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Retiree Medical Solutions—The Case For Change

Richard FuerstenbergSenior PartnerEmployee Health and BenefitsMercerPrinceton, New Jersey

Sean O’Donnell, CEBSDirectorGlobal Benefits and Medical ServicesCytec IndustriesWoodland Park, New Jersey

5A-1

Introduction

5A-2

About Cytec Industries Inc.

04/09/2013

Our Businesses: 

Aerospace Materials *  Industrial Materials * Specialty Chemicals

• 2012 sales up 21%; $1.70B continuing operations• Manufacturing in 15 countries• Approximately 4,600 employees (excluding Coating Resins)• New York Stock Exchange: CYT

In Process Separation

Aerospace Materials

AdditiveTechnologies

Industrial Materials

5A-3

Fun Facts

04/09/2013

• Composites used on airplanes

• Specialty Additives used  in orange soda (Fanta)

• Composite body on Formula 1 racecars

• Phosphines in LED lights

5A-4

Direction From Management

04/09/2013

Need to significantly reduce retiree medical accounting expense

Design changes (i.e., cost shifting) are ok, but minimize retiree disruption and noise

Reduce administrative expense and complexity where possible

5A-5

Planning

5A-6

Retiree Medical—Strategic FrameworkChoosing a Path

EligibilityContributions

Plan designPre-funding

Maintain with changes

Move to exchanges

Terminate Subsidy and Sponsorship

Adopt HRA designDrop plan sponsorshipEngage connector to help retirees choose

plans

Difficult for current retirees

Currently happening for Medicare-eligible

plansDevelopment of pre-

Medicare market helps

The right path may vary by retiree group

Optimize delivery Develop Exit Strategy

5A-7

Employer Group Waiver Plan (EGWP) EGWP is similar to Medicare carve-out

PlanMedicarecarve-out Medicare

What the Plan would pay IF primary What Medicare pays

Resulting plan payment under carve-out

PlanPart D w/Cvg gap

EGWP Part D w/Cvg gap

What the Plan would pay IF primary What Part D pays

Resulting plan payment under EGWP

– =

– =

Medicare

5A-8

Optimize delivery—Maintain with changesMove to exchange—how it works

Retiree selects

individual plan

Retiree selects

individual plan

Retiree reimbursed from RRA

Retiree reimbursed from RRA

Employer drops health plan, offers Retiree Reimbursement Account (RRA)

Employer may engage Medicare exchange to help

retiree choose plan

Employer may allow RRA to reimburse other out-of-pocket

costs

Retiree pays premium

Retiree pays premium

5A-9

Overview of Cytec Retiree Medical PlansAnnual Cash Costs

Plan A Plan B Plan C

Pre-65 Post-65 Pre-65 Post-65 Pre-65 Post-65

Cytec $1,000 $25,000 $1,600 $4,200 $2,400 $400

Retiree * 4,000 * 0 5,600 1,400

RDS N/A 4,000 N/A 800 N/A N/A

Total $1,000 $33,000 $1,600 $5,000 $8,000 $1,800

Members 52 3,592 83 885 410 365

* Less than $200,000

Estimated 2012 FAS expense: $24MEstimated 2012 APBO: $440M

Note: Numbers in $000s (not actual amounts; scaled for illustrative purposes)

5A-10

Post 65 Retiree Strategy

Post 65 costs are 85% of total cost (pre + post)

Plan A Plan B Plan C

Current Enrollment

3,592 members

(closed group)

885 members

(grandfathered group)

365 members

(open group)

Average Age 82 72 70

Considerations Difficult to communicate change due to age of participants. Fixed retiree contributions about 12% of total cost

No current contributions for retirees

Cost cap applies currently. Retiree contributions about 78% of total cost. Drug coverage not creditable so not eligible for Retiree Drug Subsidy (RDS)

Initial Strategic Direction

EGWP or Exchange EGWP or Exchange Exchange with a reduction in cost cap

5A-11

Implementing in 2012 vs. 2013

Cash vs. FAS106

Evaluation of Options

Key Considerations

– Retiree Drug Subsidy (RDS) tax change effective 2013

– Multiple consultants for strategy and valuation

– Financial analysis - Vendor selection– Management approval - Retiree disruption

5A-12

Preliminary Considerations—Retiree ImpactMedicare Exchange—Winners/Losers Analysis

= Savings = Cost

Medicare Exchange:Utilization level: LOW utilizer MEDIUM utilizer HIGH utilizer Very HIGH UtilizerNew Jersey

Connecticut

Florida

Medicare Exchange:Utilization level: LOW utilizer MEDIUM utilizer HIGH utilizer Very HIGH UtilizerNew Jersey

Connecticut

Florida

Medicare Advantage

Medicare Supplement Plan F; Preferred PDP

5A-13

Preliminary Considerations—Cytec ImpactMedicare Exchange—Annual Employer (Savings)/Cost

Preliminary employer savings:

30%

…however, savings would only occur if the cap was effectively lowered

5A-14

EGWPProjected 2012 Financial Impact

Note: Not actual amounts; scaled for illustrative purposes

Cost Component Current EGWP Comments

Total Rx Cost $383 $390 Driven by formulary change

Member Cost Share ($82) ($75) Lower due to change in drug mix

Coverage Gap Discount n/a ($45) Funded by pharma

Federal Reinsurance n/a ($15) Covers costs above coverage gap

Federal Subsidy ($68) ($67) RDS vs. base federal Part D subsidy

Rebates ($38) ($45) Increased due to formulary brand steerage

Admin Fee $6 $15 EGWP admin is higher

Wrap Admin Fee n/a $3 Covers cost of wrap administration

Total PMPM Cost $201 $161 Gap is smaller if tax-free nature of RDS is included

5A-15

Review of AlternativesExecutive Summary of Retiree Impact

EGWP Medicare Exchange

• Coinsurance for non-formulary drugs increased from 20% to 35% to preserve rebates

• Some retirees would be subject to Part D high income surcharge

– Allowing premium reimbursement for high income surcharge would offset projected savings

• Review of drug utilization to determine impact of change on formulary

• Consider cover management rules, mandatory mail order, step therapy, etc.

• Most retirees would see a reduction in total out of pocket costs

• Retirees with high drug costs that are stuck in the high end of the coverage gap would be “losers”

– Impact could be mitigated by using some of the savings to offset coverage gap expenses

• In contrast to current structure, some retirees would need to pay premium and then be reimbursed which could result in cash flow crunch

• Radically different benefit delivery system for a group of retirees with an average age of 82 may make communications and transition challenging

5A-16

Final Recommendations

04/09/2013

Plans A and B(EGWP)

Recommend EGWP over Medicare exchange due to high average retiree age

EGWP projected to have minimal retiree impact

Plan C(Exchange)

EGWP produced limited savings as current plan was not RDS eligible

Due to union concerns with changing the cap amount, RRA set equal to cap

5A-17

Direction From ManagementHow did we do?

04/09/2013

Need to significantly reduce retiree medical accounting expense

Design changes (i.e., cost shifting) are ok, but minimize retiree disruption and noise

Reduce administrative expense and complexity where possible

5A-18

Employer Accounting ImpactPost-65 Retiree Medical

Current Design

EGWP Plans A&B

Exchange Plan C

2012 Expense $24M $14M

(Savings)/Cost n/a ($10M)

Benefit Obligation

$440M $380M

(Savings)/Cost n/a ($60M)

Note: Not actual amounts; scaled for illustrative purposes

5A-19

What Actually Happened?

5A-20

Cytec was a little ahead of the curve

Source: Mercer’s National Survey of Employer-Sponsored Health Plans 2012

RETIREE MEDICAL PLANS ARE BECOMING LESS COMMON… …AS INTEREST IN EXCHANGES GROWS

For retirees under age 65

24%24% 17%17%

For Medicare-eligible retirees

Employers that offer a retiree plan today

14%14%

Employers that expect to offer a plan in 5 years

Interested in moving to an exchange for

Medicare-eligible retirees

RDS PARTICIPATION IS DECLINING AS EGWPs ARE INCREASING

Offer Medicare-retiree exchange today

26%26%

20,000+ employees

18%18%

Employers with 500+ employees

8%8%

20,000+employees

Employers with 500+ employees

2%

RDS usage down from

33% in 2012 to 25% in 2013

EGWPs are up from

27% in 2012 to 34% in 2013

5A-21

EGWP+WrapProjected vs. Actual 2012 Employer Savings

Note: Not actual amounts; scaled for illustrative purposes

Cost Component Current Expected Actual

Total Rx Cost $383 $390 $368

Member Cost Share ($82) ($75) ($75)

Coverage Gap Discount n/a ($45) ($38)

Federal Reinsurance n/a ($15) ($15)

Federal Subsidy ($68) ($67) ($68)

Rebates ($38) ($45) ($45)

Admin Fee $6.00 $15 $15

Wrap Admin Fee n/a $3 $3

Total PMPM Cost $201 $161 $145

5A-22

Implementation Concerns/Roadblocks• EGWP Concerns:– Biggest challenge is adapting to the rigid Medicare Rules– IRMA Penalty (Income Related Monthly Adjustment)

- Retirees understanding- Data issues

– Retirees enrolling in other Medicare Part D plans without knowing the impact that this has on the company provided coverage

•Medicare Exchange Concerns:– Breakdown of communication between Data Analytics team and the RRA 

team (processing RRA funding)– RRA enrollment kits sent in a timely fashion– Flagging retirees on census to make sure they get their RRA funding– RRA team informing retirees that there is no funding because Cytec did not 

provide Exchange vendor with the necessary funds

04/09/2013

5A-23

Next Steps• Continue to monitor that all subsidies are being received

• Negotiate exchange into future union contracts

• Exchanges for pre 65– Continue to monitor market for pre 65 retiree medical solution including

the public/private exchanges that should be available for 2014

• Be ready for next request from management!

04/09/2013

5A-24

Questions?

04/09/2013

5A-25