University of Kentucky Health Insurance Task Force Meeting August 8, 2001

1. University of Kentucky Health Insurance Task Force Meeting August 8, 2001

2. Agenda • Who is Mercer? • History of self-insurance • Development of group medical rates – overview • Insurance vs. self-insurance • Tier factor development • Rates for Medicare-eligible retirees • Factors influencing UK rates

3. Who is Mercer? • William M. Mercer, Incorporated – international employee benefits consulting firm • 43 U.S. offices • Primary consulting services: • Retirement Plans • Healthcare and Group Benefits • Compensation (Performance and Rewards) • Communications • Largest U.S. healthcare consulting practice • Louisville, Kentucky office hired to assist UK in managing health insurance program

4. Why are we (Mercer) here? • Hired in late February 1998 to produce self-insured rates for the 1998-1999 plan year – two-week deadline • Previous RFP process resulted in formal Mercer proposal • Towers Perrin (Stamford, Connecticut office) advised UK during conversion to self-insurance • Mercer goal: Partner with UK staff to provide “best value” health insurance program

5. Why are we (Mercer) here? - cont. • Sample listing of Mercer-Louisville clients • Commonwealth of Kentucky • University of Louisville • Murray State University • (new) Western Kentucky University • Ashland, Inc. • Lexmark International • Tricon Global Restaurants • Brown and Williamson

6. Development of Group Medical Rates – Overview Step 1: Develop per capita claims experience for most recent period (claims cost divided by exposures) Step 2: Plan value adjust historical experience to current (plan design, network, vendors, etc.) Step 3: Apply medical trend (inflation) assumption to develop projected per capita experience Step 4: Plan value adjust to include any design, network, etc. changes

7. Development of Group Medical Rates – Overview (cont.) Step 5: Load for expenses Step 6: Multiply by expected enrollment to get needed total premium Step 7: Allocate premium among coverage tiers (single, employee plus spouse, etc.) to get total rate on monthly basis Step 8: Employee cost = Total needed premium minus employer subsidy/credit

8. Insurance vs. Self-insurance Note: Insurance and self-insurance rating models typically use the same general methodology. Based on the differences in standard assumptions, insured rates should be higher, since the same basic claims experience information is used for projection purposes.

9. Tier Factor Development • Discussion applies to total premium rate only, NOT employeecontribution levels. • Some basic facts/assumptions • morbidity (as measured by expected medical claims) increases with age • morbidity “curve” is steeper for males than females • calculation of accounting liabilities associated with retireemedical programs requires recognition of this morbidity curve • non-workers are less healthy than workers • Historically, employers used 2-tier rates (single, family). Somestill use the 2-tier structure. • Now, most employers use a 4-tier structure (single, employeeplus spouse, employee plus children, full family). This is typically viewed as more equitable.

10. Tier Factor Development – 4-Tier Structure • Employee plus spouse factor • Typically 2 - 2.25 times single rate • Not usually based on actual employer’s claim experience, but can be • Standard actuarial factor is 2.16 • Employee plus children factor • Typically 1.6 - 1.9 times single rate • Recognizes that a child is much less costly than an adult (standard assumption is 45% of adult cost) • Average of 1.5 - 2 children covered • Many employers want this factor to be low to make coveragemore affordable for single parents

11. Tier Factor Development – 4-Tier Structure (cont.) • Full family factor • Typically 2.75 - 3.25 times single rate • Includes cost for both spouse and assumed number ofchildren • Tier factors are often manipulated algebraically to producedesired employee contribution results • to “mask” the absence of a dependent subsidy • in transitioning to a 4-tier structure • to assist a particular group (such as single parents)

12. Post-65 (Medicare-eligible) Retiree Rates • Morbidity curve continues through retirement ages, but less steep after age 65. • Pre-65 retirees cost 2.5 - 3 times typical active employee(average age 35-40). • Medicare-eligible retirees experience even higher total claims, but Medicare covers 65-70% of cost. • If employer provides coverage, employer plan pays afterMedicare. Primary benefit to retiree (from employer plan) is unlimited prescription drug coverage. • Prescription drugs typically comprise 50-70% of employercost for Medicare-eligible retirees.

13. Post-65 (Medicare-eligible) Retiree Rates (cont.) • For post-65 retirees: • Prescription drug claims cost averages $1,000 - $1,500 per person per year. • Scripts per year per person are 4-5 times that of a 30-40 year old.

14. Comparison of UK Retiree Rates toMedicare Supplement Plan J

15. Factors Influencing UK Rates Versus State Benchmarks • Level of employer subsidy • Coverage of retirees • Location of employees in higher cost areas • Medical Center employees expected to have higherutilization (40% manual rate load) • “Richness” of UK HMO plan design