From STRS: Recap of May 2008 Board meeting

From STRS, May 16, 2008
Subject: [News] April Board News Details Retirement Board Actions and Discussions

This week, the State Teachers Retirement Board held its monthly meeting. Following the regularly scheduled meetings, a report titled "Board News" is posted on the STRS Ohio Web site, as well as mailed to a number of members and education organization representatives who have requested it. As a member of STRS Ohio with an e-mail address on file, you will also receive this report each month. The April report follows.

MAY BOARD NEWS

MYERS WINS 2008 ELECTION Tim Myers was elected to the Retirement Board to fill the contributing member seat being vacated by John Lazares. He will take his seat on the board on Sept. 1, 2008, and serve a four-year term through Aug. 31, 2012. He has been with Elida Local Schools for 26 years, where he provides computer training for middle school students. Before going to Elida, he was a special education teacher in Columbus Grove Local Schools for one year.

BOARD REVIEWS ENROLLMENT AND COST TRENDS AFFECTING HEALTH CARE PREMIUMS At the Retirement Board's May 2008 meeting, STRS Ohio staff presented an overview of the various factors that affect the premiums STRS Ohio members pay for health care coverage under the Aetna and Medical Mutual plans. The majority of STRS Ohio Health Care Program enrollees are enrolled in the self-insured Plus or Basic Plans offered through these plan administrators.

As noted in previous discussions with the board, the factors that affect health care costs nationwide also affect STRS Ohio's members. Escalating health care premiums, along with accompanying higher out-of-pocket expenses, are a national issue facing all Americans. The overall national medical and drug trends continue to outpace the CPI (Consumer Price Index). For retirees, these trend rates typically increase by 10% to 12% each year.

Contributing to these high trend rates is the continuing introduction of new medical technologies, high cost services and drugs, and the defensive practice of medicine (i.e., the extensive use of testing to avoid malpractice litigation). Biomedical and specialty drugs, such as oral cancer medications, in particular are exponentially adding to costs. Year-over-year cost increases are projected to be 20% to 30% for these types of medicines. For STRS Ohio, these drugs could increase to 25% from 10% of the total amount spent on prescription drugs in just the next two to three years.

STRS Ohio's health care costs are also driven by increasing utilization and escalating adverse selection, particularly among non-Medicare spouses. Unfortunately, it is difficult to moderate premium increases significantly without making major changes in health care coverage. For example, to reduce a 30-year benefit recipient's premiums by just $1 per month requires more than $5 million in annual health care plan cost reductions.

In June, STRS Ohio staff will present proposed premiums for all of its health care plans for calendar year 2009. Longer term, the Retirement Board and staff will be looking at future changes to manage health care cost trend rates in the context of a strategic planning process that will begin this fall. At that time, one of the focal points will be possible changes that can attract and retain healthy enrollees through plans that are aligned with the marketplace and create and maintain healthy risk pools.

RETIREMENT, INVESTMENT TRANSACTIONS APPROVED The Retirement Board approved the following retirements and investment transactions:

• 118 active members were approved for service retirement; 84 inactive retirements were approved.

• In April, fixed-income purchases totaled $589 million, real estate purchases totaled $54.6 million and STRS Ohio withdrew approximately $140 million from domestic equities.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STRS OHIO'S PROPOSED BUDGETS PRESENTED AT ORSC MEETING STRS Ohio's proposed budgets for fiscal year 2009 were submitted to the Ohio Retirement Study Council (ORSC) on April 21 in accordance with Section 3307.041, Revised Code. STRS Ohio staff held preliminary meetings with several ORSC members to answer any routine questions before the formal budget presentation at ORSC's May 14 meeting by Robert Slater, STRS Ohio's chief financial officer. At that meeting, only a few questions were asked by the ORSC members and no recommendations for changes were made. As part of the discussion, ORSC member Dale Van Vyven asked about the savings that result from STRS Ohio's internal management of investment assets instead of using outside money managers. Mr. Slater indicated that CEM studies show the savings total about $80 million annually. Mr. Van Vyven indicated he thought this was an important point to highlight.

In other business, a report by the five systems on their experience with the Iran/Sudan divestiture policies was noted and a written response was provided to each member of the ORSC. As of March 31, 2008, the market value of STRS Ohio investments in "restricted list" companies has been reduced by 23.21% from the June 30, 2007, program start date. This is due primarily to less dollars invested in companies on the restricted list, plus some decline in market value.

STAFF RECOMMENDS EXTENSION OF NRS CONTRACT Nationwide Retirement Solutions, Inc. (NRS) has been providing administrative and record-keeping services for STRS Ohio members' defined contribution accounts since 2001. STRS Ohio staff recommends extending the contract with NRS for five years at a proposed 17% reduction in costs, based on current defined contribution plan participation. There was no objection voiced to this recommendation.

MEDICARE PART B COORDINATION OF BENEFITS AT RETAIL PHARMACIES AVAILABLE TO STRS OHIO MEMBERS ON JULY 1 Under Express Scripts (ESI), the STRS Ohio prescription drug program currently has coordination of benefits (COB) for certain Medicare Part B-covered medications dispensed through the home delivery service provided by NationsHealth. NationsHealth is a Medicare-approved mail-order pharmacy that is authorized to dispense Part B medications and bill Medicare accordingly. With the growth in Medicare Part D plans, coordinating Part B drugs at retail pharmacies has also now become feasible.

Effective July 1, 2008, STRS Ohio's prescription drug program administered through ESI will begin Part B coordination of benefits at retail pharmacies. Medicare Part B-covered medications dispensed at retail pharmacies will require submission to Medicare for payment before STRS Ohio's prescription coverage will pay as secondary. Since Medicare will be the primary payer for these medications, drug expenses charged to the Health Care Stabilization Fund will be reduced. Additionally, enrollees may experience cost savings because, once claims coordination occurs, enrollees will pay the lesser of: (1) the 20% Medicare coinsurance or (2) the applicable copayment. While more than 90% of retail pharmacies are Medicare approved, some enrollees will need to change pharmacies to receive their Medicare benefit. Communication materials will be mailed to Medicare enrollees in June to advise them of this change and the steps they need to take to maximize their prescription drug coverage.