OPEB are benefits provided to eligible retired employees (and their spouses) beyond those provided by their pension plans. Such benefits include medical, prescription drug, life, dental, vision, disability, and long-term care insurance. The Public Employees Benefits Board (PEBB) was created within the Washington State Health Care Authority (HCA) to administer all these benefits for public employees, retirees, and their families. PEBB employers provide monetary assistance, or subsidies, for medical, prescription drug, dental and vision insurance.

The OPEB relationship between PEBB employers and their employees and retirees is not formalized in a contract or plan document. Rather, the benefits are provided in accordance with a substantive plan. A substantive plan is one in which the plan terms are understood by the employers and plan members. This understanding is based on communications between the employers and plan members and the historical pattern of practice with regard to the sharing of benefit costs.

The Health Care Authority (HCA) administers PEBB plan benefits. For medical insurance coverage, the HCA has two claims pools: one covering employees and non-Medicare eligible retirees, and the other covering retirees enrolled in Medicare Parts A and B. PEBB plan benefits provide two different subsidies for retirees: an explicit subsidy and an implicit subsidy.

The explicit subsidy, permitted under the Revised Code of Washington (RCW) 41.05.085, is a capped dollar amount that lowers the monthly premium paid by members and their spouses over the age of 65 enrolled in Medicare Parts A and B. The explicit subsidy is the lesser of 50 percent of the monthly premium and the set dollar amount adopted by the Legislature. The following graph displays the historical maximum monthly explicit subsidy as of the 2022 PEBB OPEB report. This graph is for informational purposes and will not be updated with every valuation. Please see the most recent valuation for more recent explicit subsidy values and assumptions for growth in this subsidy.

The implicit subsidy, set up under RCW 41.05.022, is more complex because it is not a direct reduction in a member’s premium. Claims experience for active employees and non-Medicare eligible retirees are pooled when determining non-Medicare premiums. Therefore, these retired members pay a premium based on a pool of members that, on average, are younger and healthier. There is an implicit subsidy from the employee group since the premiums paid by the non-Medicare retirees are lower than they would have been if the retirees were insured separately. The subsidies are valued using the difference between the age-based claims costs and the premiums paid by these retirees. For dental benefits, there is only one claim pool. All retirees, both Medicare and non-Medicare eligible, are pooled with active employees to determine a blended premium. Retirees pay the full premium so the only subsidy that exists is an implicit subsidy, since the premium retirees pay is lower due to being pooled with active employees.

Governmental Accounting Standards Board Statement No. 75 (GASB 75) requires employers to disclose key financial measures for the plan, including the Total OPEB Liability (TOL), OPEB expense, and benefit payments (or employer contributions).

GASB 75 requires the use of the Entry Age Normal (EAN) actuarial cost method to measure the Actuarial Accrued Liability (AAL). The AAL under the EAN cost method is also referred to as TOL in GASB 75. In addition, the discount rate for OPEB plans without a dedicated trust fund is based on a 20-year municipal bond index, which means the discount rate will fluctuate from year-to-year.

In Washington State, the implicit and explicit subsidies are funded on a pay-as-you-go basis, meaning that PEBB employers pay these costs as they occur.

It is important to look at the projections of the expected future subsidy payments (or benefit payments) in order to determine if the payments are manageable. Projections allow policy makers to determine the best funding policy for the state and their constituents while providing investors and stakeholders knowledge of what lies ahead.

The following graph illustrates expected state subsidy payments for current hires as well as future new hires. This graph is for educational purposes and may not include the most recent actuarial valuation results. We intend to update this graph with the next PEBB OPEB Experience Study.

The above graph is for illustrative purposes only, so we made simplifying assumptions for these future hires. We prepared new hire cohorts for this graph based on the Public Employees’ Retirement System (PERS) Plan 2/3 New Hire Profiles and assumed PERS growth. Further, we assumed that all members participate in the UMP medical and dental plans.

The projected subsidy payments could be higher or lower, based on actual growth of the explicit subsidy.