Guiding you through US Health Reform: Charting a new course

21 January 2010 Guiding you through US Health Reform:Charting a new course Linda Havlin, Chicago Geoff Manville, Washington Kelly Traw, Washington George Wagoner, Richmond

Today’s speakers Linda Havlin Chicago +1 312 917 0706 linda.havlin@mercer.com Geoff Manville Washington +1 202 263 3957 geoff.manville@mercer.com Kelly Traw Washington +1 202 263 3904 kelly.traw@mercer.com George Wagoner Richmond +1 804 344 3740 george.wagoner@mercer.com

Agenda • Legislative state of play • Key elements that impact employer-sponsored plans • Case studies • Looking ahead

Legislative state of play

Health reform hangs in the balance after Democrats’ Senate setback • Republican Scott Brown’s win in Massachusetts dramatically alters outlook • Democratic leaders now weighing legislative/procedural options • Option 1 – try to move comprehensive reform largely as drafted • Rush a merged House/Senate bill through before Brown is seated • Appears to be off the table • Move major elements of current bills though Senate by budget “reconciliation” process that requires just 51-vote majority • Political, procedural problems abound • Option 2 – move scaled-back health reform “light” with bipartisan support • Could include Medicare doctors payment fix and quality incentives, scaled-down insurance reforms, no employer mandates • Option 3 – drop reform effort altogether • Blame Republicans and pivot to jobs and the economy

Meanwhile, leaders say talks on final bill to continue • House bill (HR 3962) approved on November 7, panned by employers • Senate bill (HR 3590) approved December 24 less objectionable • Employer-friendly changes in Senate-passed bill • Public plan option dropped • Maximum 30-day enrollment period extended to 60 days • ‘Full-time’ employee threshold raised to 30 hours per week • New incentives, programs for value-based purchasing • Controlled release of Medicare claims data • New and retained provisions opposed by employers • Employer “vouchers” to help workers buy coverage in Exchanges • Adverse tax changes related to employers’ Part D retiree drug subsidies

Democratic negotiators had been making substantial progress • Tentative deal on excise tax on “high cost” plans • Coverage thresholds raised to $8,900 individual/$24,000 families • Collectively-bargained, state and local government plans exempt until 2018 • For all plans, value of dental, vision coverage excluded beginning in 2015 • Not changed: indexing of thresholds at CPI+1% • But lawmakers, President must find more revenue • Raising fees, cutting reimbursements to certain industries • Applying Medicare tax to unearned income • Changes in coverage provisions may also be in the mix • Subsidies for individuals • Medicare Advantage, Medicaid provisions in flux • National vs. state insurance Exchanges

Employers pressing for host of changes in any merged bill • Many open issues, so time remains to affect final outcome • Employer to-do list includes • Keep Senate’s modified “free rider” penalties • Drop Senate’s employer voucher proposal • Keep Senate’s grandfathering for self-insured plans • Drop House’s curbs on changing retiree health benefit • Drop House and Senate provisions to tax employers Part D subsidies • Drop House’s expanded COBRA rights • Keep Senate’s expanded incentives for employer wellness plans • Increase $2,500 caps on FSA, index to medical inflation • Keep House’s extension of tax-free benefits to domestic partners • Employer involvement, perspective important to Congress, White House • But employers, other groups ready to oppose final bill if changes aren’t made

Several steps ahead even if Democrats push ahead with reform Assume deal is reached on final bill, which heads to CBO Congressional Budget Office and Joint Committee on Taxation would likely need at least a week to assess the proposal’s budget impact. Possible action on broad or scaled-down bill later this year Action could last well into 2010 under either a budget “reconciliation” strategy or an effort to move a scaled-back bill. No deal yet on merging House, Senate bills Democratic leaders and the president have yet to strike a deal on merging House-, Senate-passed bills. Several contentious issues remain in play. February January March Scott Brown (R-MA) is formally seated in Senate Strength of Brown’s victory likely to result in his taking office with little/no delay. Lawmakers, public given at least 3 days to review final bill, CBO report As promised by Democratic leaders. Additional potential procedural hurdles could delay final House, Senate votes.

Key elements for employer-sponsored health benefit programs

Senate bill (unless noted): General effective date timelineExcluding group health plan mandates 2010 2011 2013 2014 Employer mandate Free choice vouchers Auto-enrollment HIPAA wellness incentive limit increase Individual coverage mandate Health insurance exchanges Medicaid expansion Employer W-2 reporting of employee health coverage Cap on health FSA contributions Bar OTC drug reimbursement Tax change related to Medicare Part D RDS payments Industry fees 40% excise tax Comparative effectiveness research fee Medicare tax increase for high-income individuals Temporary early retiree reinsurance program (Retiree anti-cutback rule-House bill) (2012 is an election year)

Top tier issues for employer-sponsored plansCurrent House and Senate bills

Top tier issues for employer-sponsored plans Current House and Senate bills

Proposed: 17 states would have delayed excise tax Three are below the average cost per active employee: $8,945 17 highest cost states >$11,000 $10,000 – 10,999 $9,000 – 9,999 $8,736 – 8,999 Next 3 states: $8,500 – 8,712 SOURCE: 2009 Mercer National Survey Of Employer-sponsored Health Plans

Estimated percentage of employers with medical plans that will trigger excise tax if no changes are made to current plan design Tax threshold: Source: 2009 Mercer Survey of Employer Sponsored Health Plans; medical premium trended at 6%, excise tax threshold trended at 4% (CPI + 1%). Based on employers’ largest medical plan (highest enrollment) of any type.

+ MLR Senate bill: Effective dates without grandfathering protectionGroup health plan standards only Plan years beginning six months after date of enactment (Subtitle A) Plan years beginning on or after Jan. 1, 2014 (Subtitle B) • Ban: • annual and lifetime limits • emergency services preauthorization • OB-GYN preauthorization or referral • Mandatory coverage: • unmarried dependent children up to age 26 • preventive services with no cost sharing • Mandatory internal, external appeals process • Enrollee choice of primary care provider/pediatrician • Insured plans only: ban on rescissions • Ban on: • preexisting condition exclusion ban (earlier for kids under age 19) • waiting periods over 90 days • Mandatory coverage: • clinical trial participation • Health status nondiscrimination • Guaranteed issue and renewal Plan years beginning on or after date of enactment Insured plans only: minimum medical loss ratio of 85% For calendar year plans: 2011 2013 2014 But…

Senate bill: Grandfathering provisionsGroup health plan standards only • In general: Subtitle A and Subtitle C shall not apply to a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment (certain exceptions, including medical loss ratio for insured plans) • Family members permitted to enroll • New employees (and family members) permitted to enroll • How long would grandfathering protection last? • Other employees permitted to enroll? • Benefit and cost-sharing changes to conform to new requirements? • Other benefit or cost-sharing changes? • Complete pass for self-insured group health plans? • Collectively bargained plans: Subtitle A and Subtitle C shall not apply to plans maintained pursuant to a collective bargaining agreement ratified before date of enactment until the date on which the last of the CBAs relating to the coverage terminates • Any coverage amendment made pursuant to a CBA solely to conform to Subtitle A and Subtitle C shall not be treated as terminating the CBA

Top tier issues for employer-sponsored plansCurrent House and Senate bills

Case studies

Employer case studies • Case studies • Hospitality employer • Financial services employer • Scope of modeling • Determine current cost and coverage • Determine expected cost using the Senate bill provisions • Identify “Red Flags” – characteristics that could increase cost, create penalties • Identify potential solutions to reduce cost and/or administrative impact • Financial impact is presented for two out of many possible scenarios • Scenario 1 – maintain current employer program • Change/improve benefits and contributions only as necessary • Scenario 2 – offer minimum qualifying coverage • Reduce all medical benefits/contributions to prescribed minimums • For both scenarios, we assume those currently enrolled maintain coverage and that 50% of employees who currently opt-out will join the employer plan or Exchange. We also assume employers do not choose to use grandfathering provisions

Case Study 1: Hospitality employer Observations • All plans have high actuarial value - 83% to 89%; exceeds 60% Senate minimum • Significant opportunity to reduce plan value • 7,000 part-time employees not covered, but Senate bill does not require coverage for part-timers Red Flags • Low full-time participation • Adding more FTEs will increase total cost • Excluding FTEs will create penalties • Large number of low paid FTEs and high employee contributions • Shared Responsibility and Free Choice Voucher risk • High cost medical plan combined with FSA • Excise Tax risk • Employer Characteristics • 18,582 full time employees • 6,841 covered (37%) • Average salary: $27,000

Case Study 1: Impact of HCR on employer cost for full-time coverage • Scenario 1:Maintain current program; minimal change Impact on Enrollment Impact of HCR on Cost • Almost 2,000 employees newly eligible for Medicaid have no employer cost • Low income employees become eligible for vouchers and move to Exchange • Over 40% of employees are in the exchange

Case Study 1: Impact of HCR on employer cost for full-time coverage • Scenario 2: Offer minimum qualifying coverage Impact of HCR on Enrollment Impact of HCR on Cost • Employer reduces coverage to minimum reducing cost of coverage for employer and employees • However, high contributions + low salaries still make coverage unaffordable for many Note: Cost in penalties for dropping coverage is $13.9 million (61% reduction)

Potential solutions: Hospitality industry employer • Avoid Shared Responsibility Surcharge/Free Choice Voucher • For one plan, reduce contribution to make coverage affordable for low income employees ($96/month for single, $129/month family) to avoid cost and administrative expense for both • Avoid Excise Tax • More aggressively manage cost of medical plan • Reduce or drop FSA • Reduce or drop dental/vision, or move to voluntary individual coverage • Reduce or drop medical plan

Case Study 2: Financial services employer • Employer Characteristics • 25,254 full time employees • 21,415 covered (85%) • Average salary: $64,700 Observations • Actuarial value range from 60% to 80%; all plans qualify • Single contribution is low • No risk of Shared Responsibility/Free Choice Voucher • Family contribution could produce Shared Responsibility/ Free Choice Voucher expense but it should be minimal due to high salaries • Large percentage of employees electing high cost plan and FSA Red Flags • Newly eligible employees • Increased cost for coverage or penalties • High enrollment and FSA election • Excise Tax risk

Case Study 2: Impact of HCR on Employer Cost for Full Time Coverage • Scenario 1:Maintain current program; minimal change Impact of HCR on Cost Impact of HCR on Enrollment • Because of high income, no employees eligible for Medicaid • Because of low premium compared to income, no employees eligible for Exchange with Shared Responsibility Surcharge or Free Choice Voucher • Individual Mandate causes more employees to enroll

Case Study 2: Impact of HCR on employer cost for full-time coverage • Scenario 2: Offer minimum qualifying coverage Impact of HCR on Cost Impact of HCR on Enrollment • As with Scenario 1, no employees were eligible for Medicaid, Shared Responsibility Surcharge or Free Choice Voucher • Additional enrollees assumed due to individual Mandate Note: Cost in penalties for dropping coverage is $18.9 million (91% reduction)

Potential solutions: Financial services employer • Excise tax • More aggressively manage cost of medical plan • Reduce or drop FSA • Reduce or drop dental/vision, or move to voluntary individual coverage • Reduce or drop medical plan

Impact of Senate tax credit on individual premium • Medicaid and Government subsidy in Exchange reduces premium if income is 400% of Federal Poverty Level ($43,344 for single) or less • Government subsidy • Tax credits which produce premium cost ranging from 2.8% of income at Federal Poverty Level (FPL) to 9.8% of income from 300% to 400% FPL

Impact of Senate tax credit on individual premium • Tax credits for individuals with income <400% FPL ($43,344 for a single) will reduce premiums to specified percent of income • Subsidized premiums range from $25/month (at FPL) to $354/month (at 400% FPL) • For individuals >400% FPL, there are no tax credits; individual seeking coverage in exchange pay full premium

Impact of tax credit on premium for family of four Example for Family of Four • The level of subsidized premium in an Exchange varies based on income and the number of members in the family (which affects the FPL) • Subsidized premium for family of four ranges from $51/month (FPL) to $720 (400% FPL) Level of affordability and Medicaid eligibility cutoff

Looking ahead

16% 17% 3% 3% 51-53% 7-10% 2019 Medicaid / CHIP Medicare Other Govt Individual / Non Group Exchange Employer Plans Uninsured Potential redistribution of lives Re-distribution of health plan lives and uninsured Current Medicaid / CHIP 43 million Employer Plans 176 million Medicare Other Govt 54 million Individual / Non-Group 27 million Uninsured 46 million 16% 12% 13% 8% 51% Source: Mercer estimates; CBO estimate of Medicaid growth

Impact on employers • Employers will continue to feel cost pressures constraining how much they can contribute to all benefit plans • 2010 renewal rates were high for insured plans • New industry fees are likely to be passed on as cost to employers • Increased enrollment in government plans will add new cost pressure on provider payment • Although uncompensated care is likely to be reduced • Mandates and excise tax concerns • Total benefit cost will reinforce employers shifting to voluntary benefits • Benchmarking prospective changes will have increased value • Employees will have heightened awareness of the new minimum for benefit value and contributions; and cost for Exchange coverage • May create new sources of employee relations concerns for employers who are not providing the minimum

Taking action January February March Ongoing Bill passes & is signed Now When reform passes Ongoing actions • Evaluate impact – immediate changes, cost to bring plans into compliance or penalties for non-compliance, cost savings opportunities • Evaluate impact on employee relations, attraction and retention • Monitor what direction that competitors and industries are taking for future plans • Determine services that will be provided by health plans • Maintain ongoing education – webcasts, GRIST, Alerts, Updates, Perspectives • Sequence of communication as reform is being finalized • High level webcast followed by a more detailed webcast upon passage • Local market meetings

Questions and contacts Questions Please type your questions in the Q&A section of the toolbar and we will do our best to answer as many questions as we have time for. To submit a question while in full screen mode, use the Q&A button on the bottom right-hand side of your screen. To submit a question while in half screen mode, use the Q&A panel on the bottom right-hand side of your screen. Linda Havlin Chicago +1 312 917 0706 linda.havlin@mercer.com Geoff Manville Washington +1 202 263 3957 geoff.manville@mercer.com Kelly Traw Washington +1 202 263 3904 kelly.traw@mercer.com George Wagoner Richmond +1 804 344 3740 george.wagoner@mercer.com CLICK HERE TO ASK A QUESTION TO “ALL PANELISTS” Feedback Please take the time to fill out the feedback form at the end of this webcast so we can continue to improve. The form will pop-up in a new window when the session ends. mercer.com/webcasts View past recordings and sign up for upcoming webcasts

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Guiding you through US Health Reform: Charting a new course