Health Care Reform: A New Environment for Benefit Negotiations

1. Health Care Reform: A New Environment for Benefit Negotiations Cynthia D. Stribling, CEBS Vice President/Training Director Keenan & Associates

2. Your Unique Challenges • Preparation for health benefit changes in anticipation of 2014 • Development of a coordinated game plan for 2014, even if some or all of Health Care Reform may change • Negotiation of health benefits when much of the 2014 paradigm is unknown

3. Our Purpose • Inform you of our view of Health Care Reform’s impact in 2014, recognizing that there is very little guidance • Facilitate your fact and data gathering • Assist in your development of real-life scenarios • Identify issues in advance of their impact • Foster an orderly approach to benefit discussions

4. How Will You Handle Automatic Enrollment?

5. Automatic Enrollment - 2014 • New FTEs must be enrolled, automatically, in a group health plan – subject to plan waiting periods • FTEs already enrolled in a plan must continue to be enrolled unless a new election is made • Employees must be given notice and the opportunity to opt-out of health coverage

6. Automatic Enrollment - Issues • Definition of “Full-Time Employee” • Plan and tier of coverage in which to enroll the FTE • The requirements for allowing employees to opt-out

7. Action Items • Definition of FTE - who must be enrolled? • Ensuring that employees/families receive the coverage they want - defaults • New requirements for opt-outs, including how they relate to cash-in-lieu

8. How Will The California Health Benefit Exchange Work?

9. California Health Benefit Exchange • Established January 1, 2011 • Operational January 1, 2014 for individuals and small employers (50 employees or less) • Independent public entity within California government -- not affiliated with any State agency or department • Overseen by a five-member board selected by the Governor, Speaker and Senate Rules Committee

10. Exchange Board Members • Diana S. Dooley, Current CA Secretary, HHS (Chair) • Kim Belshe, Former CA Secretary, HHS • Paul Fearer, Senior Executive Vice President and Director of Human Resources, Union Bank • Susan Kennedy, Former Schwarzenegger Chief of Staff • Robert Ross, MD

11. Function of California Exchange • Sets standards for insurance companies to “qualify” to offer their products on the Exchange • Negotiates and selects which qualified companies can offer their products on the Exchange • Administrative powers, determines individual eligibility for coverage, eligibility for Federal subsidies, etc • Interfaces with employers • Coordinates with other agencies

12. Exchange Health Plans • Plan Benefits • Bronze: Covers 60% of the benefit costs • Silver: Covers 70% of benefit costs • Gold: Covers 80% of benefit costs • Platinum: Covers 90% of benefit costs • Deductibles: $2,000 single/$4,000 family • OOP Limits: $6,000 single/ $12,000 family

13. Federally Negotiated Exchange Plans • At Least Two Multi-State Plans Negotiated by Federal Office of Personnel Management • Plan One – Offered by a Non-Profit Entity • Plan Two – Does not cover abortions

14. Exchange Structure

15. Why Purchase Exchange Coverage? • Exchange coverage may be a better fit for the employee • Networks/Hospitals • Coverage (less/more) • Exchange coverage may be less expensive than employer coverage • Fixed monthly cost may be less than employer’s (although potential overall cost may be higher if benefits are used) • Financial incentives to purchase on the Exchange

16. Action Items • Definition of FTE - who must be enrolled? • Ensuring that employees/families receive the coverage they want - defaults • New requirements for opt-outs, including how they relate to cash-in-lieu • Comparison of employer plans to Exchange plans

17. How Does An Employee Purchase Health Benefits On The Exchange?

18. The Exchange Transaction The California Exchange (Central Administrator) Employee 2012 Form 1040 & Proof of Citizenship HHS Social Security IRS Immigration • CA Exchange Plans • (Exchange  Insurers) • Multi-State Plans • (OPM  Insurers)

19. General Rules - 2014 • Mandate: Individuals and their dependents must have health coverage or pay a tax penalty • Exempt: If the cost of self-only coverage costs more than 8% of Household Income

20. Employee with No Health Coverage • Individual Mandate tax penalty as follows: • 2014: Greater of $95/adult ($47.50/child) or 1% of HI to $285 maximum • 2015: Greater of $325/adult ($162.50/child) or 2% of HI to $975 maximum • 2016: Greater of $695/adult ($347.50/child) or 2.5% of HI to $2,085 maximum

21. General Rules - 2014 • If self-only coverage costs 9.5% or more of HI, it is “unaffordable” or • If the plan’s share of benefit cost is less than 60% • Then the employee is eligible for a Federal subsidy if health coverage is purchased on the Exchange

22. Income Illustration

23. The Exchange Transaction Exchange Analysis for employee eligibility for a Federal subsidy: • Is the employee’s Household Income between one and four times the Federal Poverty Level? • What is the employee’s cost, as a percentage of Household Income, toward self-only coverage of the employer’s medical plan?

24. Federal Poverty Level • Household Income as a Multiple of FPL: • Examples of FPL (2011): Fam. SizeFPL2 x FPL4 x FPL 1 $10,890 $21,780 $43, 560 2 $14,710 $29,420 $58, 840 3 $18,530 $37,060 $74, 120 4 $22,350 $44,700 $89, 400

25. The Exchange Transaction • Federal subsidies are: • Premium Assistance Tax Credit payable directly in advance to the insurance company by U.S. Treasury, or to employee as a reimbursement at year-end, and • Reduced Cost Sharing lowering the Exchange Plan cost sharing requirements

26. Example – Jones Family • Family Size: 4 • Salary: $45,000 • Household Income: $35,000 • Employer Self-only coverage: $280/mo • Employer Family coverage: $450/month • Exchange Silver family coverage: $800/month • Exchange Bronze family coverage: $600/month

27. Example – Jones Family • Jones is eligible for a tax credit • Jones Household Income is between 1.38 and 4 times FPL • Cost of self-only coverage exceeds 9.5% HI • What is the amount of the tax credit? • Based on sliding scale multiple of Household Income to the Federal Poverty Level

28. Example – Jones Family • Jones HI = $35,000 • FPL for a family of four = $22, 350 • Jones’ HI is 1.56 (156%) x FPL • Jones’ cost for the second lowest cost Silver level coverage on the Exchange is 4.3% of Household Income

29. Example – Jones Family

30. Example – Jones Family • Full cost of Silver Level Family Coverage is $800/month • Jones cost, using the credit, will be $125/month • Monthly tax credit amount is $675/month • Annual Tax Credit = $8,100

31. Example – Jones Family • Jones can purchase any coverage on the Exchange and receive the same credit amount, or a lesser amount if the cost of coverage is less than the credit. • For example, Bronze coverage at $600/month would cost Jones $0.

32. Example – Jones Family • If Jones actually purchases Silver level coverage, there is reduced cost sharing: • OOP Maximum reduced from $11,000 to: $4,000 • Other costs are reduced to ensure that Jones’ share of the total allowable cost of the plan is no greater than a fixed percentage.

33. Employer Coverage Family – $450/mo 15.4% HI Paid Pre-Tax Deductibles - ? OOP Max - ? Subsidized Coverage Silver Family -$125/mo 4.3% HI Paid After-Tax Tax Credit - $8,100 OOP Max - $4,000 Other cost reductions Bronze Family - $0/mo OOP max - $11, 900 Deductible - $4,000 Comparison – Jones Family

34. Action Items • Identification of groups most likely eligible for tax credits using a broad definition of FTE • Develop an approach to estimating HI • Estimate employee cost for self-only coverage as a percentage of HI for those groups

35. How Does The Exchange Transaction Work For The Employer?

36. The Exchange Transaction Employer The California Exchange (Central Administration) Employee 2012 Form 1040 & Proof of Citizenship HHS Social Security IRS Immigration • CA Exchange Plans • (Exchange v. Insurers) • Multi-State Plans • (OPM v. Insurers)

37. Example Jones Family - Continued • Exchange contacts the employer and advises that Jones, one of its employees, is eligible for a Federal Subsidy • The employer can appeal this determination • Personal tax information of the employee must be made available as part of the appeals process

38. Example – Jones Family • Employer Tax Penalty: If just one FTE purchases coverage on the Exchange and receives a Federal subsidy, the tax penalty is: • Lesser of: • $3,000/FTE who receives a subsidy; or • $2,000/FTE whether or not receiving a subsidy (excluding first 30 FTEs)

39. Example – Jones Family • Jones’ employer has 500 FTEs • 50 FTEs enrolled in the Exchange and received a Federal Subsidy • Employer tax penalty is the lesser of: • $150,000 (50 x $3,000) or • $940,000 (470 x $2,000)

40. Employer Employer cost of Family Coverage for Jones - $0 Tax Penalty – ($3,000) Cash-in-lieu – ($1,200) Savings: $5,800 Jones Silver Family -$125/mo Tax Credit - $8,100 Cash-in-lieu - $1,200 Cash Benefit - $9,300 Comparison – Jones Family

41. Adverse Incentives Create Adverse Selection

42. The Effect of Adverse Incentives • A purchaser of health care chooses insurance that is to their economic advantage • A healthy individual may choose not to buy insurance, or choose the leanest benefit available • An individual with known health conditions will try to obtain a richer benefit plan • This “adverse selection” means that the out-of-pocket cost of a health plan often becomes the most important part of the decision, NOT the appropriateness of the benefits • Anything that adds financial incentives to the purchase decision, such as cash-in-lieu of benefits, can drive healthier people out of the plan, resulting in a smaller sicker population remaining and driving up costs.

43. Employer Employer cost of Family Coverage for Jones - $0 Tax Penalty – ($3,000) Cash-in-lieu – ($1,200) Cash Savings: $5,800 Jones Silver Family -$125/mo Tax Credit - $8,100 Cash-in-lieu - $1,200 Cash Benefit - $9,300 Comparison – Jones Family

44. Action Items • Evaluate cash-in-lieu with respect to potential subsidy eligible employees • Evaluate potential tax penalties for employer – is this a good/bad thing? • What employee behaviors should be encouraged?

45. Uniform Summary of Benefits

46. 2012? – Uniform Summary of Benefits • Original Requirement: By March 23, 2012, employees must receive a statement of whether the plan or coverage: • Provides “minimum essential coverage” and • Ensures that the plan or coverage provides not less than 60% of the benefits and cost • Implementation delayed on 11/17/11, “until final regulations that take into account stakeholder feedback” • Why is this important?

47. Recap of Action Items

48. Action Items • Definition of FTE – who must be enrolled? • Ensure that employees/families receive the coverage they want – defaults • New requirements for opt-outs, how do they relate to cash-in-lieu? • Comparison of employer plans to Exchange plans • Identify groups most likely eligible for tax credits and subsidized cost sharing

49. Action Items • Develop an approach to estimating employee HI for planning purposes • Estimate employee cost for self-only coverage as a percentage of HI for those groups • Evaluate cash-in-lieu with respect to potential subsidy eligible employees • Evaluate potential tax penalties for employer – is this a good/bad thing?

50. Action Items • What employee behaviors should be encouraged?