The Future of Consumer Centric Health Benefits: Opportunities in a Changing Health Benefits World

1. The Future of Consumer Centric Health Benefits: Opportunities in a Changing Health Benefits World Stephen T Parente, Ph.D., M.P.H. University of Minnesota Minnesota Insurance Industry Professor of Health Finance Department of Finance, Professor Carlson School of Management Medical Industry Leadership Institute, Director American Enterprise Institute Adjunct Scholar April 27, 2010 Consumer Health Technologies, Las Vegas, NV

2. Agenda • Health Economist Health Reform Priors • A 21st Century Version of Health Reform • Meaningful Market Based Reform • Train Wreck Path • Impact on CDHP insurance market • Short list for ‘Fix the Bill’

3. Priors as Academic Health Economist • Health economists find that technology is both good for society and huge cost driver. • Nothing in the Bills passed will measurably bend the cost curve down. • Health insurance actuaries find the best way to keep costs within general inflation is through catastrophic/high-deductible insurance. • Advocating catastrophic insurance for all might be the surest way to a two year House of Representatives visit.

4. If Asked:A 21st Century Version of Health Reform • 1) Get actuarially certified risk profiles for all insured based on existing data. • Let people get them like a they would a credit report. • Equifax and Experia are standing by and waiting for the go-switch. • 2) Government and private federal exchanges portals. • Take risk profiles from (1) and provide a ‘lock in’ by Internet click. • Target the younger population not buying coverage today through the web. Have brokers handle the rest. Gives brokers time to get a Plan B. • 3) Where the market fails from (2), auction off the high risk • Given (1) and (2), who are the vulnerable and why • Target resources to fill the insurance gaps using federal and state resources. • 4) Let the Employer-sponsored market evolve; it’s not broken.

5. Meaningful Market Based ReformFeature Set • This proposal was discussed by moderate GOP/Dems up to Senate Vote on 12/24/2009 – Joint Committee on Taxation Score was $480 billion over 10 years and paid for with Medicare cuts or any tax other than a ‘Buick’ tax. • Guaranteed issue insurance coverage/no pre-existing conditions etc. • Insurance exchanges • A tax on those who choose health insurance benefits greater than $6.5K for single coverage and $13K for family coverage equal to the employee’s marginal income tax rate times the amount over those thresholds • Full subsidy up to 200% of the federal poverty line and subsidy phased down to zero at 300% of FPL (~$66,000 for a family of four). • All insurance plans must offer preventive care benefits. • All plans must use modified community rating: premiums can vary only by geographic region (to be defined), family structure, actuarial value of benefits, and age. • Start date is January 1, 2013.

6. Meaningful Market Based ReformFeature Set An age-adjusted health insurance voucher with the following 2010 amounts:

7. Meaningful Market-Based Health Reform Proposal, as of 12/21/2009 • Uninsurance is reduced by 35% (46% if base is US citizens only) to newly cover approximately 17.6 million people • Subsidy - Tax Recovery = Net cost: • $49 billion subsidy for voucher, annual 2013 • $50.6 billion tax capture , annual 2013 • Total cost over ten years: $435 billion • Total revenue over ten years: $450 billion • Net cost (surplus): -$15 billion over ten years • Private market crowd out: Not an issue.

8. Instead: Impact of Health Reform Reconciliation Bill, as of 3/15/2010 • Uninsurance is reduced by 59.8% (81% if base is US citizens only) to newly cover approximately 30.7 million people • CBO Estimates – 3/18/2010 • CBO 10 year cost: $940 billion • CBO deficit savings $130 billion • HSI Estimates – 3/19/2010 • 10 year cost: $1.36 trillion • Summary: Additional costs will eliminate deficit savings and add to deficit by $287 billion

9. CBO: 2010-2019 Spend

10. CBO: 2010-2019 Tax/Save

11. CBO: Projected Savings on Vote Eve, March 21, 2010 By 2019, $122 billion deficit savings

12. CBO: Projected Additional Cost/Savings of Pending Changes By 2019, $676 billion additional deficit burden

13. Current vs. Pending Budget Effect – CBO’s Own Numbers Net impact: $554 billion additional deficit 2010-2019 $1.4 trillion additional deficit 2020-2029

14. Train Wrecks Do Happen In DC This one will take 2-4 years for clean up

15. Short List for Fix the Bill Remove Replace High risk pools Buick Tax 5:1 Community Rating Capped subsidy • Individual mandate • Cadillac Tax • 3:1 Community Rating • Uncapped subsidy Combined, this would provide insurance expansion we can believe in and afford

16. STP Editorial Moment: Left of Center Preferences and CDHPs • Likely discussion from Public Option Advocates (POA) as paraphrased from Independence Day (1996). • President (CDHP) to alien (POA): Can there be a peace between our peoples? • Alien (POA): No peacccceeeee • President (CDHP): What is it that you want from our people? • Alien (POA): Diiiieeeee

17. Likely Effect of Reform on CDHC • Budget pressure will force scale back in federal subsidies in 3 to 10 years. • Subsidy scale back will accelerate move from defined benefit to defined contribution. • Consumers will want to start owning their accounts in full: • Financial transactions & benefits • Medical/clinical/wellness information

18. Health Reform Impact on Employers and their Benefits Vendors • Build/buy decision on lifetime maximum benefits. • Build – underwrite with employer cash • Buy – increase re-insurance premium • New data requirements (by 2013-4) • Wages for IRS for HHS link for excise tax • Health benefit contribution W2 reporting • Benefit features: • Premium • Cost-sharing/out of pocket

19. CDHC & Medicaid Version 2.0 • As state budget explore, re-visitation of CDHC models for Medicaid expansion. • Why? • 14-17 million new beneficiaries by 2015 via health reform. • Benefit card technology will be mature enough to be the infrastructure for the expansion. • Can’t afford Medicare pricing for a defined benefit Medicaid program. • Voila: Version 2.0 HSA Opportunity accounts

20. Health Reform Goal: ExpansionUninsured Impact 2010-2019 As of 4/22/2010, CMS Actuary forecasts uninsured in 2019 to be 22 million.

21. Individual/small group premiums will increase at 8% per year, minimum

22. Employer-sponsored premiums will increase dramatically as well

23. If employer trends are 8% growth: CDHC share grows 9% to 16%

24. If HSA growth at 4%: CDHC share grows 9% to 19%

25. Details worth watching in Health Reform • Minimum actuarial value/loss ratio – Federal or state determination? • What gets factored into the loss ratio as medical expenses. • Broker fees squeezed to meet loss ratio regs • Interstate insurance sales coupled with favorable state actuarial fair value. • High risk pools as trojan horse for federal regulation of insurance market.

26. In Closing • Many CDHC opportunities/threats • Lots of non-CDHC sentiment remains • Want to make sure HSAs stay in the market for loss/ratio exchange market. • Want to slow HRA cost increases to closer to HSA, rather than PPO. • Consumers/employers/providers all want the universal dash board of benefits – ironically, the bill may have helped.