Implicit Subsidy in OPEB Plans

Have you ever wondered, “Why is the employer’s share of cost different from what we pay for insurance benefits?”

You might have also noticed something on your OPEB valuation that said implicit cost is $X million. That probably got you thinking, “What is this implicit cost and why is it on my OPEB valuation?”

What is Implicit Subsidy?

Concerning OPEB (Other Postemployment Benefits), the implicit subsidy refers to the fact that older individuals tend to have higher medical care costs than younger individuals, and on most health insurance plans they both pay the same premium. Therefore, on an OPEB plan, the Active employees are paying more than they otherwise would if the retirees were not on the plan and vice versa.

The indirect transfer from the younger employee to the older retiree is subsidizing the costs of the older retiree which is known as “Implicit Subsidy”. Any medical insurance that does not have different costs based on the age of the participant is going to create an implicit subsidy between older and younger members of the plan.

Implicit subsidies are required to be valued as an OPEB liability which is why it’s important to understand how they can affect your bottom line.

How is Implicit Subsidy Calculated?

To calculate the value of the implicit subsidy on an OPEB report your Actuary will use an “Age Grading Factor” to determine the expected claims by age for a group.

The claims by age may tell us that a 60-year-old has average expected claims of $13,000 per year, while a 30-year-old has average expected claims of $7,000 per year. If the actual amount of the insurance premium is $10,000 for both people that means the 30-year-old is overpaying by $3,000 and the 60-year-old is underpaying by $3,000.

That $3,000 is the implicit subsidy.

Now you’ve learned a new party trick – how to amaze your friends with your actuarial knowledge of OPEB’s implicit cost. If you have any further questions, leave us a message here and myself or another one of our consultants will get back to you shortly.