Department Of Defense Agency Financial Report 2007 - Section 2: Financial Information Page 61
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82Section 2: Financial Information
Department of Defense Agency Financial Report 2007
7
Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits
In accordance with P.L. 106-398, the MERHCF accumulates funds to finance the health care program liabilities of Medicare-
eligible retirees for all the Uniformed Services and specific Medicare-eligible beneficiaries. The Board approves the
long-term assumptions for medical trends and interest. The actuaries calculate the actuarial liabilities annually using actual
experience (e.g., mortality and retirement rates, direct care costs, purchased care). Due to reporting deadlines, the current
year actuarial present value of projected plan benefits rolls forward from the prior year’s results. The Department used the
following assumptions in calculating the FY 2007 roll-forward amount.
Medical Trend
FY 2006 – FY 2007
Ultimate Rate FY 2031
Medicare Inpatient
6.74%
6.25%
Medicare Outpatient
6.54%
6.25%
Medicare Prescriptions (Direct Care)
6.25%
6.25%
Medicare Prescriptions (Purchased Care)
10.95%
6.25%
Changes in MERHCF Actuarial Liability
(Amounts in billions)
Actuarial Liability as of 09/30/06 (all Uniformed Services Medicare)
$538.0
Expected Normal Cost for FY 2007
10.8
Expected Benefit Payments for FY 2007
(8.5)
Interest Cost for FY 2007
34.0
Actuarial (gains)/losses due to other factors
(4.8)
Actuarial (gains)/losses due to changes in trend assumptions
(53.1)
Actuarial Liability as of 09/30/07 (all Uniformed Services Medicare)
$516.5
($21.5)
Change in Actuarial Liability
Actuarial Cost Method Used for MERHCF Liability: Aggregate Entry-Age Normal
Market Value of Investments in Market-Based and Marketable Securities: $107.8 billion
Assumed Interest Rate: 6.0%
The MERHCF liability includes Medicare liabilities for all Uniformed Services. The $516.5 billion liability includes
$505.1 billion for the Department, $10.2 billion for the Coast Guard, $1.1 billion for the Public Health Service and
$72.8 million for National Oceanic and Atmospheric Association (NOAA). The FY 2007 contributions from each of the
services were: $11.2 billion by the Department, $278.7 million by the Coast Guard, $36.3 million by the Public Health
Service, and $1.8 million by NOAA.
Federal Employees Compensation Act (FECA)
The Department of Labor (DOL) determines the liability for future workers’ compensation benefits, which includes the
expected liability for death, disability, medical, and miscellaneous costs for approved compensation cases, plus a component
for incurred but not reported claims. The liability is determined annually using historical benefit payment patterns related to
a specific incurred period to predict the final payment related to that period. Consistent with past practice, these projected
annual benefit payments have been discounted to present value using the Office of Management and Budget’s economic
assumptions for 10-year U.S. Treasury notes and bonds. A 4.93% interest rate was assumed for year one and 5.08% was
assumed for year two and thereafter.
The DOL calculates this liability using wage inflation factors (cost of living adjustments or COLA) and medical inflation
factors (consumer price index medical or CPIM). The actual rates for these factors for charge back year (CBY) 2007 were also
used to adjust the methodology’s historical payments to current year constant dollars. The compensation COLAs and CPIMs
used in the projections for various charge back years were as follows.
CBY
COLA
CPIM
2007
2.63%
3.74%
2008
2.90%
4.04%
2009
2.47%
4.00%
2010
2.37%
3.94%
2011+
2.30%
3.94%
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