Monday, January 30, 2012

“Essential” Information

About a month ago, the Department of Health and Human Services (HHS) released a bulletin outlining proposed policies that it said would “give states more flexibility and freedom to implement the Affordable Care Act.”

It did that by proposing to allow individual states to select a single benchmark to serve as the standard for qualified health plans inside the Exchange operating in their state – and for the plans offered in the individual and small group markets in their state. The Patient Protection and Affordable Care Act requires that health insurance plans offered in the individual and small group markets, both inside and outside the ”Affordable Insurance Exchanges” (Exchanges), offer a comprehensive package of items and services, known as “essential health benefits(1).” This benchmark would set the standard of the items and services included in the essential health benefits package called for in PPACA(2).

Acknowledging that “[t]There is not yet a national standard for plan reporting of benefits,” HHS also noted that PPACA does not provide a definition of “typical,” and it therefore gathered benefit information on large employer plans (which account for the majority of employer plan enrollees), small employer products (which account for the majority of employer plans), and plans offered to public employees (3).

In releasing its proposal, HHS noted that “[n]ot every benchmark plan includes coverage of all 10 categories of benefits identified in the Affordable Care Act” and that “the most commonly non-covered categories of benefits among typical employer plans are habilitative services, pediatric oral services, and pediatric vision services.”

However, HHS did at least suggest some boundaries, noting that states “would choose one of the following health insurance plans as a benchmark”:

•One of the three largest small group plans in the state (4);
•One of the three largest state employee health plans;
•One of the three largest federal employee health plan options;
•The largest HMO plan offered in the state’s commercial market.

HHS is soliciting public input on this proposal – though comments are due by January 31, 2012. You can send comments to

Nevin E. Adams, JD

The essential health benefits bulletin is online at

A fact sheet on the essential health benefits bulletin is online at:

The Institute of Medicine’s report on Essential Health Benefits is online at

Note: The HHS bulletin addressed only the services and items covered by a health plan, not the cost sharing, such as deductibles, copayments, and coinsurance. HHS noted that the cost-sharing features will be addressed in future bulletins and cost-sharing rules will determine the actuarial value of the plan.

See also Paul Fronstin and Murray N. Ross, “Addressing Health Care Market Reform Through an Insurance Exchange: Essential Policy Components, the Public Plan Option, and Other Issues to Consider,” EBRI Issue Brief, no. 330, June 2009.

(1)Beginning January 1, 2014, qualified health plans sold in health insurance exchanges must cover all essential benefits. In addition, new plans sold in the individual and small group markets must cover essential benefits, regardless of whether plans are sold inside or outside of state health insurance exchanges.

(2) The following benefit classes are identified as essential benefit classes
◦Ambulatory patient services
◦Emergency services
◦Maternity and newborn care
◦Mental health and substance use disorder services, including behavioral health treatment
◦Prescription drugs
◦Rehabilitative and habilitative services and devices
◦Laboratory services
◦Preventive and wellness services and chronic disease management
◦Pediatric services, including oral and vision care

(3) HHS noted that it has considered a report on employer plans submitted by the Department of Labor (DOL), recommendations on the process for defining and updating EHB from the Institute of Medicine (IOM), and input from the public and other interested stakeholders during a series of public listening sessions. In 2010, Paul Fronstin, Ph.D, Director, Health Research & Education Program at the Employee Benefit Research Institute (EBRI) was appointed to the Institute of Medicine (IOM) Committee on Determination of Essential Health Benefits. For more information on the essential benefits proposal, you can contact him at

(4) an Illustrative List of the Largest Three Small Group Products by State was just published by HHS at

Sunday, January 22, 2012

Replacement “Window”

There is an old adage that cautions about the consequences “when you assume…”

And yet, the business of retirement planning is replete with any number of so-called “common wisdom” rules of thumb. Doubtless many have well-intentioned origins – to make complicated concepts easier to grasp, and thus to address.

One of the more pervasive notions is that a realistic target for retirement savings can be determined by accumulating a sum that will provide an income stream equal to a percentage of one’s pre-retirement earnings – a sum that is generally expressed as 70-80% of what you earn prior to retirement. This starting point - generally called
a "replacement ratio" - includes any number of imbedded assumptions, perhaps most significantly that the individual will need to spend less post-retirement, generally understood to be on things such as taxes, housing, and various work-related expenses (including saving for retirement).

Moreover, the replacement rate approach represents, at best, an indirect approach in evaluating whether retired workers can maintain their standard of living in retirement – because what matters is not how much you have to spend, but how much you need to spend. A recent research report sponsored by the Society of Actuaries’ Pension Section, “Moving Beyond the Limitations of Traditional Replacement Rates”, also highlights the limitations of relying on replacement rates. A recent paper published by the Center for Retirement Research at Boston College (“How Much to Save for a Secure Retirement”) acknowledges that “the most direct approach would be a comparison of household consumption while working with consumption after retirement” – before launching into a discussion that instead draws on a relatively simplistic series of assumptions , not the least of which is that the goal of retirement saving is a replacement rate of 80-percent of one’s pre-retirement income.

The problem is that these assumptions are just that – and, as a result, in some cases that 80% will be more than is required – and for some it will, unfortunately, be less. Furthermore, most of the assumptions underpinning such replacement ratio targets are implicitly using a 50 percent probability of success.

Additionally, these replacement rate models tend to ignore one – or more – of the most important retirement risks; investment risk, longevity risk, and risk of potentially catastrophic health care costs.

The reality is that there is no “correct” single replacement rate, but the factors that undermine those simplistic rules of thumb are quantifiable. Those factors, and the importance of probabilities in retirement planning are detailed in “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates (EBRI Issue Brief No. 297).

After all, it isn’t what you have accumulated at retirement that matters, it’s how much you have left at the end of it.

- Nevin E. Adams, JD

Sunday, January 15, 2012

'Under' Covered?

One of the more pervasive statistics bandied around about the voluntary retirement system is that only about half of working Americans are covered by a workplace retirement plan.

It’s a data point that is widely and openly presented as fact—not only by those inclined to dismiss the current system as inadequate, but even by some of its most ardent champions, who see that result as a call to action for expanded access to these programs.

There’s only one problem: It doesn’t tell the whole story.

A 2011 EBRI report found that in 2010, 77.6 million workers worked for an employer/union that did not sponsor a retirement plan and 91.0 million workers did not participate in a plan. However, focusing in on employees who did not work for an employer that sponsored a plan, 9.0 million were self‐employed.

Of the remaining 68.5 million:

• 6.2 million were under the age of 21, and
• 3.7 million were age 65 or older.
• 32.0 million (approximately) were not full‐time, full‐year workers, and
• 17.2 million had annual earnings of less than $10,000.

Now, admittedly, many of these workers would fall into several of these categories simultaneously (they might, for instance be under age 21, make less than $10,000 in annual earnings, and not be a full‐time, full‐year worker).

But if you adjust these numbers so that only workers who work full-time, full‐year, make $10,000 or more in annual earnings, and work for an employer with 50 or more employees, only 17.4 million workers (or 26.7 percent) would be included among those working for an employer that did not sponsor a plan.

Of course, another way to look at this last number is that 73.3 percent of these workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2010.

And that’s a lot more than 50 percent.

- Nevin E. Adams, JD

Tuesday, January 10, 2012

Pension Penchants

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”

The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.

• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.

- Nevin E. Adams, JD

Monday, January 02, 2012

Conversation "Starters"

While the headlines out of our nation’s capital are driven by talk of the looming budget crisis, concerns about the sluggish economy, and the impending 2012 elections, discussions about retirement, retirement savings, and ways to improve retirement savings have been the order of the day here in Washington.

The Women’s Institute for a Secure Retirement (WISER) recently convened its Annual Women’s Retirement Symposium, with a focus of the future of retirement (broadly defined) and the specific implications for women (who live longer, are frequently paid less than men, and whose working careers often include family interruptions in pay and savings). EBRI data surfaced in a number of presentations throughout the event, including references to gender participation rates (see,, as well as differences in retirement confidence, and men’s and women’s response to opportunities such as the catch-up contribution.

Among information shared by those at the conference:

* American women are marrying and having children later.
* The longevity gap with men has shrunk – from eight years to five years.
* There is no gender gap in access to retirement savings plans, or in participation in those plans.
* Women tend to save at higher rates than men, though men have larger average account balances.
* Social Security provides half of women’s retirement income, but only a third of men’s.
* Only 11% of young women are confident of their ability to prepare/save for retirement.
* The top suggestion across all age demographics: provide motivation to learn about saving/investing for retirement, and make the topic easier to understand (41 percent of 20-somethings).
* Younger women were more likely to go to family/friends for investment help (those in their 40s were more likely to rely on a financial adviser)—but only 8 percent are actually talking about saving/investing with those friends/family.
* Most disabilities don’t occur at work.
* The leading cause of disability in the United States is arthritis.
* Healthcare costs impact certainty/predictability of benefit programs as well as individual savings rates.

All in all, the likelihood of significant change in the short term seems unlikely, with legislators and regulators hemmed in by budgetary constraints and concerns about the impact of change on private-sector hiring. However, today’s discussions could well set the stage for future change.