Ronald Bachman, FSA, MAAA President & CEO Healthcare Visions, Inc.

1. A Workbook for Developing a Vision and Roadmap to 2nd+ Generation Healthcare Consumerism Ronald Bachman, FSA, MAAA President & CEO Healthcare Visions, Inc. Senior Fellow, Center for Health Transformation RonBachman@gingrichgroup.com 404-697-7376

2. Table of Contents • Page # Topic . • 2 Agenda • 3 Scope of Work • 4 Background Info • 5 Task #1 – Setting Principles for Change • 8 Task #2 – Vision Statement Development • 11 Task #3 – Identification of Acceptable Stategies • 14 Change Formula • 18 Actuarial Issues • 20 Consumerism • 40 Task #4 – Personal Care Accounts • 65 Task #5 – Wellness, Prevention, & Early Intervention • 78 Task #6 – Disease Management • 93 Task #7 – Decision Support Tools • 102 Task #8 – Incentives & Rewards • 111 Task #9 – Viewing Consumerism by Generations • 145 Task #10 – Create Consumerism Plans • 154 Task #11 – Setting Time Frame for Implementation • 158 Integrated Health Management • 161 Potential Savings from Healthcare Consumerism • 164 Actual Industry Experience Results • 170 Task #12 (summary) – Potential Savings • 171 Consumer-driven Healthcare Surveys of Growth

3. Agenda • Day#Goal • 1 Morning Agenda, Scope of Work, Background, (T1-3), Change Formula, Actuarial Issues, Consumerism, Building Blocks (T4), Building Blocks (T5) • 1 Afternoon Building Blocks T(6-8), Multi-generational Issues (T9), • Create MSFT Plans (T10), Time Frame for Implementation (T11) • 2 Review Decisions from Tasks 1-11, Financials Task 12, Final Input to Roadmap • Tasks To Be Completed During 1.5 Day “Extreme” Consumerism • 1. Principles 7. Decision Support Tools • 2. Consumerism Vision Statement 8. Incentives & Rewards • 3. Strategies 9. Viewing by Generations • 4. Personal Care Accounts 10. Create Consumerism Plans • 5. Wellness 11. Time Frames • 6. Disease Management 12. Financial Analysis

4. Scope of Work for Developing the Roadmap and Beyond Diagnostic and Readiness Assessment Perform Financial & Actuarial Analysis (set metrics) Design Benefits and Contrib. Strategy (The Road Map) Evaluate, Select, Implement Vendors Develop and Implement Education, Comm., Training, etc. Monitor and Evaluate • Evaluate current • plans • Interview • stakeholders • Identify Basic • Principles for Change • Create Consumer • Vision Stmt • Select Strategies • Develop Obj. & • scope, set timeframe • Match HR/business plan • Communication Strategy • Web-based Training, education • Print, video, other media uses • Internal vs. External Services • Periodic reevaluation of baseline metrics • Consumer scorecards • Survey, measure success, acceptance • Vendor/supplier audits • Reassess & modify as appropriate • Vendors • Technology • Services • Performance • Accountability • Reliability • Develop baseline costs • Co.& Ee contrib. level • Model options • Evaluate cost impact and revise • Develop measures of success • Est. Rel. Value • of Components • HDHP & Accts • Wellness & DM • Transition • strategy • Optional • Coverages • Carve-out Programs • Support services • Health vs. Healthcare • Debit/Credit Cards • Incentive Programs

5. Background & Issues • Current Benefits, • Design Issues, • Service Issues, • General Concerns, • Anti-selection • Reasons for Change, • Interests in Consumerism, • Driving Forces for Change, • Perceptions of Employee Satisfaction, Dissatisfaction • Other Problems and Positives with Current Plans

6. Task #1 – Setting Principles for Change • Important…Not Important • 1. Have the Right Vision & Vision Stmt 1 2 3 4 5 • 2. Have a 3-5 Year Roadmap/Strategic Plan 1 2 3 4 5 • 3. Consider Other Related Corporate Initiatives 1 2 3 4 5 • 4. Create plan as part of Employer of Choice 1 2 3 4 5 • 5. Consider other HR metrics impacted by Healthcare 1 2 3 4 5 • 6. Provide Information on Rx Costs & Alternatives 1 2 3 4 5 • 7. Provide Information on Dr. & Medical Service Costs 1 2 3 4 5 • 8. Provide Information on Hospital Costs 1 2 3 4 5 • 9. Provide Information on the Quality of Dr. Care 1 2 3 4 5 • 10. Provide Information on the Quality of Hospital Care 1 2 3 4 5 • 11. Focus on Discretionary Costs (Rx and OV) 1 2 3 4 5 • 12. Focus on High Cost Claims & Claimants 1 2 3 4 5 • 13. Focus on Wellness and Preventive Care 1 2 3 4 5 • 14. Focus on an Individual Behavior Changes 1 2 3 4 5 • 15. Focus on Group Behavior Changes 1 2 3 4 5

7. Task # 1 – Setting Principles for Change • Important…Not Important • 16. Use Incentives and Compliance Rewards 1 2 3 4 5 • 17. Increase Costsharing to Change Behaviors 1 2 3 4 5 • 18. Increase Employee Contributions to Offset Costs 1 2 3 4 5 • 19. Focus on Overall Plan Cost Reduction 1 2 3 4 5 • 20. Set the Right Measurements for Monitoring Progress 1 2 3 4 5 • 21. Build Broad Employee Agreement for Change 1 2 3 4 5 • 22. Minimize Change from Current Plans 1 2 3 4 5 • 23. Make Choices and Plan Options available 1 2 3 4 5 • 24. Improve Access to Care 1 2 3 4 5 • 25. Maintain Existing Network of Providers 1 2 3 4 5 • 26. Provide $ for post-65 retirement healthcare 1 2 3 4 5 • 27. Provide $ for pre-65 retirement healthcare 1 2 3 4 5 • 28. Provide $ for non-plan medical 1 2 3 4 5 • 29. Provide $ for terminated ee’s healthcare 1 2 3 4 5 • 30. Provide $ for non-healthcare expenses 1 2 3 4 5 • 31. Alternative to cutting benefits or initiating contributions 1 2 3 4 5

8. Task #2 – Sample Vision StatementPositioning to Balance Cost, Quality, and Access Sample Vision Statement: Create health and healthcare program options valued by employees that adapt effectively to environmental trends that increase the quality of services,improve access to care, andlower costs. Quality Uncertain, Clinically Oriented Consumer Valued Quality Demand Driven Controls Supply Driven Controls Access Consumer Involvement & Transparency Third Party Reimbursement Cost

9. Task #2 – Create a Consumerism Vision Statement • Sample Vision Statements: • Providing high performing highly educated employees and their families with the security of comprehensive health and healthcare coverage that meets their diverse needs and rewards their personal involvement and responsibility as wise users of services to optimize their individual health status and functionality. • 2. Affect employee behavior change towards healthier lifestyles and greater consumerism through the use of rewards and incentives. • 3. Make employees better consumers of healthcare services by providing them with the necessary health education, decision support tools and useful information including provider cost and quality data. • 4. Encourage greater employee awareness and involvement in healthcare and financial decision making, as a building block towards a defined contribution strategy for healthcare in the future.

10. Task #2 - Key Words / Phrases for Consumerism Vision Statement or Addition to Guiding Principles • __________________________________ • __________________________________ • __________________________________ • __________________________________ • __________________________________

11. Task #3 - Identification of Acceptable Strategies • High Priority...Low Priority • 1.Create Transparency – support “employee’s right to • know,” minimize distortions of third-party reimbursement • system, create transparency in costs, provide education/ • training on healthcare costs, use decision support programs. 1 2 3 4 5 • 2.Create Personal Involvement – establish greater • financial involvement through HDHPs, HRAs or HSAs, • reward good behavior, offer valued options, provide long • term incentives, provide immediate feedback. 1 2 3 4 5 • 3. Be Bold and Creative - Shift from supply-side controls • to demand-side control designs. Be an early adopter/fast • follower, consider out-of-the box ideas.1 2 3 4 5 • 4. Focus on High Cost “Pareto” Population - Provide • financial protection to families in need due to high • unexpected medical costs and/or chronic conditions 1 2 3 4 5

12. Task #3 - Identification of Acceptable StrategiesContinued • Important…Not Important • 5. Focus on Saving Lives and Improving Health – • Focus on improving the health of the entire population • regardless of plan design selected. Implement prevention • & wellness for long term savings and DM for • immediate impact. 1 2 3 4 5 • 6. Focus on Preventive Care – Create incentive • programs that change behaviors towards acceptance and • compliance with wellness and early intervention, including • pre-natal, non-smoking, diet, exercise, and safety 1 2 3 4 5 • 7. Minimize Impact of Cost Shifting – Use consumerism • as an alternative to increased cost shifting or higher • contributions. 1 2 3 4 5 • 8. Implement Optional Consumerism – Provide new • programs and plan options on a voluntary basis. 1 2 3 4 5

13. Task #3 - Identification of Acceptable StrategiesContinued • High Priority…Low Priority • 9. Implement Change on a Multi-Year Program – • Establish a consumer-centric program with a pre- • determined multi-year introduction of options and • use of accumulated HRAs and/or options. 1 2 3 4 5 • 10. Focus on Information Sharing Only– Provide ees • with decision support systems and information sources w/o • accounts or incentives to reward behavioural change. 1 2 3 4 5 • 11. Use Packaged Programs – use full integration of plan • design, information, disease management, and decision • support systems from single vendor. 1 2 3 4 5 • 12. Use Existing Vendors – develop consumerist programs • through current vendor relationships only. 1 2 3 4 5 • 13. Use “Best of Class” Programs – use selected vendors that • May overlay core benefit designs as long as integration is • Non-disruptive and transparent to members 1 2 3 4 5

14. A Reason To Consider Change The Definition of Insanity: “Endlessly repeating the same process, hoping for a different result.” -  Albert Einstein

15. Employee Perceptions • Lead to a sense of entitlement… • Employees underestimate total premium cost • Employees overestimate their share of cost 63%Underestimate 16%Close 21% Overestimate 20%Underestimate 11% Close 69% Overestimate Source: Watson Wyatt

16. Requirements &Stages of Change NO CHANGE Without Desire – “Back Burner” Without Vision – False Starts Without Process – Frustration • - - - - - - - Alignment - - - - - - - C H A N G E CHANGE No C H A N G E Threshold Gather Info Pros & Cons Awareness + = +

17. The Formula for Making Change Happen Set by Mgmt’s Direction Task at Hand Later - Next Steps Results Desire for Change Vision / Roadmap Process for Change POSITIVE CHANGE + + = Desire for Change Vision / Roadmap Process for Change Put on Back Burner + + = Desire for Change Vision / Roadmap Process for Change Expensive False Starts + + = Desire for Change Vision / Roadmap Process for Change Frustration + + =

18. Preliminary Actuarial Work & Issues(NOT performed by CHT) • 1. Data Collection and Population Profiling • 2. Distribution of claims (low-medium-high-catastrophic claims) • 3. Types and Analysis of Chronic & Persistent Conditions • 4. Review of Industry Data on Consumerism • 5. Use of Actuarial Pricing Model • 6. Behavioral Modification Recognition • 7. Cost Impact of Strategies and Plan Designs Selected

19. Purpose of Actuarial Work • Perform the actuarial and financial analysis to determine the impact of options available under a Consumerism Plan. • Determine Potential: • Plan designs • Savings Elements / HRA, HSA, & Account Credits • Combinations and interactions of “Building Blocks” • Costsharing structure • Contribution strategies • Participation

20. Consumerism • Supply Controls vs. Demand Controls • “Them” or “You” Reform is Not Enough, Transformation is Required

21. Supply Controls or Demand Controls • Plan Sponsors and Members have two basic choices to control costs: • 1. Managed care & HMOs - The “supply of care” is limited by a third party who controls the access to medical services (e.g. utilization reviews, medical necessity, gatekeepers, formularies, scheduling, types of services allowed), or • 2. Healthcare Consumerism - The member controls their “demand for care” because of a direct and significant financial involvement in the cost of care, rewards for compliance, and the information to make wise health and healthcare value driven decisions.

22. Supply Controls Are Failing High Healthcare Costs Climbing Higher Patients have lost control of their own healthcare, and are not truly engaged in the process of managing their health Patients are frustrated with managed care “rules” and the impact on time and productivity Patients don’t understand healthcarecosts – costs are not transparent • “Every System is perfectly designed for the results achieved.”

23. Mega Trends Leading to Demand Control • Personal Responsibility • Self-Help, Self-Care • Individual Ownership • Portability • Transparency (the Right to Know) • Consumerism (Empowerment)

24. Healthcare Consumerism is about transforming an employer’s health benefit plan into one that puts economic purchasing power—and decision-making—in the hands of participants. It’s about supplying the information and decision support tools they need, along with financial incentives, rewards, and other benefits that encourage personal involvement in altering health and healthcare purchasing behaviors. Healthcare Consumerism - Defined “The job of a leader is to create the possible” – Condi Rice 23

25. Consumerism – Saving Lives & Saving Money • The Moral Imperative for Consumerism: Increasing the Quality of Care, Better Health, and Improving LivesThe Economic Imperative for Consumerism: Saving Money • (Lower Product Prices and More Jobs)

26. Objectives Of Consumerism • Change participant health and healthcare purchasing behaviors • Narrow market cost and quality variations using patient decisions • Increase transparency of healthcare costs to plan participants • Give plan participants more control over and “shared responsibility” for managing own healthcare and related costs • Supply participants with the tools to act as better informed healthcare consumers • Reduce costs for “discretionary care” through informed purchasing & incentives • Reduce long term costs with added incentives for “good health” • Reduce costs of Chronic Conditions through improved compliance with treatments and disease management programs • Reduce Acute Care costs with incentive hospital tiering based upon cost and quality

27. Basic Requirements for Successful Healthcare Consumerism • Must work for the sickest members, as well as the healthy • Must work for those not wanting to get involved in decision-making, as well as those that do

28. The Core of Consumerism • The Unifying Theme • for a • Health and Healthcare Strategy is: • Behavioral Change “Implement only if it supports behavioral change consistent with the strategy”

29. Healthcare ConsumerismRoles & Responsibilities / Implications • Employers • Facilitators of change • Provide increased information and decision making tools • Improved employee morale with choice and access • Link to productivity, absenteeism, disability, turnover, etc. • Consumerism can improve costs/budgeting (current & future) • Payers (Self-Insured Employers) • Focus on high cost case mgmt/disease mgmt/population mgmt • Will become responsible for more communications, training, education direct to consumers • Value added services may change, including transactions and asset management • Diminished role of managed care for routine care

30. Healthcare ConsumerismRoles & Responsibilities / Implications • Employees • Increased responsibility for own health & healthcare • Involved in own treatment and medical necessity decisions • Improved access to care • Involved in financial costs of health & healthcare (P4C) • Providers • More direct involvement with patients and treatment • Service and quality will be determined by consumers • Pricing will become more flexible and visible (P4P) • Overall implications • Roles will change for all players • The picture change quickly - your strategy must prepare you for rapid market changes

31. Consumerism Choices Involve Options for Behavioral Change • Consumerism Choices: • Wellness • Preventive care • Early Intervention • Lifestyle Options (diet, exercise, smoking, safety) • Self-help, self care • Discretionary Expenses (e.g. OV, ER, Rx) • Value purchasing (e.g. DXL, o/p vs. in/p) • Participation in Disease Management Programs • Compliance with Evidence Based Medicine • Treatment Plans

32. Consumerism – Much Broader than HDHP & Consumer-Driven Healthcare Consumerism is A Strategy ****************** It’s about moving from a “benefit” to an “accumulating asset.”

33. Evolution of Healthcare Consumerism

34. The Evolution of Healthcare ConsumerismFuture Generations of Healthcare Consumerism 2nd Generation Consumerism Focus on Behavior Changes Traditional Plans with ConsumerInformation 1st Generation Consumerism /CDHC Focus on Discretionary Spending 4th Generation Consumerism Personalized Health & Healthcare 3rd Generation Consumerism Integrated Health & Performance Traditional Plans Behavioral Change and Cost Management Potential Low Impact ---- ---- ---- ---- ---- ---- ---- ---- ---- High Impact

35. The Promises of Consumerism Major Building Blocks of Consumerism Personal Care Accounts The Promise of Demand Control & Savings It is the creative development, efficient delivery, efficacy, and successful integration of these elements that will prove the success or failure of consumerism. Wellness/Prevention Early Intervention The Promise of Wellness Disease and Case Management The Promise of Health Information Decision Support The Promise of Transparency Incentives & Rewards The Promise of Shared Savings

36. 2nd Generation Consumerism Focus on Behavior Changes 1st Generation Consumerism Focus on Discretionary Spending 4th Generation Consumerism Personalized Health & Healthcare The Consumerism Grid 3rd Generation Consumerism Integrated Health & Performance Personal Accounts Wellness/Prevention Early Intervention Disease Management Information Decision Support Incentives & Rewards

37. Creating Healthcare Consumerism Plans • Understand Basic Consumerism Plan Designs • Including Consumerism in All Plan Options • Building Blocks • 1. Understanding HRAs/HSAs to Create Personal Care Accts as a Basis for Health “Asset Accumulation” • 2. Include Wellness Programs that Encourage Healthy Habits • 3. Include Disease Management Programs that Encourage Compliance • 4. Include Decision Support Tools for All Plans • 5. Include Incentives/Disincentives to Change Behavior

38. Basic Plan Design Options & Healthcare Consumerism Most Healthcare Consumerism Plan Designs Traditional Health Plans Incentives & Rewards Personal Accounts HDHP PPO & Ltd FSAs & HSAs & Ltd HRAs PPO & FSAs with HRAs HMO & FSAs HRAs? HDHP PPO & Ltd FSAs & HSAs PPO & FSAs HRAs? Typical CDHP Must Meet HSA / HDHP Legal Definition Wellness/Prevention Early Intervention Disease Management Case Management Information Decision Support

39. Potential Use of PCAs to Support Consumerism Plan Designs Most Healthcare Consumerism Plan Designs Traditional Health Plans Incentives & Rewards HDHP PPO PPO HDHP PPO HMO PPO Personal Accounts Typical CDHP Must Meet HSA / HDHP Legal Definition Wellness/Prevention Early Intervention Minimum Co-Payment Designs Disease and Case Management High Ded & Co-Insurance Designs Health Incentive Accounts? Information Decision Support Initial Er HSA Contribution With HRA Match & Incentive HRAs & HSAs Initial Er HSA Contribution Initial $500-$1000 HRA with Incentive HRAs

40. Health Toolsand Resources Health Accounts (HRAs or HSAs) HRA – ER provided $s HSA - ER and/or EE Provided $s PersonalizedHealthCare Web- and Phone-Based Tools 3. HRA/HSA – Individual & Group Reward $s “Benefit dollars” topay for healthcare expenses. Incentives and Rewards Wellness, Condition care Programs, Information and Decision Support Tools and Resources. PPO/HRA and PPO/HSA High Deductible Health Plans Four components that work together to improve quality, outcomes, and lower cost. Preventive 100% Coverage Health Account (HRA/HSA) Deductible Gap PPO Additional Health Coverage beyond the HRA/ HSA. 4. 1. 2.

41. Task #4 - Personal Care Accounts The Promise of Demand Control & Savings • HSAs, HRAs, FSAs, FHSAs “Of the 5 building blocks, the greatest among them is the Personal Care Account”

42. HSAs and HRAs - Two Very Different Accounts to Support Consumerism • HSA (2003 MMA) • - A law, with specific requirements and benefit design requirements. • - Most TAX ADVANTAGED vehicle ever created • HRAs (6/26/2002) • - A regulatory creation based upon an IRS ruling • - Most FLEXIBLE vehicle ever created

43. Health Savings Accounts – Advantage Employees • Tax-free savings vehicles for medical expenses, no use-it-or-lose-it rule • Effective January 1, 2004 • Eligibility: must be covered under high deductible health plan (HDHP) • Portable

44. Health Savings Accounts • Individual accounts • To permit saving for qualified medical and retiree health expenses on a tax-free basis • Must be offered in conjunction with a legally defined HDHP - “High Deductible Health Plan” • Portable • An HSA is owned by the individual, similar to IRAs, and transfers if the employee changes jobs • Held in a trust or custodial account; trustees – banks, insurance companies, approved non-bank trustees

45. Health Savings Accounts: Contributions • Contribution limits determined monthly based on status, eligibility, HDHP coverage as of first day of month (offset by other HSA contributions) • 2005 Monthly limit – 1/12th of lesser of deductible or $2,650 (self-only), $5,250 (family), indexed • Catch-up contributions, age 55 to 64, $600 in 2005, phased up to $1,000 annually in 2009

46. HSAs – Real Dollars, Portable, Vested • Can be used or taken in cash at anytime, even when no longer eligible to make contributions • Tax-free if used to pay for qualified medical expenses (IRC Section 213(d)) • For other purposes, subject to income tax and 10% penalty - 10% penalty waived in case of death or disability - 10% penalty waived for distributions after age 65 or older • HSA can be transferred tax-free to spouse on death; otherwise taxable to estate or beneficiary • Transfers upon divorce, nontaxable, becomes spouse’s HSA

47. HSA Eligible HDHPHigh Deductible Health Plan – By Law • Self-only: a deductible of at least $1,000; maximum HSA is $2,650; no more than $5,100 maximum out-of pocket expenses (incl. Ded.) • Family coverage: a deductible of at least $2,000; maximum HSA is $5250; no more than $10,200 on out-of pocket expenses (incl. Ded.) • 2005 Age 55 and over catch up amount of $600 • Preventive services are not subject to the deductible • OK for out of network costs to exceed maximum out-of pocket limits THE ABOVE 2005 AMOUNTS ARE SUBJECT TO ANNUAL INDEXING

48. HRAs- Advantage EmployersNational Accounts, Er Controlled Rules • Employer does not fund and has cash flow value • Employer can determine rules for HRA usage; they are subject to forfeiture; they are not portable, but can be subject to vesting • HRAs are more flexible in plan design, can tailor scope of reimbursements, are less costly for employer • Employer decides if HRA can used for (1) medical plan expenses not otherwise reimbursed, (2) non-plan QME 213(d), and/or (3) insurance premiums

49. Important Differences between Use of HRAs and HSAs for Supporting Behavioral Change Personal Care Accounts Health Reimbursement Arrangements Health Savings Accounts

50. HRAs – Best for Larger Groups?HSAs – Best for Individuals and Small Groups? Current State Combination Accounts FSAs HRAs HSAs Employer-based Healthcare Traditional (Ltd Carry-over) Special Purpose Non-Plan Individual-based Healthcare Employer-based healthcare Special Purpose Accounts Incentive Matching Employer-based Healthcare with Individual Accountability Er-Based withHSA Contributions Employer-based Defined Contribution Developments