THE EMPLOYER’S ROLE IN MEDICARE Henry de Vos Lawrie, Jr.Kathryn J. Greenlief McGuire Woods BattleUSAA & Boothe LLP

2 TRADITIONAL MEDICARE n Defined Benefit Fee-For-Service n Out-of-Pocket – Part A (Hospital) n $768 (1-60) – Part B (Medical) n $100 Deductible n 20% Co-Pay

3 TRADITIONAL MEDICARE (continued) n Major Coverage Exclusions – Prescription Drugs – Routine Physician Exams – Long Term Care – Dental and Dentures – Hearing Aids – Routine Eye Care n Per Capital Out-of-Pocket est. $2,454

4 TRADITIONAL EMPLOYER WRAP PLAN n Coordinates With Parts A and B – Co-insurance and Out-of-Pockets – Additional Benefits (Prescription) – Medicare Primary n Retiree Contribution n FAS 106 Liability n No Coordination With Medicare HMOs

5 HOW EMPLOYER HEALTH BENEFITS HAVE CHANGED Note: Medium and Large Companies Source: KPMG

6 BALANCED BUDGET ACT OF 1997 n Fewer Dollars for Providers n More Managed Care n Effective 1999 n Introduces Medicare Part C

7 MEDICARE + CHOICE (Part C of Medicare) n More Coordinated Care Plans (HMO, PPO, PSO or POS) n Private Fee-for-Service Plan n MSA Plan n Parts A & B Remain Alternatives

8 MEDICARE RISK HMOs n Introduced in 1985 n Enrollment Quadrupled to 14% Since 12/93 n Current Primary Vehicle Under Medicare + Choice

9 HOW MEDICARE RISK HMOs WORK n Contract With Health Care Financing Administration (HCFA) n HMO Assumes Full Risk For Medicare Parts A & B Coverage n HCFA Pays Capitated Rate to HMO n Under Medicare + Choice Rules, HCFA Pays Greater of: – Blend of Local/National Rates – Floor Amount ($367/month) – Minimum Annual Increase (2%)

10 HOW MEDICARE RISK HMOs WORK (continued) n Normal HMO Coordinated Care Features – Defined Geographic Area – Gatekeeper – Network Limitations – Possibly POS Option

11 ADVANTAGES OF MEDICARE RISK HMOs n Lower Cost or Higher Benefit Level at Same Cost n More Predictable, Budgetable Expense

12 THE CURRENT HMO MARKET n Reduced or No Out-of-Pockets n Some Zero Premium Plans n Offer Additional Benefits n Pricing Too Good to Be True?

13 VARIATIONS IN SAVINGS n Vendor Network Effectiveness n Plan n Location n Enrollment n Employer/Employee Contributions for Existing Medicare Coverage

14 FAS 106 RELIEF n Estimate of Total Liability n Driven By Current and Anticipated Expense n Impact of Migration to Medicare Managed Care

15 CHOICES FOR THE EMPLOYER n Whether to Embrace or Merely Tolerate Medicare + Choice n Strategy for Encouraging Migration n Extent of Plan Redesign

16 INITIAL EMPLOYER ISSUES n Coverage Availability in Employer’s Area n Benefit and Price Differences Among Available Options n Quality of Service Due Diligence n Determine Likelihood of Acceptability of Managed Care to Current and Future Retiree Population

17 DESIGN ISSUES n Medicare + Choice as Alternative or Mandate n Single or Multiple Coordinated Care Options n Supply Benefit Enhancement to Encourage Migration to Managed Care n Limitations on Transfers Among Alternative Choices

18 DESIGN ISSUES (continued) n Define the Employer’s Subsidy n Develop Communications and Enrollment Strategies

19 ILLUSTRATION OF DEFINED CONTRIBUTION PLAN n Account Balance Feature – $2,500 Annual Credits Beginning Age 40 – Ten Year Limit – Interest Credited n Access to Funds – Termination After Age 55/15 Years Services – Forfeiture Upon Early Separation

20 ILLUSTRATION OF DEFINED CONTRIBUTION PLAN (continued) n Use of Funds – Premiums For Range of Plans – Retiree Elects Annual Allocation Amount – Individual Contributions Permitted – Eligible Dependents – Premiums Only; No Cash

21 ILLUSTRATION OF DEFINED CONTRIBUTION PLAN (continued) n Advantages of Program – Coordinates Well With Medicare + Choice – High Employee Visibility – Rewards for Service, Not Age – Employee Flexibility – FAS 106 Relief