Benefit Trends: Evaluating Consumer-Based Models

2. Benefit Trends: Evaluating Consumer-Based Models Presented By: Christopher J. DeLorey President Telamon Insurance & Financial Network cdelorey@telamonins.com 617-614-1215

3. Key Points • Factors driving trends • Employer options • Employee perspective • Consumer Driven Health Plans (CDHP) • What’s next?

4. Factors Driving Trends • Rising Health Insurance Costs • The national average for medical plan rate increases is 15% to 20% • These increases are driving employers to look for solutions • Fueling interest in consumer models

5. Factors Driving Trends • Health Care Cost Drivers: • Skyrocketing Rx costs • Rising hospital and physician costs • Advances in technology • Increase in chronic conditions • Increased utilization • Aging population • Lack of consumer involvement in purchase

6. Factors Driving Trends • In 1960, consumers paid for 50% of health care costs • In 2003, they pay for only 15% • Consumers don’t know the true costs of health care

7. Factors Driving Trends • Entitlement Perspective in America • Corporations are bottomless pits • Unrestrained desires • Employees are unaware of the actual costs • “Want it All” for a $10 co-pay

8. Employer Options • Medical Cost Outlook • Impossible for employer to pay for all the future drug/medical technology and services desired by employees • Employers have a few options: • Drop coverage • Absorb the cost • Pass on the premium increase to employees • Reduce coverage • Offer a consumer-based model

9. Employer Options • Moving Toward Consumer Models • Determine level of medical benefits needed to recruit/retain employees • Provide a menu of group medical options • Set employer subsidies based on efficient plans or base year subsidy level • Encourage employees to select efficient medical plans • Motivate employees to “own” their personal health status • Facilitate employee use of pre-tax flexible spending accounts

10. Employee Perspective • Educate them on health care costs • Educate them on products • Provide them tools

11. Employee Perspective • Are Your Employees Ready for Consumerism? • 87% of employees confident in choosing a health plan • 70% of employees understand how to navigate the health care delivery system • 87% willing to take on more responsibility for researching, choosing, and maintaining their health coverage • 49% want full responsibility for purchasing their own health care coverage

12. Consumer Driven Health Plans (CDHPs) • A concept, not a product • Often referred to as “consumerism” • Engages the consumer in making health care decisions and purchases • Encourages better health • Many variations

13. History of CDHPs • MERPS (Medical Expense Reimbursement Account) • Allowed tax-free reimbursement to employees • 100% employer-funded • Sometimes called 105(h) plan or direct reimbursement plan • Uncertainty as to ability to rollover unused funds or spend downs • Typically did not include any health tools or health assessments

14. History of CDHPs • Health Flexible Spending Accounts • Allowed for tax-free reimbursement to employees • Typically funded via employee salary deduction or flex credits • No rollover allowed • Individual insurance premium ineligible

15. Web-Based Resources & CDHPs • Carrier Resources • Current balances • Claims activity • Medical Libraries • Johns Hopkins • First Data Bank • Reuters News • The Natural Pharmacist • Personal Health Tools • Health risk assessments • Health calculators • Personal health records • Drug interaction information • Provider Search • Healthcare Prices • Diseases/conditions • Procedures and providers • Visits • Prescription drugs • Marketplace • Online shopping

16. Types of Consumer Driven Health Plans • Popular emerging options: • Defined Contribution Plans • Health Reimbursement Accounts (HRAs) • Health Flexible Spending Accounts (FSAs)

17. Defined Contribution Plans • Defining the contribution employers will spend and passing the rest of the cost onto the participant • An employer gives employees a fixed sum of money to purchase one of several healthcare plans; if an employee chooses a plan that costs more than the amount provided by the employer, the employee pays the difference

18. Defined Contribution Plans • Establish a high deductible plan which is partially funded by the employer; any employer monies not spent by the end of the year may be rolled over to the next year • Employer defines the amounts of reimbursement to providers, thus encouraging the participant to negotiate directly with provider to accept the plan’s reimbursement as payment in full

19. Defined Contribution Plans • Add additional co-pays for care at more expensive facilities • Providers are grouped into mini-networks based on cost/quality; employee pays a higher contribution in order to access higher cost providers (Patient Choice Model)

20. Defined Contribution Plans Cons • Employees • Member responsibility • May be more involved in negotiating with providers • Employers • Potentially complex enrollment • Employee education Pro • Employees • May have choice of plans • Become better consumers • Employers • Predictable cost

21. Health Reimbursement Arrangements (HRAs) • IRS Sec. 105 Plans • Allows employer to reimburse employees tax free for medical expenses

22. HRAs - Financing • HRAs must be paid by employers • HRAs may be unfunded or funded • Typically, employers use unfunded “credits” • HRAs may accept some after-tax employee contributions (e.g., COBRA premiums) • HRAs may not accept pre-tax employee contributions, either directly or indirectly • Use of debit cards when employer pays first

23. HRAs - Reimbursement • HRAs can reimburse deductible “medical expenses” • Health expenses not reimbursed by other plans • Health insurance premiums (including LTC, unless HRA is a health FSA) • HRAs can’t reimburse non-health expenses • Can’t pay bonus, severance, or death benefits • Can’t reimburse premiums paid with pre-tax dollars

24. Health Coverage Deductible Preventive 100% HRA Member Responsibility How Does a High Deductible Plan Work? • Either member or HRA pays first • 100% for preventive • Rollover of account is an option

25. HRAs and COBRA • HRAs are subject to COBRA rules • Issues to consider: • Notices • Elections • Reimbursement amounts • Duration of coverage • Premiums • Non-Discrimination rules apply

26. Coordinating HRAs with High-Deductible Plans • An HRA may be offered as a stand-alone option • Employees can be required to elect high-deductible coverage to receive an HRA • Employees can pay for the high-deductible coverage with pre-tax contributions (but can’t subsidize HRA coverage with pre-tax dollars) • HRAs may be coordinated with high-deductible health plans • No fixed coordination rules; typically, HRA pays first and covers same expenses as high-deductible plan

27. HRAs and the Rollover Feature • Provides incentive to save for future needs • If an employee knows they are leaving they may spend quicker • Previous rollovers may encourage higher dollar claim submission • Be aware of “look back loophole” (HRAs can cover expenses from previous years) • How do you have a COBRA premium “actuarially determined?” • How do employees get health care cost information? • Can create a future liability for plan (plan can cap the rollover)

28. Education • Personal Health Management Toolkit • Online provider information • Online prescription drug cost information • Health Risk Appraisals • 24-hour nurselinee • Wellness program Education Prescription drugs carved out and provided on a coinsurance basis Education Education Preventive Care Covered 100% Prescription & OTC Alternative Drugs Covered 70% Preventive care is carved out of the program and is provided at 100% Employee uses this first to cover healthcare expenses. Unused portions are carried over to next plan year. Personal Care Account $1,000 Employee only $1,500 Employee + 1 dependent $2,000 Employee + 2 or more dependents The employer funds this portion Once the PCA is exhausted, employee is responsible for 100% of healthcare expenses until the maximum is reached. The employee funds this portion Bridge – Employee Deductible $2,000 Employee only $3,000 Employee + 1 dependent $4,000 Employee + 2 or more dependents Employer and employee share the premium cost of this traditional PPO plan PPO plan covers employee after bridge deductible is met. Catastrophic Health Coverage 90/70 PPO Plan Designed to encourage network utilization Communication Communication Communication

29. HRA Pros and Cons Cons • Employees • Member responsibility • Cost, if chronic disease • Employers • Adverse selection • Actual cost savings • Accuracy of actuarial assumptions • High HRA administrative cost Pro • Employees • Rollover of unspent funds • Employee directs own care • Preventive coverage • Decision support tools • Employers • Less involved in coverage • Cost control • Shares risk of cost/utilization w/employee

30. Health Flexible Spending Accounts (FSAs) • Allowed for tax-free reimbursement to employees • Typically funded via employee salary reduction • No rollover allowed • Individual insurance premiums ineligible for reimbursement

31. HRA Coordination with Health FSAs • HRAs may be offered in lieu of FSAs • HRAs may be offered in addition to FSAs • Coordination rules • Health FSA may reimburse expenses before the HRA is exhausted if written into both plan documents • FSA can also pay first if expenses are different expenses than HRA

32. HRA – FSA Rules Ignored • HRAs are not subject to “use-it-or-lose-it” rule • Permits carry forward of unused amounts • Accumulations may be capped • Terminated employees may spend down accumulations • HRAs are not subject to “uniform coverage” rule • Permits HRA credits/contributions to accrue by payroll period, or less frequently (e.g., monthly, quarterly, semi-annually)

33. Health Savings Accounts (HSAs) • Tax deduction for amounts contributed • Employer and employee contributions • Must offer with high deductible health plan • May not be covered by any other health plan • Self employed individuals are eligible • May include in cafeteria plan

34. HSA Pros and Cons Pros • Employees • Rollover of unspent funds • Own account • Can reimburse some insurance premiums • Can save tax free for later use • Employers • Limits liability • Employees may put cost pressure on health care providers • Employer contribution may be used as employee incentive • Employer contributions not subject to FICA Cons • Employees • More cost sharing • New information to learn • Must take more responsibility • Employers • Requires a high deductible plan • Trustee requirement can add cost and complexity • HDHPs may cause employee resentment • Can’t control employer contributions

35. HSAs – Open Issues • Claims adjudication & substantiation • ERISA • DOL claims rules • COBRA • HIPAA

36. Comparison of HSA, HRA, FSA:

37. Comparison of Tax-Advantaged Accounts:

38. Comparison of HSA, HRA, FSA Continued…

39. Comparison of FSA, HRA and HSA

40. Where Are We? • 93% of US companies offer some type of health promotion program (Hewitt Associates 7/02) • First view of 2002 CDHP customers cut cost increases by 60% with greater consumer incentives and choice (Humana SmartSuite) • PricewaterhouseCoopers' touts: • Reductions in number of Rx & office visits by 5% - 25% • Overall utilization dropped 10% • First year health care trend was in the range of ­5% to 10% • 58% of HMOs either have or plan to have a CDHP within 1 year (Milliman 2003 Intercompany Rate Survey)

41. What’s Next? We need to start somewhere… • Develop a strategy • Educate employees on healthcare costs • Will help eliminate the “entitlement” perception • It’s “our” money being spent • Explore CDHP plans in our market • Create/evaluate contribution strategy

42. What’s Next? • Employer creates consumerism incentives • Encourage employee self-care • Utilize community wellness resources • Tie financial incentives to participation in programs • Maximize disease management programs • Promote Web tools by carriers/TPAs

43. Review • Factors driving trends • Employer options, status quo won’t work • Employee perspective, ready • Consumer Driven Health Plans (CDHP) • What’s next?