Impact of Health Care Reform

1. Impact of Health Care Reform RIMS Conference 2012 Sam GeraciDirector Carine Simon Consultant Patrick LearyProgram Manager – Workers’ Compensation, Disability and Leaves of AbsenceEmployee Benefits and Services 

2. Agenda • Impact on employers • Workers compensation • Medical inflation • Service availability

3. Summary of PPACA as it applies to businesses • Requirement for large employers to offer qualifying coverage and premium subsidies or face fines of $2,000 per employee • Subsidized health insurance exchanges for individual and small group market • Qualifying coverage must comply with the following: • Ban on rescissions, annual/lifetime limits, pre-existing condition exclusions for children • Coverage of dependents up to 26 years old • Coverage of certain preventive services • Restriction on “discriminatory” practices such as charging more to older Americans • Covers 60% of health care expenses • Private health insurers must provide members (employer and employee) premium reimbursements unless they comply with a minimum medical loss ratio • Employers will have to pay a 40% nondeductible tax on the value of plan costs exceeding $10,200/year for individuals ($27,500/year for families) in 2018 • Employers can grandfather existing plans as long as they are made compliant with certain PPACA rules, but are limited in the plan changes they can make thereafter • Fully insured (as opposed to self insured) plans can no longer discriminate in favor of highly-compensated individuals

4. Choices employers will face • Provide qualifying coverage • Drop coverage and pay $2,000 fine • Hire part-time employees or/outsource • Hire full time employees • Pay 40% excise tax • Eliminate “Cadillac” plans • Replace “mini-med” with qualified plans • Drop coverage and pay $2,000 fine • Grandfather a plan • Comply with new regulations • Provide coverage through a fully insured plan • Switch to a self-insured plan

5. SCOTUS may strike down part or all of PPACAThe betting markets price over 60% chance of SCOTUS striking down the individual mandate Does the Anti-Injunction Act apply? Is Medicaid federal expansion constitutional? No Yes Yes No Is the individual mandate constitutional? SCOTUS decision deferred until law is applied Medicaid expansion implemented Is it severable? Yes No No Yes PPACA implemented with individual mandate Is it severable from the rest of PPACA? PPACA struck down PPACA implemented without expansion No Yes PPACA struck down PPACA implemented without mandate

6. ILLUSTRATIVE Employers and employees may benefit from dropping coverage Employer provided insurance Employer drops coverage Gap • $9,000 • $2,000 (Fine paid to the gov’t) • $7,000 (Paid to employee) ($1,000) $10,000 Employer $2,000 • $1,000 • +$7,000 (From employer) • +$4,000 (From government) • -$12,000 (to insurer) ($1,000) Employee $0 • $2,000 • +$2,000 (From employer) • -$4,000 (To employee) $2,000 Government $0 $12,000 $12,000 Total Employer + Employee $10,000 ($2,000) $12,000

7. Reform provides incentives for employers and employees to go to state exchanges for health insurance Combined net savings by age and % of FPL realized when dropping employer coverage Net savings ($) Income (% of FPL) The goal is to ensure quality coverage without requiring families to pay more than 9.5% of their income

8. Employers may be hit by surprise by the excise tax for “Cadillac” plans • Beginning in 2018, plans with group health coverage exceeding $27,500/family ($10,200/individual) will be subject to a 40% non-deductible excise tax (on the balance above the threshold) • The tax is the third major source of increased revenue to fund PPACA ($32B in projected revenue in 2020) Research suggests that more than 60% of employers may be subject to the tax in 2018

9. The minimum Medical Loss Ratio standard will affect many employer-sponsored health plans Types of plans with low MLR Health insurers potential reactions % of insurers meeting MLR standards • New plans • Dropping out of individual or small group market • Stop offering HDHP, mini-med, expat plans • Dropping employers selectively, e.g. those with young, healthy workforce • Mini-Med plans • Expat plans • HDHPs • Plans from small insurers

10. PPACA will lead to the elimination of mini-med plans Permissible annual limits on health care coverage ($ Thousands) Mini-med plans • Mini-med plans are low-cost plans offering limited coverage to part-time, seasonal or low-wage employees • They fail to comply with several PPACA’s regulations, e.g. qualifying coverage, restrictions on annual and lifetime limits • Waivers have been offered to ~1,500 firms but will expire in 2014 In 2014, employers who used to offer Mini-Med plans will have pay a $2,000/employee fine

11. Grandfathered plans are exempt from some but not all PPACA requirements… Exempt from… Must comply with… • Coverage of preventive services without cost sharing • Exemption from the “essential benefits” package as of 2014 • Exemption from limits on out-of-pocket costs to participants • No lifetime or “restricted” annual limit • No rescissions of coverage • Extension of parents’ coverage to young adults 26 and under • No coverage exclusions for children with pre-existing conditions

12. … and can lose their grandfather status • Routine changes can be made without losing grandfather status, e.g. • Cost adjustments to keep pace with medical inflation • Adding new benefits or modestly adjusting existing benefits • Voluntarily adopting new consumer protections • But some changes lead to loss of grandfather status: Loss of grandfather status implies becoming fully compliant with the law

13. PPACA makes self-insured plans more attractive Self-insured plans exempted from… Share of firms with at least one self-insured plan by size • Small group market: not subject to reform’s price regulations, risk-adjustment provisions and essential health coverage provisions • Not subject to fee imposed on insurers starting in 2014 • Not subject to the minimal Medical Loss Ratio rule • Not required to undergo reviews of premium increases If stop-loss insurance coverage is available and affordable, firms can self-insure, especially in the small group market where reform is more onerous

14. Under PPACA, fully insured plans cannot favor highly compensated employees • ERISA nondiscrimination rules (Section 105) now apply to fully insured plans • Fully-insured plans cannot offer executives and highly-compensated employees a different plan • Failure to comply leads to taxation of those benefits (tax of $100 per day per participant) • Grandfathered plans are exempt • Incentive to use fully insured plans to provide executives and highly-compensated employees with different benefits than other employees disappears • Employers should self-insure and provide executives and highly-compensated employees with cash benefits

15. What does all this mean for employers? • Incentive to outsource or hire part-time employees Avoid being subject to the employer mandate • Incentive to drop high-end plans Avoid the Cadillac tax Avoid regulations applying to fully-insured plans • Incentive to self insure • Incentive to avoid changing current plans Keep grandfathered status Penalty, excise tax and impact of medical inflation and regulatory costs • Higher costs

16. Agenda • Impact on employers • Workers compensation • Medical inflation • Service availability

17. Medical costs represent an increasing share of Workers Compensation losses Medical Share of WC benefits Indemnity Medical

18. PPACA impact on drivers of medical inflation Number of insured Americans • ACA requires all Americans to have a compliant medical plan Individual mandate starts More insured Americans • ACA bans lifetime limits and coverage exclusions • ACA requires free preventative care Insured consume more, and more is covered Children remain on parents plans until 26 Free preventative care Aging of Americans Supply of MDs • Number of doctors limited by Medicare • Availability of substitutes remains limited by law Limited supply of doctors and nurses Physician shortages after Mass. reform Higher waiting times for treatment • Greater waiting times for treatment

19. States with the lowest insured rates and fewest doctors per capita will see the greatest medical inflation MDs per 1,000 persons Easiest implementation Hardest implementation U.S median MD per 1,000 persons % Population lacking health insurance U.S median uninsured rate

20. South and West may experience the most medical inflation Most medical inflation Least

21. As consumers pay less, they will demand more • PPACA lowers/eliminates out of pocket costs for certain services, e.g. preventive care • Prevention, health and wellness incentives’ impact on medical spend are mixed

22. But supply of doctors cannot be increased easily Supply of MDs in the US (000) • What’s limiting the supply of doctors? • Limited number of residency positions • Medical schools are adding few seats • Doctors are retiring baby boomers • Security and immigration laws burden foreign doctors willing to practice in the US, even in underserved areas Shortage of 91,500 doctors by 2020 based on a huge increase in demand and little increase in supply

23. PPACA may impact the waiting times for primary care and specialty physicians… Critical shortage Severe shortage No Shortage

24. … thus increasing STD claim durations and costs Short-term disability durations for diagnoses associated with specialists in short supply have increased since the introduction of the reform in Massachusetts thus increasing claims costs

25. Roche is the world’s largest biotech company with truly differentiated medicines in oncology, virology, inflammation, metabolism and CNS. • Roche is also the world leader in in-vitro diagnostics, tissue-based cancer diagnostics and a pioneer in diabetes management. • Roche’s personalized healthcare strategy aims at providing medicines and diagnostic tools that enable tangible improvements in the health, quality of life and survival of patients. • Fast Facts • Founded in 1896 in Basel, Switzerland • Currently over 80,000 employees worldwide • In 2011, group sales were 42.5 billion Swiss francs • In 2011, R&D investment was over 8 billion Swiss francs • 21,000,000 patients were treated with innovative Roche medicines in 2011 Roche At A Glance

26. Founded more than 35 years ago, Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes medicines to treat patients with serious or life-threatening medical conditions. • Personalized Healthcare is a key element of our research and early development strategy. We're focused on tailoring treatments to specific diseases and patients and identifying which patients are most likely to respond. Fast Facts • Founded in 1976 • Became a member of the Roche Group in March 2009 • Headquarter in South San Francisco, California for all Roche pharmaceutical operations in the United States • Over 11,000 employees • Genentech sell over 35 products and devices in the US • US Pharmaceutical sales were 12.2 billion Swiss francs in 2011 • gRED has over 30 new molecular entities in clinical development Genentech At A Glance

27. Roche US – Approach to Health Care Reform • Applying various tools and techniques to address HCR as well as marketplace position • Constantly reviewing plan design • Reduce the value of the plans by adding or changing certain plan features • Testing Consumer Driven Health Plans • Create health care consumers who will utilize health care more efficiently • Design with consideration of excise tax triggers • Expand our culture of health

28. Roche US Workers’ Compensation Stats/Trends • 2010 – 2011 Policy Year Total Claims: 392 • 2010 – 2011 Policy Year Lost Time Claims: 24 • 2010 Policy Year Top 3 Loss Areas: • Repetitive Trauma (24%) • Slip and Falls – same level + elevation (27%) • Material Handling (14%) • 2010 – 2011 Policy Year Average Cost per Claim: $16,506 • 2010 – 2011 Policy Year Frequency Rate: 0.11 claims per $100 of Payroll • 2010 – 2011 Policy Year Loss Rate: $0.18 per $100 of payroll

29. How is Roche Positioned? Most medical inflation Least

30. How is Roche Positioned? Source: Kaiser Family Foundation

31. What I Heard That’s Important to Employers • Workers’ Compensation Costs Will Increase • Increase in medical cost per claim • Also may mean more lost time • higher cost medical/more complex medical treatment often means more lost time • Access to Care Negatively Impacted • Fewer doctors willing to accept WC cases • Fewer choices to give employees • Longer wait times for appointments • Lower quality and less satisfied employees

32. What Does All This Mean For Roche? • Health and Wellness programs essential • Focus on age and weight related issues • WC physician network development • Consider participation in Managed Care Network • More pressure on vendor to provide strong network • Better integration across benefits • Medical • Behavioral Health • Disability • Wellness • Workers’ Compensation

33. Sam Geraci, Director sam.geraci@libertymutual.com Carine Simon, Consultant carine.simon@libertymutual.com Patrick Leary leary.patrick@gene.com