Navigating PPACA: What Employers and Consumers Don’t Know Can Kill Them (Really!)

1. Navigating PPACA: What Employers and Consumers Don’t Know Can Kill Them (Really!) Presented by Mark Holloway, JD Senior Vice President Lockton Benefit Group David Gautsche Senior Vice President Everence Association, Inc September 6-7, 2013

2. Today’s Agenda • Overview: Key Components of Health Reform • Play-or-Pay (Employer Mandate) • Benefit Mandates, Taxes, and Reporting • Actuarial Modeling and Strategies • Final Thoughts

3. A Quick Refresher . . . Individual Mandate Employer Mandate Insurance Exchanges Benefit Mandates Taxes and Fees Administrative Hassles

4. The Public Insurance Exchanges • 16 states and D.C. are building own insurance exchanges; Feds are building an exchange for the residents of the others • Individuals will qualify for tax credits to purchase exchange coverage if their family income is under four times the federal poverty level and they are not offered qualifying and affordable from their employer • Progress . . . • “Looks like a train wreck.” —Sen. Max Baucus (D-MT), chair of Senate Finance Committee • GAO Report: “Can’t be certain” the exchanges will open on time, by October 1 • WSJ, 08/22: “California Health Exchange Might Face Online-Enrollment Delay” • HHS delays signing final agreement with insurers participating in federal exchange (Reuters, 08/28) • Exchanges won’t be able to verify employment-based offers of coverage or representations of income • Federal exchange will attempt to spot-check representations of employer-based offers of coverage

5. Public Insurance Exchanges (as of August 23, 2013) Source: Council of Insurance Agents and Brokers (CIAB) Federally Facilitated Exchange (26) Conditional Approval: State Exchange (17+ D.C.) Conditional Approval: State Partnership Exchange (7)

6. About $1 trillion over 10 years But cost is largely back-loaded over final 6-7 years of the decade; what happens after that? The Price Tag

7. $1 Million in $100 Bills

8. $100 Million

9. $1 Billion

10. $1 Trillion

11. Financial Impact of Law Will Vary

12. Health Reform’s Cost Impact—All Industries (Except Retail, Restaurant, Hotels, Hospitality, and Entertainment) The impact to the EE varied based on salary levels and the ER's contribution. For example, for a low- paid workforce where the ER does not contribute a significant portion of premium, the EEs’ increase is much smaller than a higher-paid workforce with a substantial ER contribution. • Based on analysis of 199 clients; Summary of Findings • * Employees can opt out, so the impact will depend on how many new employees remain on the plan, for how long, and the size of the ER’s subsidy. • # First number based on employee's salary; second based on estimate of the EE's household income, on which Exchange subsidies will be based.

13. Employer Mandatea.k.a. “Play or Pay”

14. Employer Mandate • Who’s “in the boat”? • Calculate: • Average 50+ FTEs/FTEqs . . . • . . . on business days of prior year • Controlled group calculation!

15. Employer Mandate • When you’re “in the boat,” which employees matter? • Full-time: reasonably expect to average 30+ hours per week • Variable hour: Not sure whether employee will average 30+ hours • Take a 12-month look! • Detailed record keeping, complex “break in service” rules, special unpaid leave rules, special rules for schools and colleges • Seasonal: Employed on seasonal basis; “seasonal” not yet defined • Effectively, no obligation for seasonals

16. Employer Mandate • Offer something or pay a penalty • Offer FTEs and kids some health insurance, or pay $2,000 (nondeductible) annual penalty for all FTEs • But free pass on first 30 FTEs

17. Employer Mandate • If decide to play, make sure the employees’ coverage is reasonably good and affordable . . . • 60 percent actuarial value or greater • 9.5 percent of household income for employee-only coverage . . . or risk $3,000 nondeductible, annual penalty on THAT employee, if the employee gets subsidized coverage on a public exchange

18. Benefit Mandates, Taxes, and Reporting

19. Health Reform—Benefit Mandates (PY Beginning in 2014) • Cost-free preventive care (nongrandfathered plans) • In-network only; plans can use medical management techniques to control costs • Women’s health, including contraception (PY beginning on/after 08/01/12) • Accommodation for some nonprofits with religious ties • Hobby Lobby case • Obesity screening and counseling (PY beginning on/after 07/01/13) • Wide variations on cost impact

20. Health Reform—Benefit Mandates (PY Beginning in 2014) • Maximum OOP limit for in-network care (nongrandfathered plans) • Tied to OOP max under HSA-qualifying HDHPs (e.g., for 2014, $6,350/12,700) • Potential cost impact • One-year extension for plans that use “multiple service providers” (e.g., carve-out PBM, mental health/substance abuse); they can continue to use separate OOP limits for 2014 • Plan with “carved-in” prescription won’t qualify for extension

21. Health Reform—Benefit Mandates (PY Beginning in 2014) • 90-day max waiting period • Not “first of the month after 90 days” • Satisfaction of reasonable substantive conditions (e.g., a training requirement) can result in a waiting period longer than 90 calendar days

22. Health Reform—Administrative Duties • Notice regarding public insurance exchanges • Due by October 1 for all current employees; within 14 days of hire for new employees • Excludes former employees (COBRA QBs, retirees, severed employees) and spouses/children of current employees • Must provide automatically and free of charge • May be provided electronically in accordance with DOL standards • Content: • Information about the individual’s coverage options • Information about public health insurance exchanges • Notice that subsidies might be available in an exchange, but foregoing employer coverage means the employee foregoes the employer’s nontaxable subsidy • Other information about employer’s coverage

23. Health Reform—Administrative Duties • MLR rebates (insured plans only) • August 1, 2013, is deadline for distributing rebates for 2012 • Expat coverage exempted from MLR for 2012, so no rebates payable • Insurers must distribute to policyholder (e.g., employer) prior to August 1, but only if the plan did not meet MLR standard for 2012 • Last year, notice was required even if insurer met its medical loss ratio target • Important and specific rules about what to do with the rebates and when • MLR eBook available from Lockton

24. Health Reform Fees and Taxes

25. And Let’s Not Forget the Cadillac Tax (2018) • 40 percent excise tax health benefits with COBRA values exceeding: • $10,200 individuals; $27,500 for families • Calculation includes value of medical, HRA, HSA and FSA benefits (whether provided by employer or employee), on-site clinics, etc. • Dental and vision not included; neither indemnity nor dread disease policies • Thresholds indexed, but not for medical inflation • Higher-risk demographics may take that into account when determining the value of coverage • Thresholds are increased $1,650 single/$3,450 family for retirees <65 and for "high-risk professions”

26. Health Reform—On the Horizon • Tax Code Section 105(h) Nondiscrimination Regulations • New rules would apply to nongrandfathered insured plans; current regulations apply to self-funded plans, but enforcement has been lax • No whispers on when new proposed rules will be issued • “Be careful what you wish for” • Automatic enrollment • Effective after DOL issue final regulations • To date, DOL has not issued proposed rules • Unlikely requirement will apply before 2015 • Cost impact: 4.4 percent (est.)

27. Health Reform—On the Horizon Track Hours Worked Determine Plan Design (“Min. Value”) Benefits Payroll Designate Measurement Periods Determine Premium Cost Identify Eligible Employees W-2 Health Plan Values Assess Affordability (EE-by-EE) Determine W-2 Wages Insurance Exchanges/IRS Employment Verification Verify Eligibility For Coverage Report Coverage Values Report Coverage Cost Report W-2 Wages Confirm Full-Time/ Part-Time Status

28. Actuarial Modeling and Strategies for 2014

29. Actuarial Modeling by Industry GENERAL CONCLUSIONS: • Most employers can continue to offer coverage with minimal cost impact due to play-or-pay • Most employers could save a lot by terminating group coverage and allowing employees to find coverage in the insurance exchanges • Most employees begin to “lose” when shopping in the exchanges, once household income reaches twice the federal poverty level • For now, most employers will continue to offer coverage to their FTEs

30. Strategies to Mitigate Costs • Options • Do nothing; maintain status quo (current offerings, to employees currently eligible) • Pay (in whole or in part) • Terminate plan, or fail to offer coverage to FTEs in one or more subsidiaries • Play, but utilize workforce management to shrink the universe of newly eligible FTEs • Play, by offering current plan(s) to the newly eligible FTEs • Play, by offering current plans and an affordable 60 percent plan • Play, by offering only a 60 percent plan • Play, by offering a 60 percent plan and an MEC plan • Offer only nonqualifying coverage, or offer qualifying coverage without regard to affordability • Combinations of the above Individually, these strategies reduce the number of FTEs, or the potential cost per FTE. Combinations mitigate both risks.

31. Strategies to Mitigate Costs—Status Quo • Do nothing new (maintain current plan design and eligibility) • Maintain current plan design and continue to offer the plan to the class of employees currently eligible; ignore the employees considered “full-time” under health reform who are not eligible now • Little or no workforce management to shrink the universe of newly designated “full-time” employees • Why it works, or doesn’t: • Not a cost-effective option in vast majority of cases; penalties are too severe, particularly in light of cost-effective and efficient alternative strategies

32. Strategies to Mitigate Costs—Pay HEALTH REFORM • Pay • Offer no coverage to more than 5 percent of FTEs • Why it works, or doesn’t: • Won’t work for employers who need to attract and retain employees. • For employers in restaurant/retail industries, many employers cannot afford to pay a $2,000 nondeductible penalty on behalf of all FTEs, particularly where the employer has: • A significant number of FTEs to whom it effectively must offer coverage (executives and other corporate staff, managers, etc.) • A significant number of FTEs to whom the employer does not offer coverage (or only limited coverage) today • Consider possibility of isolating groups of employees, to whom you do not want to offer coverage, under separate EIN

33. Strategies to Mitigate Costs—Workforce Management • Play, but utilize workforce management to minimize the universe of newly eligible FTEs • Manage some FTEs to part-time • Employ “measurement period” concept to seasonal and variable hour employees • Identify up to 5 percent of FTEs who won’t receive a coverage offer • Engage Medicaid- or Medicare-eligible employees • Why it works, or doesn’t • Reduce potential cost by minimizing the number of newly eligible FTEs to whom you must make a coverage offer • Are you able to substitute part-time labor for full-time? Can you shave hours from one group and have another pick up the slack? • Conform HR policies, practices, publications, and contracts to notion that you hire part-time employees

34. Strategies to Mitigate Costs—Offer Current Plans • “Play” by offering current plan(s) to all FTEs • In other words, maintain status quo offerings and offer them to the new universe of eligible FTEs • Why it works, or doesn’t: • Usually it doesn’t. Coverage tends to be generous, and would have to be offered at very modest cost (to satisfy “affordability”) to the new universe of eligible FTEs • The take-up rate may be too high to be acceptable (financially); plan will attract: • Unhealthy employees in greater numbers • Employees driven by the individual mandate—particularly the more highly paid (due to increase in individual mandate penalty) • Individuals who lose coverage under spouse’s plan

35. Strategies to Mitigate Costs—Offer Current and 60% Plan • Play by Offering all FTEs current plans, plus a new 60 percent qualifying option (“Teflon Plan”) • Add a 60 percent actuarial value (i.e., minimum value) offer of Qualifying coverage to the current offerings, price the 60 percent plan so it’s “affordable” to all FTEs, and offer all options to all FTEs, including the universe of newly eligible FTEs • Why it works, or doesn’t: • Eliminates any worry over penalties, because you’ve made an offer of qualifying and affordable coverage to your FTEs • OK to price the more generous plan at “unaffordable” levels, as long as the 60 percent plan is “affordable” • Cheaper plan may cause migration of your best risks into the 60 percent option

36. Strategies to Mitigate Costs—Offer Only 60% Plan • “Play” by offering all FTEs a new 60 percent “qualifying” option only • Substitute a “qualifying” 60 percent actuarial value (i.e., minimum value) coverage offer for the current plan(s), price it at “affordable” levels, and make it the only offering to FTEs • Why it works, or doesn’t: • Reduces premium cost immediately; OK to soften the transition to higher deductibles (coverage may have a $3,500 or larger deductible) through bonuses to key employees • Potential for penalties is eliminated because of the offer of qualifying and affordable coverage • Minimize the take-up rate, particularly among the universe of newly eligible FTEs, via contribution rates (even for “affordable” coverage); can minimize it further via plan design (i.e., increasing deductibles) • Note: The offer freezes employees out of subsidized coverage in an exchange; thus they cannot satisfy the individual mandate or have insurance unless they buy the 60 percent plan

37. Strategies to Mitigate Costs—Offer 60% and MEC Plan • Offer all FTEs a 60 percent and affordable plan (and maybe current plans too), plus a skinny and inexpensive “minimum essential coverage” (MEC) plan • Couple a 60 percent offering with an MEC plan that would look/feel much like contemporary “limited medical” plans • Coverage would be very inexpensive to employees, and employer (might even be employee-pay-all) • Why it works, or doesn’t: • If the 60 percent plan is designed to minimize the take-up rate, the MEC coverage solves a variety of issues: • Coverage will be inexpensive • Coverage satisfies their individual mandate • Note: No guidance yet on how skimpy an MEC plan may be • May be a challenge to adequately differentiate the MEC plan from the 60 percent plan (from a contribution standpoint) if employer doesn’t subsidize the MEC plan

38. Strategies to Mitigate Costs—Offer Unaffordable Coverage • Offer qualifying coverage to all or substantially all FTEs, but do not worry about making it qualifying or affordable • Offer only an MEC plan • Offer qualifying 60 percent coverage but don’t worry about affordability • Make coverage deliberately unaffordable • Use wellness surcharges to trigger unaffordability • Why it works, or doesn’t: • Some employees will not seek subsidized coverage in an exchange (they’ll object to the mandate, have coverage elsewhere, or won’t care) • It might be cheaper for the employer to pay the penalty than to subsidize the coverage • It may be better for the employee, too, to reap subsidies • Enticing unhealthy employees to bolt for exchange-based coverage will almost always be a “win” for the employer, even with penalties

39. Final Thoughts

40. Any Questions? • Mark C. Holloway, JD • Senior Vice President • Lockton Benefit Group • 444 W. 47th Street, Suite 900 • Kansas City, MO 64112 •  816.960.9567  816.783.9567 • mholloway@lockton.com • www.lockton.com

42. Please Rate Today’s Overall Educational Program (Speakers + Workshops on September 6) Text a CODE to 22333 Exceeded My Expectations 497816 Met My Expectations 497817 Fell Short of My Expectations 497818