Health Care Reform Implications for US employers April 2010 [Client Name]

Health Care ReformPage 1 Functional integration will be required Operational Financial Compliance Strategic Human resources Tax Finance Legal Healthcare reform

Health Care ReformPage 2 History ► November 7, House passes H.R. 3962, the Affordable Health Care for America Act. ► December 24, Senate passes H.R. 3590, the Patient Protection Affordable Care Act (PPACA) ► January 19, Republican Scott Brown elected to Senator Edward Kennedy seat. Senate super majority lost. ► March 21, House passes the Senate bill, the Patient Protection Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872). ► March 23, President signs H.R into law ► March 25, House modifies the HCERA and is passed by both the House and Senate. ► March 30, 2010 – President signs H.R into law.

Health Care ReformPage 3 Funding – how it’s paid for A combination of tax increases and Medicare changes provide funding for health care reform. Medicare cuts $455 billion Increased Medicare high-income taxes $210 billion Other tax increases $103 billion Taxes on insurers, drug manufacturers, and medical device sales $107 billion Changes affecting employers (penalties, Medicare Part D changes, tax on high-cost plans) $89 billion

Health Care ReformPage 4 Revenue generated from health care reform Major offsets in bill10 yr. revenue est. (billions) Increase Medicare payroll tax from 1.45% to 2.35% for wages in excess of $200,000 and adds a 3.8% surtax on lesser of investment income or AGI over $200,000 ($250,000 for couples) $ Annual fees on drug manufacturers, medical device manufacturers, and insurers $ % tax on insurers for plans valued over $10,200 per individual and $27,500 per family $ 32.0 Corporate information reporting$ 17.1 Raise AGI floor on medical expense deduction to 10% from 7.5%$ 15.2 Limit health FSAs to $2,500 indexed to CPI after 2013$ 13.0 Change definition of medical expenses for HSAs, HRAs, and FSAs$ 5.0 Eliminate deduction for Medicare Part D subsidy expenses$ 4.5 Add a 10% excise tax on indoor tanning services$ 2.7 Penalty for nonqualified HSA distributions increased to 20%$ 1.4

Health Care ReformPage 5 Health care reform timeline  Medicare provider cuts*  Biofuel credit exclusion  Economic substance  Part D “Donut Hole” *  Retiree reinsurance  Tanning tax (7/1)  Minimum benefits *  OTC drug exclusion  Fees on Pharma *  Medicare Adv. Cuts*  W2 health reporting  Corporate information reporting  Medicare payroll tax  Investment income tax  Retiree drug subsidy tax*  FSA limits  Medical devise tax*  Outcomes research fee*  162(m) limits in insurers  State ins. exchanges  Individual mandates*  Employer mandates*  Free choice vouchers*  Health insurer fees*  Excise tax on high cost plans* * Impacts health plan costs

Health Care ReformPage 6 Medicare reimbursement cuts (2010) Description of issue The new law provides for reductions in reimbursement rates ($455 billion over 10 years) to Medicare providers (hospitals, physicians, and other providers of care). Implications ► This has, historically, resulted in cost shifting to the private sector as providers attempt to make up the difference in reimbursement negotiations with the health care insurers / administrators of private sector business (Aetna, BCBS, UHC, etc.) Action steps ► Assess effect on existing budgets and future inflation rates ► Consider in employee contribution rate development, COBRA rate development, and budget projections

Health Care ReformPage 7 Essential benefit provisions (2011) Description of issue The new law establishes a minimum benefit level and standardized benefits that must become a part of any employer offering including: All dependents to age 26 No cost sharing on preventative services Restrictions on annual limits No lifetime limits Actuarial value of plan Employer implications Costs may increase to meet minimum standards Increased administrative burden, at least initially Maintaining grandfathered plans Government filings to assure compliance with new standards Action stepsAssess cost of mandate: Benefit “upgrade” Additional administration Review existing benefit strategy under new rules Review new requirements for reporting and compliance

Health Care ReformPage 8 Industry fees and taxes (2011) Description of issue The new law provides for fees and excise taxes on pharmaceutical companies, medical device manufacturers, and insurance companies (on insured business). Implications ► Costs passed on to employers via cost of products purchased by employees and retirees (brand name drugs, medical devices) or through administrative charges (insurers) ► Will drive higher trends and/or administrative costs Action steps ► Assess effect on company budgets

Health Care ReformPage 9 Industry fees and taxes Year Medical Device Manufacturers Pharmaceutical Companies Health Insurers $ $ $1.8$ $2.7$3.0$ $2.8$3.0$ $3.0 $ $3.1$4.0$ $3.2$4.1$ $3.4$2.8 Increased based on premium growth Amounts in billions

Health Care ReformPage 10 Quality initiatives and fees (2013) Description of issue The new law provides for studies of new technologies, drug therapies, etc., to evaluate their value and effectiveness before allowing release into the market. Other quality initiatives exist including physician incentives and re-admission rate reductions. Implications ► Outcomes research comes with a fee for employers. Starting in 2013, all plans will be charged a fee per covered life. The fees start at $1 and increase to $2 in 2014 and thereafter. ► Other initiatives, including those focused on the Medicare and Medicaid populations, could translate into better quality outcomes and health care system cost reduction in the private sector. Action steps ► Assess potential cost savings effect on plan costs ► Assess effect of outcomes research fee on budgets and rates

Health Care ReformPage 11 Individual mandate (2014) Description of issue The new law requires all U.S. citizens and legal residents to have qualifying coverage or pay a penalty: The greater of $ 95 or 1.0% of household income in 2014 The greater of $325 or 2.0% of household income in 2015 The greater of $695 or 2.5% of household income in 2016 Increased by cost of living thereafter Exemptions for financial hardship, religious objections, etc. Exemption if lowest cost plan exceeds 8% of income Premium credits available for families between 100% and 400% of the FPL (2.0% – 9.5% of income) who purchase coverage through the exchange (2014) Employer implications Costs may increase to cover those currently without insurance Action stepsAssess potential employee migration Review existing benefit strategy under new rules

Health Care ReformPage 12 Employer mandate (2014) ScenarioProvision Employer does not offer coverage If at least one FT employee receives a tax credit, then the penalty is $2,000 times the number of all FT employees. Tax credit is available if income is less than 400% of the Federal Poverty Limit. Employer offers coverage but does not meet actuarial value or is deemed unaffordable  Employer pays a penalty equal to the lesser of: Up to $3,000 times those that receive a tax credit, or $2,000 times the number of all FT employees  Deemed unaffordable if employee contribution exceeds 9.5% of income Employer offers qualified coverage  Free choice vouchers – If employee contribution is 8.0% - 9.5% of income and less than 400% of FPL, employer pays their subsidy for health care if they opt out.

Health Care ReformPage 13 Health care excise tax (2018) Description of issue Currently, the tax code generally provides that employees are not taxed on the value of employer-provided healthcare, employers can take a deduction for the full cost of healthcare, and no insurers / third-party administrators are taxed in the normal course of doing business. The new law imposes a 40% excise tax on insurers / TPAs for the cost of coverage that exceeds $10,200 per individual and $27,500 per family in 2018 (includes healthcare, FSAs, HSAs, and HRAs). Higher thresholds may apply for certain occupations and groups. Employer implications ► Costs passed onto employers via administrative charges ► Reporting requirements to insurers / TPAs ► Tracking costs for multiple administrators ► Additional Form W-2 reporting requirements Action steps ► Evaluate additional cost impact ► Negotiate with vendors over cost pass-through

Health Care ReformPage 14 Health care excise tax assumptions 2009Medical and Drug FSATotal Individual$4,572$2,500$7,072 Family$12,924$2,500$15,424 ► CPI = 2.5% ► Health care inflation trends ► Medical and Rx = 8.0% ► No growth in FSA contributions ► No benefit changes ► Tax will be passed directly back to company by TPA / Insurer / Administrator

Health Care ReformPage 15 Health care excise tax analysis

Health Care ReformPage 16 Health care excise tax analysis

Health Care ReformPage 17 Retiree plans (2010) Description of issue Reinsurance: The new law provides for a temporary subsidy for each retiree age 55 – 64 equal to 80% of the actual claims cost above $15,000 and below $90,000 per year. The reinsurance payment must be used to offset retiree contributions or cost sharing requirements (deductibles, coinsurance amounts, co-pays, etc.). Ends on January 1, 2014 or after exhaustion of $5 billion allocated to the program. Retiree Drug Subsidy: The bill eliminates the deductibility of the subsidy effective January 1, 2013 Employer implications ► Reinsurance subsidies could exceed current retiree contributions ► Creates a new tax liability to be reflected on the balance sheet and charged against earnings Action steps ► Evaluate financial impact ► Re-evaluate retiree strategy in light of the new law

Health Care ReformPage 18 Deferred tax effect of Retiree Drug Subsidy

Health Care ReformPage 19 Other issues ► Carefully evaluate transactions to avoid triggering a new strict-liability penalty for transactions lacking economic substance (2010) ► Tax treatments of flexible spending accounts (FSA), health savings accounts (HSA), and healthcare reimbursement arrangements (HRA) in 2011 ► 90 day waiting period maximum ► Auto-enrollment for employers with 200 or more employees ► W2 reporting for 2012 ► Requirement to file information returns for payments aggregating $600 or more in a calendar year that are made to a single payee (starting in 2012) ► Individuals making over $200,000 ($250,000 for couples) will pay an additional 0.9% payroll tax on their wages, representing an increase in the Medicare hospital insurance tax (2013) ► FSA limitations in 2013 at $2,500 ► Individuals will pay a 3.8% tax on either their net investment income (e.g., income from interest, dividends, capital gains) or the excess of their modified adjusted gross income over $200,000 (individuals) or $250,000 (couples), whichever is less (2013)

Health Care ReformPage 20 EY economic modeling capabilities of health care reform ProvisionHealth care cost effect modeled Medicare payments (2010) Changes in Medicare and Medicaid reimbursements rates in the past have resulted in cost shifting from the public sector to the private sector. Minimum benefit requirements (2011) Plan costs effect from required changes in annual or lifetime limits, dependent eligibility status, waiting period rules, elimination of co-payments for preventative services, actuarial value rules, etc. Industry fees and taxes Fees on pharmaceutical companies (2011), medical device manufacturers (2013), and insurers (2014) will be passed through to the end consumer or user of health care services. Outcomes research (2013) A fee for each covered life of the employer to fund comparative effectiveness research. Employer mandate (2014) Penalties for low wage employees who elect plans from the exchange and potential payments for the “Free Choice Vouchers”. Insurance Exchanges (2014) As uninsured move to the exchange, hospital bad debt will be reduced, reducing pressure to increase reimbursement rate for private sector plans. Individual mandate (2014) These provisions will likely affect the make-up of the employee population that chooses to elect coverage through the employer as penalties could apply if qualified coverage is not obtained. “Cadillac” Tax (2018) Direct or indirect pass-through of cost to employers from the insurers / TPAs. Quality initiativesOutcomes research, physician incentives, re-admission rate reductions, and other quality initiatives will improve quality of care and reduce employer costs. Retiree plansChanges in the deductibility of the Medicare Part D subsidy (2013) and access to retiree reinsurance payments (2010).

Health Care ReformPage 21 ► Develop benefit strategies to align with and/or mitigate effect of reform ► Benchmark plan offerings against market and best practices ► Evaluate changes to healthcare reimbursement accounts, health spending accounts and flexible spending accounts for value to employees ► Identify ways to reduce cost effect of reform Organizational considerations Strategic Financial Compliance Operational ► Develop actuarial projections of employer’s healthcare costs ► Assess tax implications (employer and employee) ► Evaluate effects employees migration resulting from employer and individual mandates ► Evaluate cost to cover mandated benefits ► Evaluate cost of industry fees on plans ► Understand effect on current benefit service delivery model ► Evaluate new administrative requirements ► Manage employee communications ► Address new compliance requirements ► Conduct compliance review under new regulations to assess risk ► Evaluate HR structure for ability to manage new requirements ► Benchmark plans against minimum requirements under legislation Health Care Reform

Page 22 Next steps for employers ► Evaluate the effect of changes on your current group health plan options ► Engage decision makers from finance, legal, tax, and HR to address cost, compliance, tax, and compensation issues ► Identify a strategy to address both short-term and medium-term changes ► Address cost and compliance issues of keeping "grandfathered" plans ► Determine communications strategy to address employees’ questions ► Develop comprehensive strategy for evaluating and resolving issues that may arise