio Council of Higher Education Retirees (OCHER) Ohio Federation of Teachers (OFT) Ohio Retired Teachers Association (ORTA) Ohio Education Association (OEA) Ohio Education Association Retired (OEA R) Additional Issues Isn t health care a national problem? Yes, it is. STRS Ohio is an active member of two different groups that have been working to address this issue at the national level. The first is the National Coalition on Health Care, which includes about 100 organizations (public and private) that employ or represent about 150 million Americans. The second group is the National Public Sector Health Care Roundtable, which represents the particular interests of the public pension community and public sector constituents. Both groups are working hard to attract attention on the national
level to health care issues. However, even though the rising cost of health care is generally acknowledged to be a national problem, there is no consensus on a solution to the problem. Any nationwide initiative would not be implemented in time to address the immediate need of STRS Ohio. If no additional revenue is generated, the spending of the principal in the Health Care Stabilization Fund will be necessary to cover health care expenses. This is expected to occur somewhere between 2009 and 2011. Spending the fund principal quickly accelerates the demise of the program. STRS Ohio cannot wait for a national solution; it must act now to preserve access to affordable health care for retirees. The Health Care Advocates for STRS and STRS Ohio are committed to working with other stakeholder groups to develop solutions to this national crisis. However, given the speed with which this issue has been dealt with in Washington, we cannot in good conscience postpone action on a proposed solution to keep the STRS Ohio health care system working. In the future, if a national solution emerges, STRS Ohio can reduce health care contributions if such an action is warranted. Why not address the problem for all the state pension systems? Finding a way to provide long-term access to affordable health care coverage is a common problem for all five of Ohio s public pension systems, but that doesn t mean there is one common solution. The demographics of each of the state s five public pension systems are significantly different. These differences in member characteristics and career service characteristics result in dramatically different issues and needs for each system. The uniqueness of each pension system makes it very difficult to identify a single solution for all. The Health Care Advocates for STRS have been working jointly with the State Teachers Retirement Board to propose an equitable solution to fund the STRS Ohio Health Care Program. Each of Ohio s five pension systems is working with its constituent groups to propose solutions to its unique needs. Should a plan emerge to fund retiree health care benefits for all public employees, it will merit consideration. However, there is no plan on the table at this time. If this increase in contributions is such a good idea for STRS Ohio, why don t all the systems do it? The funded status of STRS Ohio s health care program is considerably higher than the other four Ohio systems as well as most other public pension plans in the United States. This is due primarily to the more than $5.4 billion in past allocations made to the health care fund by the Retirement Board and changes in plan design and eligibility. STRS Ohio s annual required contribution needed to fund the health care program on a full-reserve basis (i.e., a 30-year funding period) falls within the requested 5% increase. However, the other systems need considerably more: HPRS, 18.23%; OP&F, 15.04%; OPERS, 17.19%; and SERS, 27.95%. General Questions Why don t STRS Ohio associates have to pay the same premiums for health care as retired educators?
The use of health care among an active workforce differs greatly from a retiree group. That s why group rates differ. While STRS Ohio associate rates for health care are lower than those of retired teachers as are the rates active teachers pay STRS Ohio associates are paying more than the average costs for active teachers in Ohio. Why don t you just eliminate artwork/on-site child care/fitness center/lunch service/board and staff travel/bonuses, etc., and use the money on health care? We share your interest in ensuring STRS Ohio manages all of its operating expenditures in an appropriate and prudent manner. We have made a number of changes in the past four years that we have shared through our newsletters and Web site. However, each day about $1.3 million flows out of the Health Care Stabilization Fund to pay for retiree health care coverage. Controlling expenditures is important, but these savings don t create an ongoing, dedicated revenue stream for health care. STRS Ohio newsletters have been reporting good investment returns. In fact, one newsletter said you have a record amount of investment assets more than $76 billion. Why do you need more contributions from me? The recent excellent returns we have experienced are resulting in a return to the desired 30- year funding period for our pension fund. It is imperative that we continue to maintain the current level of contributions to the pension fund to ensure we can meet future liabilities. The Health Care Stabilization Fund is a separate fund. While it is also benefiting from these excellent returns, our projections show that we will need to begin dipping into the principal in the fund somewhere between 2009 and 2011. That is why we are looking to put additional contributions into the health care fund to create a more predictable revenue stream. As a taxpayer, all I see is teachers wanting more and more from me all the time. Why don t they make some concessions for a change? Just as a point of information, the OEA reports that over the last three years, about 20% 25% of teacher contracts have had a 0% increase in at least one year of the contract. The average salary increase in contracts negotiated in 2006 was 2.2%; it was approximately 2% the previous year. In many cases, teachers are accepting lower salary increases to preserve their health care coverage. With this proposal, educators are saying they are willing to put an additional 2.5% of their own salary toward pre-funding their health care in retirement. How many active teachers are there? How many employers are there? There are about 181,000 active members and almost 1,100 employers. We also have about 119,000 benefit recipients.