Implicit rate subsidy is measured as the difference between an individual’s actual incurred costs for coverage (i.e., total incurred claims) and the premium rate charged to the individual for such coverage. In general, premium rates for a group plan are based on the total expected costs of all participants covered in the group. While, in most cases, each participant is then charged the same premium rate, not every participant will incur the same level of claims. Since some participants will have higher costs than others while being subject to the same premium rate, some of their costs are being “subsidized” by the premiums paid by others with lower costs. Hence, there is an implicit rate subsidy.
Implicit rate subsidy is most prevalent in regards to group health plans. On average, health care costs (i.e., medical services and Rx) tend to be higher for older individuals. As a result, it’s expected that a retiree group’s per capita health care costs will be greater than that of an active group. GASB guidelines require that the OPEB liability measured in a valuation be based upon the value of the health care benefit. Thus, the value of the benefits received by such coverage in excess of the premium rate must be determined and included in an OPEB valuation. In other words, typically, an implicit rate subsidy exists and requires valuing whenever a retiree remains on your group health plan. While implicit rate subsidy resulting from participants continuing health coverage requires valuation and inclusion in your OPEB valuation, in and of itself, it isn’t an actual ‘payment’ being made to those retired individuals. Rather, it will simply be included in your annual reported OPEB payment to recognize the total value of benefits that were provided for the year.
This can be a confusing component of your OPEB valuation, so please feel free to reach out with any questions you may have!