BICKMORE & ASSOCIATES, INC. 2-2016

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Other Post -Employment Benefit Programs of the City of "" Actuarial Valuation as of July 1, 2015 Addendum 1: Bickmore Healthcare Claims Age Rating Methodology Both accounting standards (e.g. GASB 45) and actuarial standards (e.g. ASOP 6) require that expected retiree claims, not just premiums paid, be reflected in most situations where an actuary Is calculating retiree healthcare liabilities. Unfortunately the actuary is often required to perform these calculations without any underlying claims information. In most situations the information is not available, but even when available the information may not be credible due to the size of the group being considered. Actuaries have developed methodologies to approximate healthcare olalms from the premiums being paid by the plan sponsor. Any methodology requires adopting certain assumptions and using general studies of healthcare costs as substitutes when there°is a lack of credible claims information for the specific plan being reviewed. Premiums paid by sponsors are often uniform for all employee and retiree ages and genders, with a drop in premiums for those participants who are Medjoare-ellgible. White the total premiums are expected to pay for the total claims for the insured group,. on average Jhp premi,yrhs charged would not be sufficient to pay for the claims of older insureds and would be expepted to exceed the expected claims of younger insureds. An age',6ting methgdology takes the typically uniform premiums paid by plan sponsors and spread tBie total Vemium dollars to each age and gender to better approximate what the insurer might be expecting 1rnactual claims costs:' The process of translating premiums %ttosex the steps below. 1. Obtain or Develop Relative Medical Cla are deemed significant.; : For example] e male has $1 in claims, then on averag year old male has claims of $i7;40, ant claims cost curve providesubli"relx significant factor the curve`mtght have source of information.. used to d'eyelop costs developed for your plan. by age and gender generally follows sts'by Age, Gender, or other categories that a cost curve might show that if a 50 year old year old female has claims of $1.25, a 30 year old female has claims of $0.20. The osts for each age, gender, or any other developed to reflect. Table 4 provides the a curve and shows sample relative claims 2. Obtain a census of participants,, their` chosen medical coverage, and the premium charged for their coverage. ;An>attempt is made to find the group of participants that the insurer considered in setting the premiums they charge for coverage. That group includes the participant;And any covered spouses and children. When information about dependents is unavailablo, assumpto,ris must be made about spouse age and the number and age of children represented in the population. These assumptions are provided in Table 4. 3. Spread the total premium paid by the group to each covered participant or dependent based on expected claims. The medical claims cost curve Is used to spread the total premium dollars paid by the group to each participant reflecting their age, gender, or other relevant category. After this step the actuary has a schedule of expected claims costs for each age and gender for the current premium year. It is these claims costs that are projected into the future by medical cost inflation assumptions when valuing expected future retiree claims. The methodology described above is dependent on the data and methodologies used in whatever study might be used to develop the underlying claims cost curve. These methodologies and assumptions can be found in the referenced paper cited in Table 4. Bickmore''°