LRO’s Proposed Agenda Items For Healthcare Issues
(Lucent labeled the proposed agenda items as “questions” and provided its written response.)
Q1: Lucent Focus group / LRO retirees survey results:
“After-the-fact changes in health plans,
prescription drug plans, and network providers.”
With the growing costs of healthcare coverage nationwide, Lucent is facing significant annual retiree healthcare costs, which were more than $850 million in 2003. With revenues of approximately $8.5 billion last year, these costs represent 10 percent of our annual revenue. A company of our size and revenue simply cannot afford to absorb these costs and remain a sustainable, competitive company. While we’ve made some difficult decisions regarding benefit changes, we have made every effort to provide advance notification to all those affected, and when possible, before open enrollment begins in the fall. There may be some cases, however, when changes in the network providers take place after open enrollment – for example, when contracts between physicians, hospitals and healthcare carriers come up for renewal during the plan year. Occasionally, a provider may drop out of the plan’s network but alternative in-network providers are usually available within the service area. Lucent monitors these changes and will continue to provide retirees with notification on any benefit changes as far in advance as possible to make it easier for them to plan their healthcare.
“Health plan administrators don’t provide timely and accurate answers.”
In our contracts with the health plan vendors, we have built in standards to guarantee the timeliness of responses to participants and resolution of issues. In addition, we are adding a participant advocacy program through the Lucent Benefits Center, which will assist retirees with access to benefit programs and claim issues, and will further monitor the performance of our vendors. More details about the program will be announced soon.
We would be interested in hearing comments from our retirees so that we can improve your experience with our health plan administrators.
"Need better quality and more stable healthcare networks.”
The quality of healthcare is a national issue that many employers, trade associations and government agencies are working together to improve. Lucent is an active participant in groups that endorse national quality standards. We also make available tools such as nurse lines through the health plan carriers to assist participants with their healthcare decisions. In the future, we plan to increase our efforts to educate our plan participants on how they also can be their own advocates for safe, quality care.
As for stability of healthcare networks, there may be changes to providers as contracts between physicians, hospitals and healthcare carriers come up for renewal during the plan year. In most cases, these contracts will be renegotiated, but should a provider drop out of the plan’s network, alternative in-network providers are usually available within the service area. Lucent monitors these changes continuously and we will continue to provide our retirees with notification on any changes as far in advance as possible to make it easier for them to plan their healthcare.
“Retirees would like to comment on materials before they are delivered so that they are readable and relate to their situations.”
Lucent currently retains employees, and engages professionals, who have expertise in the communication of healthcare services.
In addition, these materials, like any draft documents, are considered confidential, so they would not be broadly distributed.
“Retirees need the availability of an advocate who will help them work the maze among Lucent's benefit center, the healthcare network, and the providers.”
Within the next month, we will be implementing a participant advocacy program through the Lucent Benefits Center, which will assist retirees with access to benefit programs and claim issues. More details about the program will be announced soon.
“Medicare-eligible retirees feel they need a Medicare-supplement plan, which pays what Medicare doesn't pay.”
Lucent currently offers Medicare-eligible retirees a choice of plans that are supplemental to Medicare. These plans offer a choice between a medical supplement plan -- which includes prescription drug coverage -- a prescription drug only plan or a Medicare Advantage HMO, if available. For more information on these options and monthly contributions that may apply to you, contact the Lucent Benefits Center at 1-888-232-4111.
Retirees looking for additional coverage, beyond what is provided by Lucent, should evaluate other alternatives such as a Medicare Advantage HMO or a Medigap insurance plan.
Q2: Pat Russo has described retiree healthcare as an $850 million item. Retirees would like to understand both where the $850 million is expended and where the $850 million comes from in some detail.
A2: The $850 million represents the total company-paid U.S. retiree healthcare benefit costs (for both represented and management retirees) made in fiscal 2003 - about $350 million for management retiree healthcare benefits and the balance for formerly represented retiree healthcare benefits.
We expect our funding requirements for post-retirement healthcare for management retirees to be approximately $300 million annually for fiscal 2004 through fiscal 2006. Of that number, approximately $240 million would be paid out of cash in fiscal 2004 (including the $110 million in cash that we funded during our first and second quarters). Thereafter, we expect these payments will be made entirely from operating cash because, as we previously stated, the management retiree healthcare trust was depleted in 2003.
The remainder of total retiree health costs is related to formerly represented retirees and is covered by the remaining formerly represented VEBA trust. However, by fiscal 2007, we expect the plan assets in this trust will be depleted as well. At that time, without changes in our post-retirement healthcare benefits for retired employees, annual funding from cash from operations would need to increase substantially.
Q3: The recent Wall Street Journal analysis is being widely interpreted that retirees' funds have been subsidizing Lucent's payment for medical services in the last five years. Is there an alternative analysis that Lucent can share with retirees?
A3: As reported, the benefits for Lucent's U.S. retiree healthcare programs have historically been paid from trusts that the company inherited at its spin-off from AT&T that were established specifically to pay for healthcare -- called VEBA trusts -- and from the transfer of excess pension assets, not from operating cash.
First, not many companies have healthcare trusts to prefund retiree healthcare benefits. Second, Lucent was not required by law to fund these trusts, although AT&T set aside some funds prior to our spin off. Third, these trusts we inherited from AT&T were only partially funded from the beginning and were only intended to help subsidize Lucent's retiree healthcare costs, but not to pay for them entirely. Finally, we held these trusts and expended their assets solely for the purpose of funding retiree healthcare benefits.
The pension transfers, which helped to subsidize retiree healthcare, were permitted by law as long as our pension plans were funded at 125 percent or more.
As we have already stated, these transfers are not currently possible in our management plan because of the drop in equity markets prior to last year, which reduced plan assets, and lower interest rates on bonds, which have increased plan liabilities.
Moreover, the sharper-than-expected rise in healthcare costs over the last five years, coupled with the drop in equity markets, is why the non-represented VEBA trust was depleted in 2003 and why we expect the formerly represented VEBA trust to run out completely by fiscal 2007. At that time, without changes in our postretirement healthcare benefits for all active and retired employees, annual funding from cash from operations would need to increase dramatically.
Q4: We'd like to discuss Lucent's intentions on pension/healthcare legislation and whether there are common areas we can support. Specifically, continuation of Lucent's Prescription Drug Plan after Medicare Prescription Drug Plan takes effect.
A4: Since the bill is not effective until January 1, 2006, Lucent has not decided how or if it will alter its medical plan in response to the government plan for providing prescription drug coverage under Medicare Part D. There are a number of regulatory milestones that have to be cleared before we would make our decision regarding our response to this legislation. At this point, detailed regulations necessary to implement the Act have not yet been announced, but we expect them to be issued later in fiscal 2004. We will communicate any changes to our health plans in our 2005 open enrollment materials.
Q5: Lucent is collecting "insurance premiums" from retirees, specifically for dental care and for dependents in certain selected groups. The payments are projected to increase substantially in future years. Retirees would like to understand how these receipts and the payments are accounted for in Lucent's financials.
A5: These premiums for dental benefits and medical coverage for certain dependents are actually the expected costs to Lucent of providing these benefits, not insurance premiums. These amounts offset Lucent's cost of providing benefits and therefore have a neutral effect on our financial statements.
Q6: Is there any governmental oversight, such as a state Insurance Board of this service?
A6: The dental and medical plans for certain dependents are covered by the Employee Retirement Income Security Act (ERISA), and therefore not subject to any state regulatory oversight.
Insured HMOs are subject to state filings and state mandates. The Centers for Medicare and Medicaid Services (CMS), which is a federal agency within the Department of Health and Human Services (HHS), has oversight responsibility for Medicare Advantage HMOs.
Q7: Does Lucent issue a formal document that obligated reimbursement to some schedule, in return for the payments received?
A7: Dental benefits and medical coverage for certain dependents are provided under separate plans called the “Lucent Technologies Inc. Medical Expense Plan for Eligible Dependents of Retired Employees,” and the “Lucent Technologies Inc. Dental Expense Plan for Eligible Dependents of Retired Employees,” effective Jan. 1, 2004. We will provide plan documents upon request.
Q8: What does 2005 look like?
A8: Due to the legislative and regulatory changes relative to retiree healthcare that are now being considered, we are not able to comment on 2005 plan changes at this time.
LRO’s Proposed Agenda Items on Management of Retirees' Pension and Healthcare Trusts
Q9: We would like to understand the disposition of VEBA trust funds transferred from AT&T, including the assets of TOLI policy. This work is only partially completed because of the unavailability of Form 5500 from the Department of Labor.
A9: We are up to date with our filings with the Department of Labor. Please keep in mind that the 5500s for calendar year 2003 will likely be filed close to the October 15, 2004 deadline.
Q10: Need to obtain Plans 501 and 502 (E.I.N. 22-3463675) and Plans 504, and 506 (E.I.N. 22-3408857) for the years 1996-1998. These plans were previously requested by a plan participant and not furnished. It is the LRO's understanding that the plan sponsor is obligated to supply publicly filed documents to plan participants on their request.
A10: We believe that you are requesting Forms 5500 for the above stated plans.
We will provide copies of these 5500s to you. As a reminder, in November 2003, we sent you the Forms 5500 associated with Plan 502 for the years 1996 through 2001.
However, if you are requesting something other than Forms 5500, please let us know.
Q11: Our summations of the assets of the plans and trusts available to the LRO do not net to "zero." We are prepared to provide these summations in advance of the meeting so that they can be analyzed and comments received.
A11: If you provide us with your summations, to the extent that we are able, we will compare them to our own statements.
There are two retiree healthcare benefit plans for which Form 5500s are filed: the Retiree Medical Expense Plan and the Retiree Dental Expense Plan. Each plan covers both non-represented and formerly represented retirees.
There are two VEBA trusts involved with these plans: the VEBA trust for non-represented retirees and one for formerly represented retirees. Each trust has separately tracked assets for medical benefits and for dental benefits. Therefore, each of the two Form 5500s covers both represented and formerly represented retirees and a portion of each of the two trusts.
As required by law, trust assets are audited as part of the plan audits. That is, each Form 5500 for benefit plans funded by means of a trust include audited financials of the assets of the trust, and the asset amounts stated – both beginning and end of year, as well as all the activity within the year – are included in the audits.
The Form 5500s are filed, and meet all the statutory requirements.
Loss on Investments
Q12: The reported loss on investments exceeded $300 million in each of the years 2001 and 2002. Because the fiduciaries of the trust funds chose not to provide audits to the plan participants, the plan participants are searching for additional details of the losses and their categories.
A12: The loss on investments was due in large part to the decline in the equity markets during 2001 and 2002 years.
The assets of the trust were invested in a diverse portfolio of both equity and fixed income instruments in accordance with the asset allocation targets approved by Lucent's Board of Directors.
As required by law, trust assets are audited as part of the plan audits. That is, each Form 5500 for benefit plans funded by means of a trust include audited financials of the assets of the trust, and the asset amounts stated – both beginning and end of year, as well as all the activity within the year – are included in the audits. The company does not, and is not required to, present details of asset gains and losses in its 5500 filings.
The plan participants are interested in the investment strategy and the investment managers of the trusts that are committed solely to their health benefits.
A13: Up until 2002, the assets of the trust were invested in a diverse portfolio of both equity and fixed income instruments in accordance with the asset allocation targets approved by Lucent's Board of Directors. In late 2002, the Board approved an asset allocation that would preserve the remaining assets in the management health VEBA trust, and invested these assets entirely in fixed income securities.
As we have previously stated, the institutions selected by Lucent Asset Management Corporation (LAMCO), as well as the investment strategy, applied are considered competitive information, and therefore are confidential.
In addition, we are required in our Form 5500 to list investment managers and other vendors paid more than $5,000 per year. The investment managers are clearly labeled in the filing. These most recent filings (2000 – 2002) can be found on-line by accessing the ERISA Web site: www.freeERISA.com.
TOLI (Trust Owned Life Insurance)
Q14: The TOLI was a majority of the plan assets in some years. On September 8, 2003, Lucent filed an 8-K report with the SEC that stated: "The VEBA trust that helps fund healthcare costs for management retirees will be exhausted this fiscal year."
According to the unaudited management retiree healthcare trust, the depletion of the trust was solely due to payments for the TOLI loan. The proceeds from the TOLI and the assets of the TOLI were credited to different trusts and plans than the management trust, which was paying for the loan.
A14: Again, as required by law, trust assets are audited as part of the plan audits. That is, each Form 5500 for benefit plans funded by means of a trust include audited financials of the assets of the trust, and the asset amounts stated – both beginning and end of year, as well as all the activity within the year – are included in the audits.
The use of TOLI polices in retiree health VEBA trusts is a common practice among companies that choose to prefund retiree health benefits for non-represented retirees because the policies are tax-efficient and allow for more of the trust income to be used to pay for retiree healthcare, which benefits both the company and its retirees. In point of fact, the use of the TOLI policies within the VEBA trust for Lucent's non-represented retirees extended our ability to fund non-represented retiree healthcare benefits.
Here's how it works. The assets of the VEBA trust for non-represented retirees were increased by asset gains and life insurance payments made by the insurance company to the trust. When the VEBA trust for non-represented retirees had insufficient funds on hand to pay benefits, it borrowed against the cash value of one of the TOLI policies to pay the benefits – both medical and dental – for non-represented retirees only. All assets of this non-represented VEBA were used to fund retiree healthcare benefits for non-represented retirees only under the retiree medical plan and the retiree dental plan.
The sharper-than-expected rise in healthcare costs over the last five years, coupled with the drop in equity markets that have decreased the excess pension assets available to fund healthcare, are the reasons why the VEBA trust for non-represented retirees was exhausted in 2003. Having served their purposes within the trust, the TOLI policies were surrendered and the loan was satisfied in 2003. The remaining value of the policies was retained in the VEBA trust and used to pay medical and dental benefits for non-represented retirees.
Q15: The plan participants are interested in a separate balance sheet and cash flow analysis of the TOLI, as it was transferred from AT&T to the present day, and the asset assignments to the various trusts and plans.
A15: The information you are seeking is complex and would be burdensome and expensive to provide. All activity involving TOLI policies was within the VEBA trust; therefore, TOLI details are not necessary to track the trust's asset values.
Independent Auditors Report to Plan
· Based on the LRO’s review of documents and audits, we consider Lucent’s response far from adequate.
Q17: From the independent auditors report, neither plan participants nor shareholders could gain an understanding of the impending depleting of the healthcare trust and the future financial obligations of the corporation. The announcement that "the company expects to contribute between $300 - $350 million in corporate cash in fiscal 2004 to pay these financial obligations," even with a substantial cutback in benefits, was not discernible from the auditors report.
A17: The report of the independent auditors was prepared in accordance with generally accepted accounting principles.
The Form 5500 is an annual return/report regarding the plan's investments, operations and condition. In short, the Form 5500 provides a snapshot of the activity of the plan during a specific calendar year. It does not and is not required to provide forward-looking statements about the future capital requirements of the company.
In accordance with generally accepted accounting principles, we stated in our 2002 10K filed with the SEC on 12/12/2002, that our current view of the management retiree healthcare funding requirement was approximately $350 million annually. We also stated that with respect to represented retirees, the Company does not expect to have to make cash payments before fiscal 2006 or 2007 due to assets currently held in a separate trust to fund these payments.
In addition, we said that the cost of providing postretirement healthcare benefits continued to rise and that we expected to take steps designed to reduce the overall cost of providing postretirement healthcare benefits and to reduce the share of these costs borne by the Company, consistent with legal requirements and our collective bargaining obligations.
Q18: Retirees would like to meet with the independent auditor of their plans and improve our understanding of their reporting practices. We note that the predecessor plans of AT&T were not certified by their auditors.
A18. The Plan financial statements are compiled in accordance with Generally Accepted Accounting Principles (GAAP) promulgated by FASB, and audited in accordance with Generally Accepted Auditing Standards (GAAS) as directed by the American Institute of Certified Public Accountants.
There are numerous accounting firms and employee benefit-consulting firms, as well as a number of publications that can provide a broader understanding of Form 5500 reporting requirements and the associated plan financial audits. In addition, the Department of Labor issues instructions on how to prepare Form 5500s.
Q19: Because of the lack of filings available at the DOL, retirees have been unable to trace the transfer of assets from AT&T to Lucent.
Richard Rawson, Lucent General Counsel, provided helpful insight into the TOLI's in his recent letter. As part of that, he said: "Lucent replicated the structure of the AT&T trusts…" From the information available to us, we would like to discuss some differences we observed.
Retirees would like an accounting statement of the terms and conditions of the transfer of the trusts, as they were with AT&T and as they were deployed at Lucent after their distribution.
A19: Our filings are up to date with the Department of Labor. Instructions on how to obtain Employee Benefit Plan Documents from the Department of Labor can be found at the following Web site: http://www.dol.gov/ebsa/publications/how_to_obtain_docs.html
The terms and conditions of the transfer of the VEBA trusts from AT&T to Lucent are listed in Article 5, Section 5 of the Employee Benefits Agreement between AT&T Corporation and Lucent Technologies, dated March 29, 1996, which was filed with the
Securities and Exchange Commission (SEC) on April 1, 1996.
Per Article 5, Section 5, AT&T transferred one of the TOLI VEBA policies to the Lucent non-represented VEBA, and other assets of the AT&T VEBA were transferred to the Lucent VEBA so that the total funded percentage of both the AT&T and Lucent VEBAs were the same immediately after the transfers.
We are currently compiling a statement, which we will provide to the LRO, that will cover the non-represented VEBA trust beginning with the assets transferred from AT&T, and showing year-by-year activity (including benefit payments, expenses, asset gains and losses) through 12/31/03. Although, the activity for calendar year 2003 will not be filed as part of our Form 5500 until October 2004, we will continue our statement through 9/30/03 when the trust assets were depleted.