HRMAG

1. HRMAG The Path to Consumer Driven Healthcare Interpretation ~ Preparation ~ Opportunity ~ Impact ________________________________________ Presented by: Sean Willoughby-Ray Scott Benefit Services May 5, 2005

2. Key Points • Trends in Healthcare Demand and Expectation • Understanding Cost Drivers • Defining Consumer Driven Healthcare • Objectives & Challenges • Preparation • Transition • Early Results

3. Trends in Healthcare Demand & Expectation Heading in the Wrong Direction?? • Blind to the actual cost • The “Copay” defines the value of your benefit plan • Expanding definition of healthcare • Prescription drug blitz • Want more….don’t expect to pay more • Lifestyles adding to chronic conditions • Exponential growth of healthcare consumption

4. Trends in Healthcare Demand & Expectation Cost Awareness on the Decline Source: EBRI Brief #247 – July 2003

5. Trends in Healthcare Demand & Expectation Employees Perceptions are Distorted • Employees underestimate what their company pays for healthcare coverage by 63% • Employees overestimate what they pay for their healthcare coverage by 69% Source: EBN Survey, December 2003

6. Trends in Healthcare Demand & Expectation Entitlement ? “ whereas once health care and health insurance were understood as activities related to acute injuries and illnesses, they have expanded to include preventative and mental health services, long term care, complementary medicine, and the ability to maintain psychology, social, spiritual, and sexual performance far into the golden years” James C. Robinson, PhD JAMA May, 2001

7. Trends in Healthcare Demand & Expectation • Pharmacy Utilization • 6% of adult Americans were on maintenance prescriptions in 1992 • 62% of adult Americans were on maintenance prescriptions in 2003 Source: Express Scripts: 2004 Outcomes

8. Trends in Healthcare Demand & Expectation RX Growth By Therapeutic Class “Lifestyle” Drugs Asthma $300 $300 Gastrointestinal $250 $250 Anti-Cancer In Billions $200 $200 Cardiovascular $150 $150 $100 $100 Central Nervous System $50 Anti-infectious $0 119500 1960 1970 1980 1990 2000 2010 Lifestyle Drug: a pharmaceutical product characterized as improving quality of life rather than alleviating disease". Source: Express Scripts

9. Trends in Healthcare Demand Tobacco use, lack of regular exercise and poor nutrition are the leading lifestyle habits that are contributing to the rise of chronic conditions in America” • U.S Department of Health & Human Services (2003

10. 1991 Trends in Healthcare Demand Obesity Trends* Among U.S. Adults(*BMI 30, or about 30 lbs overweight for 5’4” person) 1996 2003 No Data <10% 10%–14% 15%–19% 20%–24% ≥25%

11. Trends in Healthcare Demand • 61% of American adults are overweight • 76% increase in Diabetes in adults ages 30-50 since 1990 • 78% of Americans are not meeting basic activity recommendations • 80% of Americans are not meeting the FDA’s recommended dietary guidelines Source: Centers for Disease and Control (2004)

12. Trends in Healthcare Demand The Number of People with Chronic Conditions is Rising Rapidly Source: Wu, Shin-Yi and Green, Anthony. Projection of Chronic Illness Prevalence and Cost Inflation. RAND Corporation, October 2000.

13. Trends in Healthcare Demand • Chronic Diseases account for 75%-78% of this country’s annual health care costs. Lifestyle Driven Driven by the Patient Decisions

14. Trends in Healthcare Demand Growth in Per Capita Consumption of Healthcare Source: “2003 Trends” - Department of Health & Human Services

15. HealthcareCost Drivers • Medical technology • Prescription drugs • Anti-managed care sentiment • Consumer demand • Legislation • Health plan consolidations • Provider push back on fees • Lifestyles • Carrier profit pressures • Administrative complexity • Uninsured • Aging population (Boomers) • Cost shifting to private sector • Waste & Quality of Care • Persistent entitlement mindset • Third-payer system - no ownership

16. Healthcare Cost Drivers • Healthcare CPI 3-4% • Medical Technology 3-4% • Aging Demographics 2-3% Healthcare Trend Infinitum…..10%

17. Solutions?? • Provider Networks • Managed Care • Pharmacy Benefit Managers -------------------------------------- • Increase premium contribution • Adjust plan design _______________________ • Disease Management • Health Risk Management • Initiate “Consumerism” Supply Side Controls Cost Shifting (short term) Demand SideControls

18. Objective of “Demand-Side Controls” 1. Use Less Healthcare! • Health Risk Management • Consumerism 2. Make it Insurance….again! • Consumer Driven Health Plans (high deductible plans with limited first dollar coverage)

19. Defining Consumer Driven Healthcare • Not a product • A concept….philosophy….a strategy in healthcare access • Supported by Consumer Directed plan designs • Facilitates the engagement of the Patient • Leverage the most effective form of cost control…consumer purchasing power • Patient has more choice, flexibility, control over healthcare decisions and expenditures • Patient has more “skin in the game”

20. Consumer Driven Healthcare Source: IFTF, Centers for Disease Control and Prevention

21. Defining Consumer Driven Healthcare Objectives of Consumer Driven Healthcare • Raise Patient awareness and participation in the cost of care • Improve satisfaction by providing more control and choice • Shift expectations – greater self reliance • Reduce Healthcare Cost • Short Term: Impact healthcare inflation through efficient utilization and reducing unnecessary utilization. • Near Term: Impact provider pricing. Increased public awareness of providers that offer the highest quality/value proposition. Promote prevention • Long Term: Impact lifestyles. Reduction of chronic conditions.

22. Defining Consumer Driven Healthcare The “Chassis” of Consumer Driven Healthcare • Health Reimbursement Account (HRA) • Health Savings Account (HSA)

23. Health Reimbursement Account (HRA) • Section 105 (June 2002) • Employer funded only • Employee contribution prohibited • Roll over allowed • Employer controlled & sponsored • Employer determines portability • Highly flexible and customizable • Adjudication required • $$ can be used to reimburse medical expenses under IRS Section 213 (FSA)

24. Deductible $2,000 Defining Consumer Driven Healthcare HRA ~ “Bridge” Model Sample Plan with $2,000 deductible “Health Reimbursement Account” $1,000 First $$ coverage for medically necessary expenses. Employer determines rollover parameters of unused funds (IE: 50% to a maximum of $2,000) Annual employer pre-tax allocation to an employee’s HRA Employee is responsible for paying an out-of-pocket amount to “Bridge” to more coverage Bridge $1,000 Traditional HealthCoverage Coinsurance up to a specified out-of-pocket-maximum. Employer provides coverage above the deductible 100% after out of pocket max

25. Health Savings Account (HSA) • Similar in concept to a “HealthcareIRA” • Individually owned & controlled account held by a bank or other IRS approved custodian • HSA balances roll over each year • Tax deductible contributions can be invested…earnings grow tax free • Distributions are tax free (for qualifying medical expenses) • Eligible individuals cannot be Medicare eligible • An HSA must be paired with a High Deductible Health Plan • No formal adjudication required • “…between you, the IRS and God”

26. Health Savings Account (HSA) Qualified Expenses under an HSA • Diagnosis, cure, mitigation, treatment, or prevention of disease • Prescription drugs • Qualified Long Term Care services and insurance • COBRA premiums • Health insurance for those on unemployment compensation • Medicare Part A and B premiums. Medicare HMO premiums

27. Health Savings Account (HSA) Qualifications for a High Deductible Health Plan • Annual Deductibles: • Individual: $1,000 minimum / $5,000 maximum • Family: $2,000 minimum / $10,000 maximum • Deductibles do not “Stack” • Maximum out-of-pocket limit: • $5,100maximum out of pocket for single • $10,200 maximum out of pocket for family • Includes deductibles and coinsurance • Maximum out of pocket amounts do not “Stack” • Strict limits on first dollar coverage • No first $$ coverage (copays, etc) • Only routine preventive care can be covered on a first dollar basis • Rx copays after deductible has been met

28. Health Savings Account (HSA) Contributions to an HSA • Single: The lesser of the in-network deductible or $2,600Family: The lesser of the in-network deductible or $5,150 • Employee contributions can be made through a Section 125 plan….and can be adjusted at anytime. • Employers can contribute to an employees HSA • Comparable contribution and non-discrimination rules apply • Employer cannot direct use of contribution or require formal proof of use for qualified medical expenses

29. Anatomy of an High Deductible Plan for an HSA • Parameters of a HDHP (Example assumes 80/20% coinsurance) FAMILY SINGLE Minimum Deductible: $1,000 Minimum Deductible: $2,000 Maximum Annual Out of Pocket: $5,100 Maximum Annual Out of Pocket: $10,200 20% Coinsurance 20% Coinsurance 100% 100%

30. Market Reaction to HSA’s • Interpretation / clarification still needed from IRS • Carriers scrambling to be able to provide qualifying HDHP’s • Much confusion with Employers • Excitement… “the silver bullet ??” • HDHP’s are being priced all over the Map….10% to 40% less than traditional plans. • Employers considering funding part of an employee’s HSA • Not much discussion on preparation or transitioning strategies

31. Today’s Users……. Not “Consumers” • Confusion with current plan designs • Three-tier Rx copay ?? • Generic vs Brand vs Over the counter • Contrast Media vs Non-Contrast Media MRI ?? • Don’t know the questions • Employees confused and suspicious

32. Critical Ingredients of CDH Plan • Decision Support (limited…but growing) • Web Based • Current examples Include: • Nurse Line • “Healthcare Cost Estimator” • “Pharmaceutical Advisor” • Hospital Comparative Tool • Employee education and awareness

33. Turning Towards CDH……..What To Do Now? • “Here you go Joe” • Transition Strategy • Establish your starting point • Why……Establish awareness • How……Opportunities for to access care more efficiently…use less! • Incremental steps…...”Training wheels” • “Here you go Joe”

34. 1. Establish Your Starting Point • Claims ~ Utilization patterns • Culture….Expectations and Cost Awareness • Benefits philosophy • Web penetration • Plan Design and Enrollment • How high is your deductible / Coinsurance max now? • Contribution strategy….do employees pay very little? • Decision Support Utilization: Website/ nurse line/ preventive measures/ DM • Resources available to educate, communicate, support • FSA success? • 401K success?

35. 2. Why….Establish Awareness • Benefits Committee • “Connectors” • Regular communications highlighting cost issues and trends • Uncover and communicate YOUR utilization trends • Share the numbers • Reframe the issue

36. 3. How…Opportunities to access care smarter • Highlight decision support tools • Examples of “Consumerism” in accessing healthcare • Highlight cost savings to them

37. 3. How…Opportunities to access care smarter $4,115 annual plan savings

38. 3. Incremental Steps….”Training Wheels” • Defined employer contribution with plan choice • Offer a Flexible Spending plan • Fund your dental through an HRA • Fund your Rx through an HRA

39. Consumer Driven Healthcare: Results & Penetration • Depends on who you ask • Early…no credible trends. • HRA & Bridge • 12% penetration in 2003 (mostly Fortune 1000) • 3.6% penetration in small to mid market (100 – 3,000 employees) • High employee satisfaction….87% reenrollment rate • 65% rolled over $$ in their HRA • Average age less than 3-4% of norm • Equally diversified participating population • Higher preventative care • 10% more generics used / Higher formulary compliance / Mail order up by 7% • Overall reduction in office visits and Rx utilization by 5-15% • Overall utilization dropped 10% • First year healthcare trend was in the range of -5% to 10%

40. Final Thoughts • Health care costs will continue to rise • Real solutions can’t be short term cost-shifting tactics • “Supply-Side” solutions are exhausted • CDH plans are work in progress but have significant market traction • Health Risk and Disease Management are critical strategies too • Consumers are NOT ready to take on total responsibility • But, there is real opportunity and the outlook is positive • Your employees are looking to you for guidance and leadership • Don’t underestimate the rate of change that can happen within your organization

41. Thank You! Sean Willoughby-Ray Scott Benefit Services sray@scottins.com 336-510-0070