2005 Retiree MIP Overview October, 2005 Rajiv Nundy & Deborah Wright HR Compensation Management

2 Agenda  Introduction  Health care cost trends  Supply- side and demand-side drivers of cost increases  Retiree Medical Insurance Program – Key features and recent changes  Recent Retiree MIP financial status – Incurred Jan to June 2005 paid through Sep 2005  Prescription Program  Cost of the Rx program  Cost Containment Strategies  Medicare Part D  Formulary

3 Health care cost trends  Health care costs in the U.S. increased 156% per capita from 1980 to 1990 and by “only” 71% from 1991 to 2000; more recently we have seen premium increases of 11% to 12% annually  During the 1980s with the economy expanding rapidly ERs reluctantly managed to absorb costs  With the 1991 recession the private sector responded with increased dominance of managed care and HMOs – medical costs still continued to outpace the CPI overall  At present ERs are still struggling to recover from the recent slowdown and with intense competition and overcapacity in many industries have been finding it difficult to pass these costs via increased prices  In addition managed care has lost some clout with health providers because of increased consolidations in the health industry and because HMOs loosened some of their restrictions due to widespread consumer backlash  ERs are responding with increased cost-shifting to EEs since they cannot pass the cost increases along to customers

4 Supply-side vs demand-side drivers Supply-side drivers  When we look at the medical component of the CPI - hospital costs and prescription drug costs have grown the fastest in recent years Hospital costs  The main drivers behind hospital cost increases are use of advanced medical technology, increased labor costs ( nurses and pharmacists) and renewed pricing power from hospital consolidations Prescription drug mix and promotion  Proliferation of drugs aimed at “lifestyle’ maladies such as erectile dysfunction (ED), high cholesterol, hypertension, heartburn, acid reflux, ulcers, depression, toenail infections and the like  Increased direct-to-consumer advertising that encourages consumers to ask doctors for specific prescriptions by brand name  These drugs utilization has grown dramatically by consumers with minor ailments ( some of which could be controlled with better management of diet and eating habits) and some with purely self-diagnosed symptoms

5 Supply-side vs demand-side drivers Demand-side drivers  The rise in behavioral risk factors ( tracked by Centers for Disease Control) 70% of health care costs are attributable to lifestyle choices and behaviors  Smoking - decline has plateaued except for year olds which have increased 15% since 1990  Chronic drinking - amongst all age groups has doubled from 3% of the population to 5.9%  Obesity (BMI of 30 or more) – has doubled from 11.6% in 1990 to 22.1% in 2002, while not a disease it is strongly associated with such chronic conditions as diabetes, hypertension and asthma costing the economy more than smoking and drinking combined  Increased utilization ( medical products and services especially for specialists and prescription drugs)  Office visits to specialists increased by 13.8% between 1990 and 2000  The population is consuming more prescriptions and more expensive prescriptions – number of Rx increased 45% between 1992 and 2002 to 10.6 per capita and the price of prescriptions increased a whopping 107% to $55.00 per Rx

6 Retiree MIP – Key Features  The Retiree MIP provides comprehensive medical, dental and prescription coverage - financial protection at a time when you need it most – likely higher medical expenses and likely fixed, lower income  Funding is a partnership between the Bank and each retiree – you pay 25% of contributions but close to 40% overall when including deductibles, coinsurance and co-payments. You have a significant investment in the plan, therefore it is in your best interest for you to understand the plan and its benefits  Please note the MIP does not cover every expense! There are MIP plan limits, certain items are not covered at all and you will have some co-payments to make  The Retiree MIP is a PPO – Preferred Provider Option – type of plan. If you choose an in-network medical or dental provider, you will have lower out of pocket costs and the Plan will also benefit from savings  Staff are eligible for retiree medical coverage if they meet certain age and service requirement when they terminate employment from the Bank – 5 years service and rule of 60 ( age plus service is at least 60) with coverage beginning as early as age 50

7 Retiree MIP – Key Features  The Retiree MIP is a self-insured program; Aetna, Van Breda and Pharmacare are administrators – they are required to process claims in accordance with the MIP Plan design. The contract is designed with financial incentives to encourage administrators to pay claims promptly and accurately  Claims are now serviced for the whole group by Aetna Global Benefits, based in Tampa, Florida. All MIP members received new ID cards in June Provides additional services such as 24 hour phone coverage, access to international network providers for direct billing outside the US  If you have a permanent non US address you also have a choice, once per year in December, to choose between Aetna and Van Breda as your administrator. The Plan design is essentially the same, but network savings are higher with Aetna if most of your medical treatment takes place in the US

8 Retiree MIP - recent changes  Recent Changes:  Increased overall contributions May 1, 2005 – 4.3%  Implemented three tier premium based on Single, Dual and Family coverage - (600 plus family coverages )  Last increase in deductible and co-pay was Jan 1, 2003  History of Changes since 1991:  Average annual rate increase of 5.2% over the period  Cost of the program has gone up 5.9% annually over the same period

9 Key Cost and Utilization Statistics- MEDICAL only AETNA claims Current: Jan-Jun ’05 Prior: Jan-Jun ‘04

10 Key Cost and Utilization Statistics- MEDICAL only AETNA claims Comparison of Medical Paid Amount Per Member $1,056 $788 $268 $1,299 $424 $875 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Medical Paid Amount per Member Inpatient Paid Amount per Member Ambulatory Paid Amount per Member PriorCurrent

11 Large Claimants – Medical only AETNA claims

12 Large Claimants – Medical only AETNA claims

13 Provider Network Experience- AETNA only Medical claims

14 Medical Cost Sharing- AETNA only Medical Claims

15 Medical Cost Sharing- AETNA only Medical Claims

16 Utilization and Unit Cost by Medical Cost category – AETNA only Medical claims

17 Summary of recent financial  AETNA only Medical Claims - Current: Jan-Jun ’05 Prior: Jan-Jun ‘04  Medical Costs up per member increased 23% ( excluding catastrophic claims up 9%)  Most of this increase is due to :  increased utilization:  Increase in number of hospital admissions, inpatient surgeries and ER visits  Increase in average length of hospital stay  Increase in catastrophic claims ( over $50,000 from 7 to 15 claimants)  price increase:  Lower in-network hospital discounts  cost shifting to plan – lower out-of-pocket costs to retirees  partially offset with increase in network usage and COB savings

Prescription Program

19 Prescription Cost and Utilization Statistics

20 Cost containment strategies  Some drug cost control tactics  deductibles  dollar based or percentage based co-pays  Educating physicians and pharmacists  Educating EEs  Formularies  Financial or other incentives for using generic medications  Mail order pharmacies  Pharmaceutical Benefit Managers (PBMs)

21 Medicare Part D  Medicare Prescription Drug, Improvement and Modernization Act (MMA) was enacted in Dec 2003  A voluntary prescription drug benefit was added ( Part D) effective Jan 2006 which was designed for Medicare enrollees (currently enrolled or eligible for Part A or Part B) who do NOT have Rx protection through other employer plans  Employer Plans that provide Rx plans at least as good as Part D are deemed Actuarially Equivalent qualify for subsidy for those Medicare eligible participant who do not enroll in Part D – subsidy approximately $450 per enrollee in 2004 projected to increase to approximately $600 in 2006 – total subsidy is projected at over $1.2 million annually in 2006

22 Medicare Part D vs Retiree MIP Rx Benefits MEDICARE  Deductible $250  Medicare pays 75% for claims between $250 and $2,250  Medicare pays 0% for claims between $2,250 and $5,100  Maximum Annual Deductible and Copay is $3,600 ( True out-of-pocket)  Catastrophic coverage begins after $5100 of annual expenses submitted – Medicare pays 95%  Premium is $420 per participant per year Retiree MIP  Deductible of $50  Brand co-pay is 20% and Generic co-pay is 0%  Maximum annual Out-of- pocket Deductible and Copay for Individual is $1,000  Catastrophic coverage begins after approximately $4,800 of annual expenses submitted – Bank pays 100% thereafter  Premium is 25% of annual cost – approx. $320 per year

23 Four possible plan design options  Do Nothing  No Federal Subsidy  No changes to the existing prescription program  Take the Federal Subsidy  Apply for 28% federal subsidy -Plan should be deemed actuarially equivalent  No changes to the existing prescription program  Introduce “Wrap Around” Plan  For the portion not paid by Medicare  Not eligible for Subsidy  Bank pays Part D premium  Eliminate Prescription coverage for Medicare eligible participants in the Retiree MIP  Retirees Shift to Part D  Bank pays the Part D premium

24 Take the Federal Subsidy  The Bank is applying for the subsidy - we are not sure if it will be approved since the legislation is silent on international organizations being eligible for the subsidy  RMIP members will receive a letter from the Bank confirming that the RMIP provides “Creditable Coverage” – no later than November 15, This will be provided each year no later than end of November  subsidy is calculated at 28% of the eligible charges between $250 and $5,000, so the maximum subsidy is capped at $1,330 per enrollee  The subsidy projected at $1.2 million in 2006, if approved by Medicare, will be credited to the RMIP and would therefore benefit both retirees and the Bank under the existing cost sharing arrangement of Retiree and Bank of 25% and 75% respectively

25 The RMIP and Medicare Part D  The RMIP coverage as noted earlier is much richer than Medicare Part D.  Enrollment in Medicare Part D is voluntary but for retirees enrolled in RMIP, Medicare Part D is not cost effective so you are strongly advised to NOT ENROLL in the MEDICARE Part D Plan  If a member of the RMIP enrolls in Medicare D, the Bank is unable to co-ordinate prescription drug benefits, and your Prescription coverage under the RMIP would be suspended. This suspension is for a minimum one year period regardless of the length of your Medicare D enrollment  Medicare will fund this new program, but it will actually be delivered through one of many Medicare Prescription Drug Plans to be offered from pharmacies e.g. CVS, or from drug manufacturers e.g. Merck Medco. The Medicare D enrollee would have to study all these new plans and make a choice of prescription benefit plan coverage, then enroll and pay Medicare D premium plus additional plan premium if needed.

26 The RMIP and Medicare Part D  Look out!! Marketing has already started for the January 1, 2006 new plan. Medicare D enrollment period runs from November 15, 2005 until May The Medicare Prescription Drug Plans are obliiged to offer a minimum set of benefits, but many will offer additional benefits if you are willing to (i) figure out what is what and (ii) pay additional premium  Remember IF you enroll in Part D you will have to pay the Medicare premium of $420 annually  If you lose RMIP coverage, because you elect to end your RMIP coverage, or because you cease to be eligible for it ( e.g. if you divorce a Bank Group retiree), then you may be able to enroll in Medicare D later. The letter of Creditable Coverage from the Bank’s MIP will confirm that you had prior RMIP coverage and this will avoid you paying a Medicare D premium penalty in the future.

27 Medicare D Summary  Letter of Creditable Coverage to be sent by Bank Group by November 15, 2005 – format pre-determined by CMS/US Govt.  In addition, a letter in “plain english” will be sent at the same time explaining what the Creditable Coverage letter means  Medicare enrollees should review the official Medicare material e.g. booklet called “Medicare and You, 2006”, websites such as: or  Be wary of aggressive marketing efforts by Pharmacies and manufacturers – RMIP members have great Rx benefits, which exceed those available under Medicare D  Be aware of the consequences to your RMIP if you do enroll in Medicare D

28 Prescription Drug Formulary Under Consideration for the RMIP  A formulary identifies a drug as Generic or Brand name (preferred) or Brand name (non-preferred) with higher benefits for Generic, then Brand name (preferred) and then Brand name (non- preferred). One possible co-pay would be 0% for Generic, 20% for Brand name (preferred) and 30% for Brand name (non-preferred)  Free choice of drug use will remain, but if a member elects a higher cost drug, where that drug has chemically equivalent options – brand and or generic – then that member will pay a higher co-pay for that choice  The Formulary will encourage members to discuss drug selection with their doctors  New drugs that are “new to market” will be “ preferred” for at least the first 6 months on the market. The Formulary Manager ( Pharmacare for the RMIP) will then determine if this new drug has pharmacological equivalents in the preferred brands or generic drugs and therefore determine if the new drug will remain “ preferred” or become non- preferred  This option does shift costs to those members who use the more expensive drugs, when there are lower cost equivalent drugs available  RMIP “stop loss” protection for prescription drugs will remain in place to ensure financial protection for members