THE EMPLOYER’S ROLE IN MEDICARE

1. THE EMPLOYER’S ROLE IN MEDICARE Henry de Vos Lawrie, Jr. Kathryn J. Greenlief McGuire Woods Battle USAA & Boothe LLP

2. TRADITIONAL MEDICARE • Defined Benefit Fee-For-Service • Out-of-Pocket • Part A (Hospital) • $768 (1-60) • Part B (Medical) • $100 Deductible • 20% Co-Pay

3. TRADITIONAL MEDICARE (continued) • Major Coverage Exclusions • Prescription Drugs • Routine Physician Exams • Long Term Care • Dental and Dentures • Hearing Aids • Routine Eye Care • Per Capital Out-of-Pocket est. $2,454

4. TRADITIONAL EMPLOYER WRAP PLAN • Coordinates With Parts A and B • Co-insurance and Out-of-Pockets • Additional Benefits (Prescription) • Medicare Primary • Retiree Contribution • FAS 106 Liability • No Coordination With Medicare HMOs

5. HOW EMPLOYER HEALTH BENEFITS HAVE CHANGED Note: Medium and Large Companies Source: KPMG

6. BALANCED BUDGET ACT OF 1997 • Fewer Dollars for Providers • More Managed Care • Effective 1999 • Introduces Medicare Part C

7. MEDICARE + CHOICE(Part C of Medicare) • More Coordinated Care Plans (HMO, PPO, PSO or POS) • Private Fee-for-Service Plan • MSA Plan • Parts A & B Remain Alternatives

8. MEDICARE RISK HMOs • Introduced in 1985 • Enrollment Quadrupled to 14% Since 12/93 • Current Primary Vehicle Under Medicare + Choice

9. HOW MEDICARE RISK HMOs WORK • Contract With Health Care Financing Administration (HCFA) • HMO Assumes Full Risk For Medicare Parts A & B Coverage • HCFA Pays Capitated Rate to HMO • Under Medicare + Choice Rules, HCFA Pays Greater of: • Blend of Local/National Rates • Floor Amount ($367/month) • Minimum Annual Increase (2%)

10. HOW MEDICARE RISK HMOs WORK (continued) • Normal HMO Coordinated Care Features • Defined Geographic Area • Gatekeeper • Network Limitations • Possibly POS Option

11. ADVANTAGES OF MEDICARE RISK HMOs • Lower Cost or Higher Benefit Level at Same Cost • More Predictable, Budgetable Expense

12. THE CURRENT HMO MARKET • Reduced or No Out-of-Pockets • Some Zero Premium Plans • Offer Additional Benefits • Pricing Too Good to Be True?

13. VARIATIONS IN SAVINGS • Vendor Network Effectiveness • Plan • Location • Enrollment • Employer/Employee Contributions for Existing Medicare Coverage

14. FAS 106 RELIEF • Estimate of Total Liability • Driven By Current and Anticipated Expense • Impact of Migration to Medicare Managed Care

15. CHOICES FOR THE EMPLOYER • Whether to Embrace or Merely Tolerate Medicare + Choice • Strategy for Encouraging Migration • Extent of Plan Redesign

16. INITIAL EMPLOYER ISSUES • Coverage Availability in Employer’s Area • Benefit and Price Differences Among Available Options • Quality of Service Due Diligence • Determine Likelihood of Acceptability of Managed Care to Current and Future Retiree Population

17. DESIGN ISSUES • Medicare + Choice as Alternative or Mandate • Single or Multiple Coordinated Care Options • Supply Benefit Enhancement to Encourage Migration to Managed Care • Limitations on Transfers Among Alternative Choices

18. DESIGN ISSUES(continued) • Define the Employer’s Subsidy • Develop Communications and Enrollment Strategies

19. ILLUSTRATION OF DEFINED CONTRIBUTION PLAN • Account Balance Feature • $2,500 Annual Credits Beginning Age 40 • Ten Year Limit • Interest Credited • Access to Funds • Termination After Age 55/15 Years Services • Forfeiture Upon Early Separation

20. ILLUSTRATION OF DEFINED CONTRIBUTION PLAN(continued) • Use of Funds • Premiums For Range of Plans • Retiree Elects Annual Allocation Amount • Individual Contributions Permitted • Eligible Dependents • Premiums Only; No Cash

21. ILLUSTRATION OF DEFINED CONTRIBUTION PLAN(continued) • Advantages of Program • Coordinates Well With Medicare + Choice • High Employee Visibility • Rewards for Service, Not Age • Employee Flexibility • FAS 106 Relief