3 rd Annual Health Care Symposium

3rd Annual Health Care Symposium Sponsored by: This presentation is available for download: www.alphabenefits.com/seminar

Year In Review Large Increases Additional cost shifting to employees Employers and Employees can not handle much more

Greg ShieldsVice President

Today’s health insurance market is in anAffordability Crisis!

The #1 concern for most business owners today is the high cost of medical insurance.The same could be said for employees!Next to payroll, health insurance is the single largest expense for most companies.

The Healthcare Market Double-digit cost increases are crippling employers Premiums have been experiencing double-digit increases over the past 3-5 years Premiums are predicted to continue these double-digit increases in the coming years No end in sight Employees are vulnerable to huge cost increases that they already have trouble affording

Reasons Technology Prescription Drugs Aging Population Malpractice Uninsured Public “Rich” Health Insurance Plans

Current Rich Insurance Plan Designs The consumer has been insulated from the true cost of their healthcare because of low copays and/or no (or low) deductibles.

This Is Starting to Change To this point, employers have had to react… Shifting more of the cost over to the employee Making changes to the plan designs Higher deductibles Higher office visit copays Prescription copays

Is This Enough??? Unfortunately – NO!

Consumer Driven Health Plans(CDHPs) Today’s movement to consumerism is the most significant change in health benefits since the mid 1970’s.

What are CDHP’s? Combines a high deductible health insurance plan with a funding program to help employees pay for their medical expenses Addresses affordability and over-insuring by providing significant health insurance premium savings Allows consumers to become more actively involved in the entire healthcare process

KEY The consumer must have a greater financialresponsibility for healthcare purchases to serve as an incentive to make prudent decisions!

Consumer Out-of-Pocket Expenditures Consumer Out-of-Pocket Expenditures % Aetna 2003 34% in 1970 to 14% in 2000 Less OOP expenses leads to less consumerism!

Skin in the game Consumers spend their own money more carefully than they do their health carriers’ money.

New OpportunityConsumer-Driven Health Plan Market Size The market potential of CDHPs is sizable. The current $2.5B market is projected to grow 142% annually to reach $88B by 2007. CDHP Premiums (US$ billions) $500 $400 $300 $200 $100 $0 Consumer-directed health planswill account for $88 billion in 2007,a sixfold increase over 2005. 2000 2002 2004 2006 2008 2010

How do we move employees to the new high deductible plan designs? Align consumer expectations with the true purpose of health insurance To protect people from financial hardship due to illness and injury Align consumer habits with a more realistic understanding of the costs of healthcare Reverse the trend to over-insure

Insured Claims Experience 55% of insureds have claims < $1,000 70% of insureds have claims < $2,000 80%of insureds have claims < $3,000 Milliman USA (2002)

How to Get Started Employers will need to be more creative Employees role will have to change

Examples of CDHPs HRA HSA

HRAs Health Reimbursement Arrangement Legislation passed June 26, 2002 Combination of a high deductible health insurance plan (at usually a lower cost) with an employer funded spending account.

HRA Plan Designs KEEP IT SIMPLE Employee pays first Employer pays first Split deductible

Employee Pays First Employer saves the most money AND employee responsibility increases $2,000 Deductible

Employer Pays First First-dollar benefits, high deductible transition, nice way to introduce the concept in a positive manner $2,000 Deductible

Split Deductible 50/50 sharing of expenses $2,000 Deductible

What is an HRA? Side funding arrangement to coincide with a high deductible health insurance plan Funds are used to help pay for services not covered by the deductible Health insurance plan continues to maintain copays for office visits and Rx Funds are provided with employer dollars only Employer retains ownership if employee leaves the company Employer has complete control of the funds

Employer is not required to set up separate accounts for each employee Employer can fully fund the arrangement in the first year or spread the contributions throughout the year (control of cash flow) Employer determines where the dollars can be spent Employees can rollover any unspent dollars to the following year Employer can set caps on accumulation amount Available to any size company (with some limitations)

HRA Administration Two moving parts! Insurance company administers Third Party Administrator of your choosing Debit card Checkbook Self administer

HSA Health Savings Account “The IRA of Health Insurance” Legislation passed December 8, 2003 The White House estimates 3 to 5 million accounts being created in 2004 alone and up to 40 million in the next decade

What is an HSA? Side funding arrangement to coincide with a high deductible health insurance plan Contributions can be made by the employees and/or employer tax deductible A tax favored savings account designed to pay for qualified healthcare expenses Contributions are pre-tax (through a cafeteria plan) Funds grow tax deferred Withdrawals are tax free if used for qualified medical expenses

Funds can be invested in a number of investment options (low risk to high risk) Money market funds, mutual funds, stocks, bonds Maximum contributions for 2004 are $2,600 (singles) and $5,150 (families) Contributions can not exceed the plan deductible Additional contributions of up to $500/year are allowed for people 55 and older in 2004 Limits are indexed for inflation

Funds belong to the employee (regardless of who contributes these funds) Funds are portable Unused funds rollover from year to year with no limits or caps - there is no “use it or lose it” provision Health insurance plan does not have copays for office visits or Rx Comparability rules apply (if employer funded) Equal dollar or equal percentage Available to any size company

Qualified Withdrawals Medical expenses as defined under Section 213d Medically necessary services Deductibles and co-insurance Vision Dental Qualified long-term care insurance and expenses COBRA premiums Medicare health insurance premiums (parts A&B) Not medicare supplement premiums

Non-Qualified Withdrawals Under age 65 Ordinary income tax plus a 10% penalty 65 or older Subject to income tax, but likely at a lower rate No penalty

Health Insurance Plan High deductible plan Minimum individual deductible of at least $1,000 and maximum out-of-pocket expenses not exceeding $5,000 Minimum family deductibles of at least $2,000 and a maximum out-of-pocket expenses not exceeding $10,000 No office visit copays or Rx copays Discount Rx card

HSA/HRA Comparison

Ultimate Goal Provide employees with dependable coverage at lower premium costs Give incentive to employees to become better consumers when dealing with healthcare costs Improve utilization of health plan Provide employees with a savings vehicle to put away money for healthcare tax-free (HSAs)

Keys to Making CDHPs Work High deductible health plans must save employers money Instill “consumerism” Should have a positive impact on utilization Employees must be well informed

Summary Why have HRA’s not taken off? Companies have not had to react (yet) Pricing not competitive enough Awareness level Why is the excitement level so high for HSA’s? White House support Tax advantages to employees True consumer type health plan design

Summary (cont.) Challenges… Insurance companies (products & pricing) Education of employees Claims process

Additional Concepts Fill exposure to high deductible plans Supplemental medical expense insurance plans Medical reimbursement plans

Supplemental Medical Expense Plans“Gap Plans” Provides coverage for costs related to high deductibles, coinsurance, and copays Stand alone policies sold on a group platform Policies can be employer paid, employee paid, or some combination Benefits help pay for expenses as a result of: Inpatient hospital expenses Outpatient covered hospital expenses Emergency room treatment Ambulance transportation All benefits are paid directly to the insured Pre-existing condition clause may apply

Executive Medical Reimbursement Plans Excess medical policy that reimburses costly exclusions and limitations found in health insurance plans on a tax favored basis Deductibles Coinsurance payments Out-of-pocket expenses Rx drugs Psychiatric expenses Infertility procedures Dental and vision expenses

Executive Medical Reimbursement Plans Can be done on a discriminatory basis Officers/Managers – key employees Saves dollars for the company AND provide benefits for key employees Premiums paid are deductible by the business Benefits received by the insured are exempt from taxable income

Todd HonsVice President

Capital BlueCross PPO 123 – Available to companies with over 100 employees Health Savings Account – currently being developed Wellness Programs – customized to each employer Keystone Health Plan Central – wholly owned subsidiary

HealthAmerica and HealthAssurance New PPO & POS plans for small and large companies Enhanced HMO product to include out of area students New HMO plans with deductibles and coinsurance HRA plans available to groups 2 or more Health Savings Account (HSA) available in January 2005 Wellness programs

HealthAmerica and HealthAssurance Lehigh Valley Lehigh County 3 hospitals 178 primary care doctors 549 specialists Northampton County 2 hospitals 73 primary care doctors 259 specialists

3 rd Annual Health Care Symposium