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Health Care Reform: Getting Ready for the Next Phase

Health Care Reform: Getting Ready for the Next Phase

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Health Care Reform: Getting Ready for the Next Phase

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  1. Health Care Reform:Getting Ready for the Next Phase October 15, 2013 George Lane george.lane@mercer.com 202-331-5222 Mercer

  2. The Problem: Health Benefit Cost Growth Dips to 4.1% After Employer Actions, But Still Surpasses Wages and Inflation *ProjectedSource: Mercer’s National Survey of Employer-Sponsored Health Plans; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April) 1990-2012; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey (April to April) 1990-2012. 1

  3. Patient Protection and Affordable Care Act (PPACA)Goals Enacted March 23, 2010, health reform’s goals were: Provide access for 30+ million uninsured Cost control Quality Focusing on all three goals was a challenge Health reform is primarily health insurance reform It does not address major cost saving opportunities Provider payment Harmonization across payer programs Tort reform

  4. Health insurance exchange coverage • Individual coverage mandate6 • Financial assistance for exchange coverage of lower-income individuals • State Medicaid expansion (possibly only some states) • Dependent coverage to age 26 for any covered employee’s child2 • No annual dollar limits on essential health benefits2 (generally banning standalone HRAs) • No pre-existing condition limits2 • No waiting period over 90 days2 • Wellness limit increase allowed2 • Health insurance industry fees • Additional standards for non-grandfathered health plans, including limits on out-of-pocket maximums, provider nondiscrimination, and coverage of routine medical costs of clinical trial participants • Small market, non-grandfathered insured plans must cover essential health benefits with limited deductibles (initially $2,000/individual, $4,000/family), using a form of community rating • Insurers must apply guaranteed issue and renewability to non-grandfathered plans of all sizes • Auto enrollment some time after 2014 Health Care Reform Update – Employer Mandate Delayed Until 2015 2013 2018 2015 2014 • 40% excise tax on “high cost” or Cadillac coverage • Temporary reinsurance fees first due in late 2014/early 2015 • Possible additional reporting and disclosure • Employer shared responsibility • $2,500 per plan year health FSA contribution cap (plan years on or after January 1, 2013) • Comparative effectiveness group health plan fees first due • Annual dollar limits on essential health benefits cannot be lower than $2 million • Employers notify employees about exchanges by Oct. 1, 2013 • Medical device manufacturers’ fees start • Higher Medicare payroll tax on wages exceeding $200,000/individual; $250,000/couples • Change in Medicare retiree drug subsidy tax treatment takes effect • Health Insurance exchanges initial open enrollment period Footnotes Applies to all plans, including grandfathered plans, effective for plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans). Applies to all plans, including grandfathered plans, effective for plan years beginning on or after Jan. 1, 2014. Applies to non-grandfathered plans, effective for plan years beginning on or after Sept. 23, 2010, except that insured plan discrimination ban is delayed until regulations issued. A temporary exemption applies to certain categories of employers. Applies to non-grandfathered plans, effective for plan years on or after August 1, 2012. A temporary exemption applies to employees of employers with non-calendar-year plans.

  5. Key Areas of Impact2014, 2015 and 2018 In 2014 and 2015, the majority of the key provisions will be effective, such as: Launch of public exchanges (2014) Individual mandate (2014) Medicaid expansion, where applicable (2014) Shared responsibility penalties (2015) For employer-sponsored plans, the key areas for potential cost increases include: Current waivers joining the plan Cost shifting from public plans (Medicare and Medicaid) to private insurance Shared responsibility penalties One area for potential savings for employers is migration of current plan enrollees from the employer plan to Medicaid This is complicated by the Supreme Court decision as states can independently decide whether or not to expand Medicaid eligibility In 2018, an excise tax of 40% applies for employer plan costs that exceed certain dollar thresholds 4

  6. Two Public Programs 2014: Medicaid and Public Exchanges Medicaid: States will determine whether to expand Medicaid to anyone below 138% of federal poverty level (FPL) In these states, subsidies may be available for certain people to buy coverage Those ineligible for Medicaid or federal subsidies may have no option for coverage other than employer plan Public Exchanges: Insurance plan options available on exchanges that are operated by states or the Federal government (or a State/Federal partnership) Exchanges will conduct open enrollment from October 1, 2013 – February 28, 2014 (expect a communication blitz early to mid summer) If household income is between 138%-400% of the FPL, and individual does not have access to affordable employer coverage, the Federal government will provide subsidies to buy insurance on exchanges 5

  7. Who is Eligible for Subsidized Government Insurance?Assumes States Expand Medicaid to 138% FPL Household income < 138% FPL Eligible for Medicaid* Household income <400% FPL Could be eligible for subsidized exchange coverage 6 6

  8. Individual Mandate2014 • All individuals must have health coverage* • Pay a penalty • 2014: Greater of $95(single)/$285 cap (family) or 1% of household income • By 2016: Greater of $695(single)/$2,085 cap (family) or 2.5% of household income OR 7

  9. Employer Shared Responsibility2015 Employers not offering coverage to full-time employees* (and their dependents) Subject to penalty of up to $2,000 for each full-time employee if at least one full-time employee receives income-based assistanceto buy coverage on insurance exchange** Employers offeringcoverage to full-time employees* (and their dependents) Lesser of: (1) up to $3,000 for each full-time employee eligible for income-based assistance**, or (2) up to $2,000 for every full-time employee Pay or Play? Minimum Value Coverage Employer Shared Responsibility Affordability Full-time Employees (and dependents) * Full time is defined as someone averaging 30 or more hours per week ** No penalties for FT employees enrolled in Medicaid Note: Penalty not applied to first 30 employees 8

  10. Employer Shared ResponsibilityMinimum Plan Value Minimum Plan Value Illustration Claim $ <40 ¢ >60 ¢ 9

  11. Employer Shared Responsibility 2015: Affordable Contributions ** Health reform legislation specifies income threshold of 133% FPL but also requires states to apply an “income disregard” of 5% of FPL in meeting income test; effective income threshold for eligibility is 138% 10

  12. Current Lowest-Cost Medical Plan Would Likely be Considered ‘Unaffordable’ for at Least Some Employees in 2014 Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 11 11 September 19, 2014 September 19, 2014

  13. Likely to Take Action to Ensure Coverage is Affordable for all Eligible Employees Introduce salary-based contributions Raise employee cost-sharing (deductibles, etc.) to compensate for lower contributions Raise dependent contributions to compensate for lower employee-only contributions Add a less expensive plan with lower employee contributions than the current plan Lower employee contributions in a current medical plan Based on respondents that have employees for whom coverage would be considered unaffordable Make no (or minimal) changes and pay shared responsibility penalty as necessary Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 12 12 September 19, 2014 9/19/2014

  14. The Most Disruptive Requirement for the Most Employers: Extending Coverage to all Employees Working 30 or More Hours per Week One-third of all survey respondents currently do not offer coverage to all employees working 30+ hours per week Percent of employers that currently do not offer coverage in a qualified plan to all employees working an average of 30 or more hours per week Retail and hospitality Health care services Government Transportation/Communication/Utility Other services Manufacturing Financial services Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 13 9/19/2014

  15. New Concept of Full-time Employee2015 Employer’s own definition of full-time (and linked benefit eligibility) does not matter for employer shared responsibility 30 or more hours per week on average/130 hours per calendar month IRS set out optional approaches for variable hour and seasonal employees Allows a “lookback” measurement period of 3 to 12 months to determine average hours Requires a “stability” period of at least 6 months (and no shorter than the measurement period) when employees determined to work 30+ hours must be offered coverage Allows an administrative period up to 90 days Potentially means that employers should already be monitoring hours Employers meeting safe harbor won’t be subject to shared responsibility penalties Gives certainty at least through end of 2015 14

  16. Lookback and Stability Examples • Employee A • Worked an average of 35 hours per week • Employee A • Treated as a full-time employee Oct. 15 Oct. 15 Jan. 1 Jan. 1 Standard Measurement Period #1 Administration Period #1 Stability Period #1 • Employee B • Worked an average of 27 hours per week • Employee B • Not treated as a full-time employee Example 1: Ongoing Employees 15

  17. Likely Response to ACA’s Requirement That all Employees Working 30 or More Hours per Week be Eligible for Coverage Make all employees eligible for the full-time employee plan(s) Add a new lower-cost plan option for all employees Use segmentation strategy: Offer a lower-cost plan to newly eligible employees Pay shared responsibility penalty as necessary Terminate medical coverage for all employees after the insurance exchanges become available Based on employers that do not currently offer coverage to all employees working 30 or more hours per week Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 16 9/19/2014

  18. Over One in 10 of all Surveyed Employers Will Reduce Some Workers’ Hours to Limit the Number of Newly Eligible Employees Will not change workforce strategy to limit the number of newly eligible employees Will ask employees already eligible for coverage to work more hours Already provide coverage to employees working 30+ hours Will reduce hours to limit the number of eligible employees Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 17 September 19, 2014

  19. After Taking These Steps, About Half of Respondents Affected by the Rule Still Expect a Significant Increase in Eligible Employees in 2014 Number of eligible employees will increase Number of eligible employees will decrease Don’t know Number of eligible employees will stay about the same Based on respondents that currently do not cover all employees working 30+ hours Among those expecting an increase in number of eligible employees, average increase: All respondents: 11% Retail/Hospitality: 19% Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 18 September 19, 2014

  20. How the Individual Mandate and Expanded Eligibility Will Affect Enrollment – and Budgeting – Remains a Tough Question for Many Employers Have budgeted for an increase in enrollment in 2014 Will not budget for an increase in enrollment in 2014 Don’t know yet whether or not to budget for an increase Those budgeting for an increase assumed enrollment would rise by 10% on average (16% for retail & hospitality) Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 19 September 19, 2014

  21. Summary and Cost ImplicationsKey Drivers of Potential Costs Under Employer Mandate Provisions • Low Scenario • 0% of current waivers w/ affordable coverage elect CLIENT’s plan • 50% of current waivers w/ unaffordable coverage elect exchange • Best Estimate Scenario • 25% of current waivers w/ affordable coverage elect CLIENT’s plan • 50% of current waivers w/ unaffordable coverage elect exchange • High Scenario • 50% of current waivers w/ affordable coverage elect CLIENT’s plan • 50% of current waivers w/ unaffordable coverage elect exchange Total Net Cost After Reform $5.57M $5.72M $5.88M $ Change % Change + $247K + 4.5% + $403K + 7.4% + $90K + 1.6% Note: Compares CLIENT’s 2014 net cost after HCR against status quo plans with 8% medical trend applied. - Does not include ACA premium tax, estimated to be $160K for CLIENT - Totals do not add up to sum of components due to rounding - Assumes 67 US opt-outs based on census provided 20

  22. Health Care Reform FeesSummary 21 21 September 19, 2014

  23. Excise Tax2018 Based on current enrollment 22

  24. Excise Tax CalculationScenario 1 – Bundled Plans (Medical/Dental/Vision/FSA) CLIENT - Estimated Excise Tax (in $000's) $1,400 $1,264 $1,200 $1,110 $966 $1,000 $835 $800 $714 $603 $600 $497 $400 $400 $312 $234 $182 $200 $137 $108 $0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Based on current plan costs and FSA elections, CLIENT’s plans are expected to trigger an Excise Tax in the first year: 2018 Since the Excise Tax thresholds are indexed by CPI (~3%) and historical trends are higher, the Excise Tax is expected to grow exponentially in future years 23

  25. Excise Tax CalculationScenario 2 – Unbundled Plans (Medical & FSA Only) Client - Estimated Excise Tax (in $000's) $1,200 $989 $1,000 $854 $800 $725 $608 $600 $500 $400 $400 $306 $222 $172 $200 $126 $85 $47 $24 $0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 If CLIENT decides to “un-bundle” the dental and vision benefits and leave them on a fully-insured basis, then the Excise tax is estimated to be lower Despite this change, the tax will continue to grow in a similar exponential manner in future years 24

  26. Excise Tax CalculationConsiderations The estimates provided were performed under the current interpretation of the law. Final regulations have not been written. Potential changes to help mitigate Excise Tax implications include: “Unbundling” of benefits Eliminating FSA (affecting approximately 13% of enrolled population) Medical plan design changes Move towards CDHPs 25

  27. Other Strategic Considerations

  28. OPTION: Self-insurance vs. Fully-insuredPotential Impact of Health Trend Reduction (2014 – 2017) Remaining fully-insured may create a significant barrier to achieving lower trend. Cumulative four-year difference: $1.9M $380K annual average savings Cumulative four-year difference: $3.0M Annual Cost (in millions) $600K annual average savings TREND • Rx Carve-Out • Funding • Wellness • Focus on High Cost Population • Plan Design with Incentives • No ACA Premium Tax 27 September 19, 2014

  29. OPTION: Private Health Care Exchanges Percent of employers that would consider offering a private exchange Advantages for Employers and Employees Employer advantages • Cost control. • Choice for employees. • Streamlined management and administration. Employee advantages • Cost-efficient, convenient buying. • Comprehensive coverage. • Personalized portfolios. 28

  30. How Does Defined Contribution Relate To Exchanges? Defined contribution = Funding arrangement where employers manage their year-over-year increase in health and welfare benefits spend to a pre-defined amount • With private exchanges, employers can successfully implement defined contribution. • Offer employees an array of choices. • Encourage employees to “buy down” to lower-cost medical coverage and use remaining dollars for other purchases. • Best achieved when employees can purchase other attractive products (life, accident, disability, critical illness, auto, etc.). • Better meets employees’ personal needs. • Helps manage their benefit spend. 29

  31. How Do Private Exchanges Work? Funding: DB or DC Employee support Administration Employer defined contribution Employee contribution or combination Online Call center Print & e-mail Eligibility determination Data-driven events Election management Contribution calculation Election data Carriers Payroll Deductions Reporting & premium data HR profes-sionals Integrated benefit processes 30

  32. How Cost Would Affect the Decision to Switch to a Private Exchange Model Might be willing to pay more than currently for easier administration, more attractive benefit Doesn’t matter what the cost savings, would not consider switching Might be willing to switch if change was cost neutral Would not need immediate savings, but would need greater control over future cost Would need immediate savings over current health insurance Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013 31 31 September 19, 2014 September 19, 2014

  33. OPTION: Limit Eligibility/Exclude Spouses What does it mean to “offer coverage”? Must offer to dependents under age 26 but not spouses Do not have to subsidize or make dependent coverage “affordable” Medical claim cost for spouse vs. child Options: spousal surcharge; exclude spouse with access to other coverage; totally exclude spouses If spouse is excluded from employer coverage, might qualify for subsidized coverage in the public exchange (whereas if employer 60% value affordable coverage is offered to spouse, spouse not considered subsidy-eligible) • Average annual claims paid by medical plan (after deductible, coinsurance, etc.) • Employee/Self $4,088.72 • Spouse/Partner $5,540.64 • Child/Other Dependent $1,999.34 32 September 19, 2014

  34. Survey Data on Spouse Coverage Larger Employers More Likely to Require a Surcharge Than to Exclude Spouses With Other Coverage Available Source: 2012 National Survey of Employer Sponsored Health Plans 33