Medicare Reform Presentation to PEBB

1. Medicare ReformPresentation to PEBB

2. Mercer Human Resource Consulting 1 Medicare Reform LegislationHighlights of new legislation Most significant change to Medicare since its inception New prescription drug benefit (Part D) effective January 1, 2006 Subsidy for employers and multiemployer plans providing prescription drugs to retirees eligible for Medicare Changes to structure of Medicare Health Savings Accounts – HSA’s Final details of the law will require clarification from government and consideration of how carriers and other vendors will respond Implementation is scheduled from 2004 to 2010 or even later

3. Mercer Human Resource Consulting 2 Medicare Prescription Drug CoverageOverview Medicare does not currently cover outpatient prescription drugs New Part D provides partial prescription drugs coverage effective January 1, 2006 Voluntary program for Medicare eligibles Standard Rx benefit (or actuarial equivalent) Benefit offered by private plans Government payments to private plans Beneficiaries pay premium Subsidies for low-income individuals

4. Mercer Human Resource Consulting 3 Part D Prescription Drug BenefitStandard Rx benefit has “doughnut hole” to meet cost goal Initial coverage: Deductible of $250, enrollee coinsurance of 25% up to $2,250 “Doughnut hole”: No coverage until enrollee reaches out-of-pocket limit of $3,600 Amounts paid by third parties (e.g., employers, individual coverage, etc.) do not count towards out-of-pocket limit Catastrophic coverage: Above the out-of-pocket limit, enrollee coinsurance is the greater of 5% or a fixed copay ($2 generic or $5 brand, indexed) Amounts are indexed

5. Mercer Human Resource Consulting 4 Part D Prescription Drug BenefitGovernment pays about three-quarters of cost Member pays roughly one-quarter of Medicare Part D premium (estimated $35 PMPM in 2006) Amounts indexed Subsidies for low income seniors Premiums may be increased for “late” enrollees Premiums may be deducted from Social Security benefits Medicare Part D benefits are primary Employer plan secondary if retiree enrolls in Part D

6. Mercer Human Resource Consulting 5 Subsidy for Retiree Health PlansPlan sponsors can maintain plan, receive subsidy Federal government offers subsidy to employers and other sponsors of qualified retiree health plans Qualified plan must provide benefits with “actuarial value” greater than or equal to Part D benefits Sponsor gets 28% subsidy for covered drug costs from $250 to $5,000 (indexed) per eligible participant Subsidy only for participants that do not enroll in either Part D or Medicare Advantage drug coverage Subsidy is not taxed to plan sponsor Recordkeeping and documentation requirements, but no details yet FASB now will allow immediate recognition of change in accounting for retiree medical benefits under FAS106 (GASB likely will be similar)

7. Mercer Human Resource Consulting 6 Options for Plan SponsorsPrescription drug coverage for Medicare-eligible retirees Plan designed by sponsor Receive government subsidy if at least “actuarially equivalent” to Part D “Wrap around” plan / integration with Medicare Medicare is primary, plan sponsor secondary With or without subsidy of Part D premium Medicare Advantage plan (formerly Medicare+Choice) With or without sponsor subsidy of Medicare Advantage premium Drop coverage, with or without Part D premium subsidy

8. Mercer Human Resource Consulting 7 Accounting and Financial IssuesSteps to estimate financial impact Determine how much cost and obligation is associated with Medicare-eligible Rx Select options to consider Model the effect on per capita claims costs of the options under consideration Use actuarial projections to estimate effect on future cash costs and benefit obligations Apply current and potential accounting rules to estimate effect on FAS 106 expense

9. Mercer Human Resource Consulting 8 Reflections . . .While quick action possibly needed for accounting . . . more time likely warranted for design details Some decisions may be needed quickly Decision to receive subsidy, wrap or terminate can drive financial reporting For details of 2006 plan design, don’t rush to judgment Look at emerging PDP designs New ideas, information and designs will emerge Some opportunities may be better than what is known now New Medicare Advantage plans may create additional options Communicate with retirees Explain the changes to Medicare and how they will impact plan participants Help plan participants understand changes, if any, to their current program made as a result of the changes to Medicare Move carefully because interpretations of the law (and perhaps the law itself) may shift over time

10. Mercer Human Resource Consulting 9 Other Medicare Related ProvisionsMedicare Advantage plan, discount card, structural change Medicare+Choice becomes Medicare Advantage New law allows 10 to 50 “regional” plans, plus a national plan Medicare Advantage plans can receive somewhat higher payments from Medicare than previously for Medicare+Choice, at least initially Discount prescription drug card effective spring 2004 until 2006 Part B deductible will be increased to $110 in 2005, then indexed Medicare Part B premiums will be tied to income Competition between traditional Medicare and private plans in 2010

11. Mercer Human Resource Consulting 10 Options for Plan SponsorsMedicare Advantage plan If health plans offer national plan or regional plans at reasonable cost, Medicare Advantage could be a viable alternative for some plan sponsors Plans maintain “managed care” Benefits could potentially fill prescription drug “doughnut hole” But past history is problematic: Growth in enrollment, followed by tight controls on reimbursement by Medicare, then reductions in enrollment

12. Mercer Human Resource Consulting 11 Health Savings Accounts – HSAsWhat Are They? Now available (since 1/1/2004); part of Medicare reform law HSA: A savings / spending account held in trust, like an IRA or 401(k) Flexibility of design: Employer may sponsor; may choose to contribute or not, OR A person can open an individual HSA account, like an IRA Triple tax-favored, if conditions are met: Pre-tax (or deductible) contributions; by individual and/or employer Tax-free build up of investment earnings Tax-free distributions for medical expenses at any age 100% vested: Spend it or grow it from year to year; no “use it or lose it”

13. Mercer Human Resource Consulting 12 HSAsEssential Linkage to High-Deductible Health Plan To contribute: Must be in a “high-deductible health plan” Definition of “high-deductible health plan” (HDHP) A health plan that covers the HSA account holder Sponsored by employer or spouse’s employer; or private coverage High deductibles: Not LESS than $1,000 for individual Not LESS than $2,000 for family Out-of-pocket limits: not MORE than $5,000 / $10,000 Preventive care can be first-dollar, as much as 100% covered Deductibles needn’t apply to dental, vision, LTD, AD&D, etc. But prescription drug coverage cannot be carved out Need not be in an HDHP when spending the HSA account balance

14. Mercer Human Resource Consulting 13 HSAsSpending the HSA Balance Can spend in same year … later year … or in retirement Tax-Free: HSA distributions are never taxed if spent on: “Medical expenses” Broad definition: Code §213(d), like HRA reimbursement account Needn’t be covered health plan cost: e.g. elective care; otc items Not for paying premiums, except the following are allowed: Post-65 Medicare and retiree plan premiums (but not Medigap) Premiums for COBRA, or while on unemployment compensation Long-term care insurance premiums Taxable: For distributions for any other purpose: Ordinary income tax applies, and 10% penalty tax applies, if prior to age 65

15. Mercer Human Resource Consulting 14 HSAsAnnual Contributions Annual limit on combined employer and employee contributions: Lesser of: ? HDHP annual deductible, or ? $2,600 (single) $5,150 (family) – indexed yearly Plus “catch-up contributions” If 55 or older Up to an additional $500 per year $500 increases to $1,000 by 2009 (in $100 yearly steps) Contributions must stop when Medicare coverage begins No contributions for a “dependent” on another person’s tax return Rollover into HSA: only from “Archer MSA” or another HSA Not from flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs) or IRAs

16. Mercer Human Resource Consulting 15 HSAsPlan Sponsor Options Offer an HSA-compliant HDHP Employees have option of setting up HSA on their own No cost to employer for HSA Offer an HDHP and sponsor an HSA for eligible employees Employees can contribute through employer or set up their own HSA Administrative cost for employer unless employees pay cost Offer an HDHP, sponsor an HSA, and make contributions to it Employer pays HSA cost plus administrative cost (unless paid by employees) Funding HSAs by employer is not a long-term liability but has a cash cost

17. Mercer’s National Survey of Employer-Sponsored Health PlansPresentation to PEBB

18. Mercer Human Resource Consulting 17 About the survey Established in 1986, national probability sample used since 1993 Largest annual survey on the topic Results are projectable to all US employers with 10 or more employees Nearly 3,000 employers participated in 2003 Today’s presentation is based on employers with 500+ employees

19. Mercer Human Resource Consulting 18 Total health benefit cost for 2003 rises more slowly than expectedAll employers

20. Mercer Human Resource Consulting 19 Total health benefit cost for active employees up 10.2%Large employers

21. Mercer Human Resource Consulting 20 Benefit reductions the key to slower cost growth In summer/fall of 2002, Mercer survey respondents predicted an average increase of 13.5 % for 2003 The 10.2% actual increase reflects subsequent benefit reductions, and may reflect a mid-year slowdown in medical trend (MCPI) No cause to celebrate: health benefit cost is still rising 4 times the rate of general inflation

22. Mercer Human Resource Consulting 21 Factors that affect average cost per employeeLarge Employers by Region

23. Mercer Human Resource Consulting 22 WA State and Gov’t – type of plan offered Percent of employers offering plan

24. Mercer Human Resource Consulting 23 WA State and Gov’t – employee enrollment Percent of covered employees enrolled

25. Mercer Human Resource Consulting 24 Washington State – average cost per active employee

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28. Mercer Human Resource Consulting 27 Significant plan design componentsWashington State vs. National

29. Mercer Human Resource Consulting 28 How employers are addressing cost in 2004 – and beyond 49% (50% WA) of large employers expect to increase employee premium percentage in 2004 45% (60% WA) expect to increase employee cost-sharing in 2004 16% expect to change carriers in 2004, 12% expect to drop carrier 38% (39% WA) are engaging in consumerist strategies 58% offer one or more disease management programs, up substantially over 2002 Health management activities up substantially over 2002 11% of large employers using “networks within networks”, another 17% considering

30. Mercer Human Resource Consulting 29 The future Focus will be on managing consumer behavior and demand Consumerist strategies Higher-cost populations Forces that converged to drive up cost will not abate any time soon Demographics Lack of competition Technology

31. Mercer Human Resource Consulting 30 Health Care Authority Budget Comparison FY 05 State Agency CY 05 Average Funding Rate Employee Contribution Initial budget (Spring 2003) $592.30 $110.58 Governor Supplemental $581.52 $97.54 (February Update) Senate Chair Supplemental $578.84 $105.89 House Chair Supplemental $600.85 $65.00

32. Mercer Human Resource Consulting 31 Open Enrollment Plan Changes

33. Mercer Human Resource Consulting 32 Key dates for 2005 procurement April 8: Purchasing document released May 13: Proposals due June 22: Board votes and contracts awarded

34. Mercer Human Resource Consulting 33 Informational bids $15 and $20 office visit copayment $100 emergency room and ambulance copayment