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

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

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

29. HRA Pros and Cons 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 Cons Employees ◦ Member responsibility ◦ Cost, if chronic disease Employers ◦ Adverse selection ◦ Actual cost savings ◦ Accuracy of actuarial assumptions ◦ High HRA administrative cost

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: HSA (Health Saving Account) HRA (Health Reimbursement Arrangement) FSA (Health Flexible Spending Account) Account OverviewTax Exempt trust or custodial account created to pay for the qualified medical expenses of the account holder and his/her spouse or dependents. An employer funded account used to reimburse employees for qualified medical care expenses. A cafeteria plan authorized under Section 125 of the IRC. FSAs can be created to reimburse for qualified medical expenses, health insurance premiums for Premium-only account, or dependent care expenses. High Deductible Health Plan? (HDHP) RequiredCustomaryNot Required Who can fund the account? High Deductible Health Plan? Employee and/or EmployerEmployer OnlyTypically only the Employee. However, Employer can also contribute Are there any contribution limits? $2,900 | $5,800 F ** Catch-up contributions: $900/yr – age 55 by end of tax year. Reduced by MSA contributions in same year There are no limits to the amount an employer can contribute. There are no limits to contributions for a health care FSA. However, employers typically set a limit. Who owns account?ParticipantEmployer

37. Comparison of Tax-Advantaged Accounts: HSAHRAFSA Can unused funds be rolled over from year to year? YesYes, subject to COBRANo, but in some cases employee may elect COBRA through end of plan year. What expenses are eligible for reimbursement? Section 213 (d) medical expenses -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits -If Medicare eligible due to age, health insurance premiums except medical supplement policies. Section 213 (d) medical expenses Health Insurance premiums for current employees, retirees, and qualified beneficiaries, and QLTC premiums. Employer can define “eligible medical expenses” Section 213 (d) medical expenses Expenses for Insurance premiums are not reimbursable Employer can define “eligible medical expenses” Must claims submitted for reimbursement be substantiated? NoYes May account reimburse non-medical expenses? Yes, but taxed as income and 10% penalty (no penalty if distributed after death, disability, or eligible for Medicare) No Is interest earned on tax- advantaged account? Yes, accrues tax-freeYes, paid to the employerNo

38. Comparison of HSA, HRA, FSA Continued… HSA (Health Savings Account) HRA (Health Reimbursement Arrangement) FSA (Flexible Spending Account) Is plan Year Carry Over Allowed? YesEmployer ChoiceEmployer Is fund portable? YesEmployer ChoiceNo Substantiate claims to withdraw money? No How are Allowable Medical Expenses Determined? Medical IRC 213 (d), Some premiums, non medical Medical IRC 213 (d), Some Premiums, non medical Medical IRC 213 )d) Uniform Coverage NoEmployer ChoiceRequired Applicable IRC Section 223Section 105Section 125

39. Comparison of FSA, HRA and HSA FSAHRAHSA Eligibility All Employees Anyone not eligible for Medicare Contributions Employer and/or employeeEmployerEmployer and/or employee Contribution Limits None Generally the less of annual deductible or $2,650 single/$5,250 family for 2005 Tax Status of Contribution Excluded for employee Deductible for employee and employer Roll-over NoYes, but not requiredYes Portability NoneDepends on PlanFull Withdrawals allowed Qualified medicalQualified medical and premiumQualified medical, limited premiums; penalty for other

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?