US Postal Service 2005 Annual Report Download - page 36

26 | 2005 Annual Report United States Postal Service
increase most postal rates and fees by approximately 5.4%
across-the-board to take effect January 8, 2006.
Health Benefits
We participate in the Federal Employees Health Benefits
Program (FEHBP) which is administered by OPM. Eligible
postal employees with at least five consecutive years par-
ticipation in the FEHBP immediately preceding retirement
are entitled to continue FEHBP coverage into retirement.
We account for employee and retiree health benefit costs
as an expense in the period our contribution is due and
payable to the FEHBP.
The drivers of our active employee health care costs
are the number of employees electing coverage and the
premium costs of the plans they select. Premiums for each
plan participating in FEHBP are determined annually by
OPM. In 2005, health benefits expenses for active employ-
ees were $5,100 million, an increase of $255 million over
2004. This was 7.4% of our total expenses. The 2004
expense of $4,845 million was 7.3% of our total expenses
and increased by $319 million over 2003 when employee
health benefits were 7.0% of our expenses.
Retiree health benefits costs of $1,495 million in 2005
represent 2.2% of our total expenses, up from $1,313 mil-
lion or 2.0% in 2004 and $1,133 million or 1.8% in 2003.
This cost has risen steadily over the last two years, and
has doubled since 2000, driven by increases in FEHBP
premium costs, an increasing number of annuitants en-
rolled in the plan, and the declining number of annuitants
for whom a portion of the premium cost is allocable to Post
Office Department service. The combined effects of these
drivers increased retiree health benefit costs by 13.9% or
$182 million in 2005 and 15.9% or $180 million in 2004.
OPM recently announced a 6.6% average increase in
health benefit premiums, to take effect in January 2006,
following a 7.9% increase in January 2005. This is the
lowest increase in average premiums in nine years and
represents a very encouraging development. However, the
pool of covered annuitants will continue to grow rapidly in
the future, resulting in double-digit percentage increases of
this expense. As of the end of 2005, there were approxi-
mately 444,000 Postal Service annuitants and survivors
compared to 438,000 in 2004. We estimate that over
200,000 of our current employees will be eligible for retire-
ment by 2008.
As an independent establishment of the U.S. government,
our participation in FEHBP is considered as a participant
in a multi-employer plan. If we were not considered a
participant of a multi-employer plan, we would be required
to record and disclose our obligation for future costs
under the program. Because there are several areas of
judgment involved in calculating this obligation, estimates
can vary widely based on the assumptions used. Based
on September 30, 2005 data, we estimated the 2005
present value of future premium payments to be between
$50 billion and $59 billion. Based on September 30, 2004
data, we estimated the 2004 value of future payments to
be between $48 billion and $59 billion. In both cases, the
range in the estimate exists only because long-term medi-
cal inflation assumptions differed by 1%.
In December 2003, President Bush signed into law the
Medicare Prescription Drug Modernization Act of 2003
(P.L.108-173). This Act will add a voluntary prescription drug
benefit to the Medicare program that could have a significant
impact on future Postal Service health care costs.
Under the terms of the P.L.108-173, employers, includ-
ing the federal government, are eligible to receive the
Medicare employer prescription drug subsidy if their ben-
efit plans provide prescription drug coverage at or above
specified levels. We qualify for this subsidy through our
direct payment of the employer’s premium to the FEHBP
that is administered by OPM. Therefore, we have applied
as a Medicare Part D provider which would enable us to
receive the employer’s retiree prescription drug subsidy.
OPM has said that it will forego the Medicare employer
prescription drug subsidy for 2006 on the basis that there
is no good rationale to pay itself to continue providing drug
coverage to federal retirees of agencies that are fully sup-
ported by federal tax dollars. As distinct from the federal
government, we directly fund the costs of our retirees’
health benefits with revenues generated through postage
rates, not taxpayer dollars. In fiscal year 2005, we paid
$6.6 billion for employee and retiree health benefits and
we estimate that approval as a Medicare Part D provider
we could save postal ratepayers $250 million per year.
Workers’ Compensation
Our employees are covered by the Federal Employees’
Compensation Act, administered by the Department
of Labor’s Office of Workers’ Compensation Programs
(OWCP) which makes all decisions regarding injured work-
ers’ eligibility for benefits. However, we pay all workers’
compensation claims out of postal funds.
We record as a liability the present value of all future pay-
ments we expect to make to those employees receiving
workers’ compensation. At the end of 2005, we estimate
Financial review
Part II