1. 1 Healthcare Group of Arizona Arizona’s Health Care and Policy Laboratory for Small Business Coverage Options

2. 2 The Evolution of AHCCCS Health Care Coverage Arizona Revised Statute gives AHCCCS broad authority to provide health care coverage to federally funded beneficiaries, small businesses, and public employees for acute and long term care. Started in October 1982, 3 year demonstration waiver approved by CMS for AHCCCS Acute program. In 1987, the Waiver request includes a proposal to include long Term Care and the Arizona Long Term Care System (ALTCS) is approved. In 1988, small employers in 4 counties are allowed to purchase medical coverage for their employees from AHCCCS Health Plans through Healthcare Group.

3. 3 The Evolution of AHCCCS Health Care Coverage In 1990 there is Phase-in of behavioral health services for certain Title XIX members. In 1993 Healthcare Group services for small employers is expanded statewide. In 1997, AHCCCS submits an amendment to cover single adults and children up to 100% of the FPL. 1998 there was a 3 year pilot to provide coverage based on a sliding scale monthly premium to uninsured people who do not qualify for Medicaid – Premium Sharing. 1998 Arizona implemented it’s version of State Children’s Health Insurance Program (SCHIP) – KidsCare- Covers children under 150% of the FPL.

4. 4 Voter Approved Proposition 204 In 2001 Arizona voter approved proposition 204 which funded the expansion of AHCCCS and created the opportunity for the state to replace state and local funding for the medically needy population with federal funds. Prop 204 replaced a state-only program for the Medically Needy and Medically Indigent (MNMI), which cost $200 M per year from the General Fund and over $30 M in county funds.

5. 5 FY 2006/2007 Legislative Changes HB-2698 Small Businesses Exemptions Exempts small business health care coverage from specified insurance coverage requirements, including certain mandates for businesses that employ 2 to 25 persons and that have been uninsured for at least 6 months. Exemptions for small businesses health insurance plans include: any surgical services, maternity benefits, coverage of medical foods to treat metabolic disorders, and drug or devices for contraception or outpatient contraception services. HB- 2177 Tax Credit for Small Businesses and Employees A tax credit for individual or a small business that is certified by Dept. of Revenue as meeting the requirements for tax credit.

6. 6 FY 2006/2007 Legislative Changes SB 1442 Temporary Medical Coverage Appropriates $6.5 million to AHCCCS to establish the Temporary Medical Coverage Program to provide health care coverage to persons who are citizens and residents and who have been enrolled in AHCCCS at any time within the last 24 months and became ineligible for coverage due to federal disability insurance benefit payment.

7. 7 While the rate of uninsured in Arizona has declined significantly since 1997, 17.0% of Arizona residents remained uninsured in 2004. Source: U.S. Census Bureau, Housing & Household Economic Statistics Division.

8. 8 Assumptions About the Small Business Market The small business market is growing. Extremely price sensitive. Small business owners to do not see health benefits as a necessary part of competitive employee compensation. Significant employee turn over. What the small business owner wants in a health benefit their employees cannot afford. Small business employers prefer a defined contribution for any employer participation in health benefit coverage.

9. 9 Designing benefit plans that the small business Market will buy Product and Pricing Strategy Product Differentiation Product Evaluation Policy Question: Can the Market Work? Will the small business market respond to differentiated benefits and health coverage products?

10. 10 Administrative Ease ChoiceBudgetability Healthcare Group Business Model

11. 11 The ABCs of Healthcare Coverage for Small Businesses A = Administrative Ease Easy to enroll Easy to deal with B = Budget-ability A health plan that fits into every employees budget C = Choice Choice of health plan benefits Choice of provider networks Choice of providers Our success equation is …… A + B + C = Success

12. 12 Design benefit plans that: Address varying health needs Address varying incomes Address varying consumer needs Can be reasonably-priced Are meaningful, provide utility and value Can be self-sufficient Product Development Strategy

13. 13 CLASSIC SECURE ACTIVE Intended for employees with limited health needs beyond routine and preventive care. Little or no co-pays for most physician office visits, diagnostic services and prescriptions. Maternity excluded. Richest benefit package, intended for: employees with existing disease or chronic condition employees wanting the added security of a wide range of benefits A variation of the Secure plan, with lower premium and higher co-pays and coinsurance. Maternity excluded. HCG Healthstyles  HCG Healthstyles Designed for varying health needs, income, and lifestyles.

14. 14 Healthstyles™ Benefit Grid Benefit Type (partial list) Classic Secure Active Physician Services (PCP) $20 copay$0 copay$10 copay Specialist Services $ 20 copay $30 copay Preventive Care $20 copay$0 copay$10 copay Maternity Services IncludedNone/Rider Urgent Care $40 copay$20 copay Emergency Care $100/$150 copay$50 copay20% coinsurance Inpatient Hospitalization $100 admission50% coinsurance*20% coinsurance Diagnostic Services $0 copay 20% coinsurance Rehabilitation Services $15 copay20% coinsurance Prescription Medicine $15/$30 copay$0/$20 copay * 100% coverage for first 10 days, thereafter 50% coinsurance.

15. 15 Product Evolution HCG Enrollment Broker fees ends To single plan Rate increase Loss of health plan New HCG Administration Subsidy Starts Product Evaluation Begins Healthstyles Benefit Plans Introduced

16. 16 Historic Enrollment Trends (1999-2006)

17. 17 HMO Enrollment by Benefit Plan and Deductible Total Membership as of July 11, 2006: 22,027 HMO 20,473 members Classic $0 deductible Classic $500 deductible Classic $1,000 deductible Classic $2,000 deductible Secure $0 deductible Secure $500 deductible Secure $1,000 deductible Active $0 deductible Active $500 deductible Members electing a deductible option: 28%

18. 18 PPO Enrollment by Benefit Plan Total Membership as of July 11, 2006: 22,027 PPO 1,554 members Medallion Plus, Classic Plus and Platinum Plus meets federal requirements for pairing with an optional HSA. Medallion PPO Medallion PPO Plus Medallion Classic PPO Medallion Classic PPO Plus Medallion Platinum PPO Medallion Platinum Plus PPO Medallion Gold PPO Medallion Silver PPO

19. 19 Original Healthstyles design based on: Historical experience with previous HCG benefit plans Meetings with small business employers Experience of other states Characteristics of the working uninsured -Demographic from Kaiser -CAN initiative (St. Luke’s) Product Evolution

20. 20 December 2004 Results from Employers and Employee Satisfaction Survey (n=285) HCG Product Evolution

21. 21 Validation of Focus Group/Survey findings: Asked Brokers/Producers what they thought Actuarial pricing analysis Empirical research Experience of other states Product Evolution

22. 22 Product Evolution HMO Single Plan 1998- 2003 April 2004 June-July 2004 Employer Focus Groups HMO Active HMO Secure Healthstyles HMO Classic SB1166 Solidify relationships with HCG employer groups Evaluate employer satisfaction Validate product design assumptions Assess unmet need (benefits & services) Validate future product ideas

23. 23 Product Evolution HMO Single Plan DESIRED BENEFITS Deductible options Mental Health benefits Vision benefits Dental benefits Expanded provider network PPO plans HSA/HDHP option Wellness 1998- 2003 April 2004 June-July 2004 Employer Focus Groups Option $2,000 Deductible Option $1,000 Deductible Option $500 October 2004 PPO Silver PPO Gold Medallion PPO Platinum, Platinum + September 2005 Vision (Avesis) Dental (EDS) January 2006 February 2006 Rx Expanded Formulary HMO Active HMO Secure Healthstyles HMO Classic SB1166

24. 24 Product Differentiation as of May 2006 ComprehensivePreventiveActive HMO “Healthstyles”ClassicSecureActive PPO “Medallion”Platinum Platinum Plus (HSA) GoldSilver Products are differentiated by covered services, benefit plan features, provider networks, and availability

25. 25 Benefit Comparison Covered Services (partial list) Healthstyles HMOMedallion PPO Physician Services (PCP/Spec)  Inpatient - Medical  Outpatient - Medical  Maternity  Acute Ancillary (SNF, HH, Dialysis)  $0 Preventive Care  Inpatient - MH/SA  Outpatient - MH/SA  Formulary Tiers 333433 Rx Benefit Limit None $12,500$7,500 Classic SecureActivePlat/+ GoldSilver

26. 26 Benefit Comparison Benefit Plan Features (Deductible) Healthstyles HMOMedallion PPO Number of Deductible Options 3213 / 233 Zero Deductible Option Yes No / NoNo MD Office Visit (E&M) excluded*  / -  Preventive Care excluded  /  Mammography excluded  /  Prescription Drugs excluded  / -  Emergency/Urgent Care excluded  Prescription Drugs excluded  / -  Out-of-Pocket Maximum No Yes Out-of-Network Benefit (NPPN) None 50% Classic SecureActivePlat/+ GoldSilver * Health plan assumes first dollar liability for services excluded from deductible.

27. 27 HMO Provider Networks Mohave Coconino Navajo Apache LaPaz Yuma Yavapai Maricopa Pima Pinal Gila Graham Cochise Green- lee Santa Cruz Mohave Coconino Navajo Apache LaPaz Yuma Yavapai Maricopa Pima Pinal Gila Graham Cochise Green- lee Santa Cruz Mohave Coconino Navajo Apache LaPaz Yuma Yavapai Maricopa Pima Pinal Gila Graham Cochise Green- lee Santa Cruz Geographic differentiation: HMO benefit plans are not available statewide

28. 28 PPO Provider Network Mohave Coconino Navajo Apache LaPaz Yuma Yavapai Maricopa Pima Pinal Gila Graham Cochise Green- lee Santa Cruz AFMC Medallion Series Benefit Plans Platinum Plus (HSA) Gold Silver Platinum Geographic differentiation: PPO availability varies by county

29. 29 ProductMonthEnrollment Average Income* Average EE Age Percent Male Tier 1 EE Tier 2 EE+S Tier 3 EE+F Tier 4 EE+C December 2004 11,224$53,74346.2 53%58%23%16%4% April 2006 12,215$53,34448.1 55%57%23%16%4% December 2004 800$53,39749.9 48%72%23%3% April 2006 5,052$45,45849.5 51%61%25%9%5% December 2004 41573,86442.1 51%72%17%7%5% April 2006 1,990$42,83546.8 53%61%22%11%6% Classic Secure Active HMO Product Demographics December 2004 to April 2006 *Represents stated income from subscribers on enrollment forms. Not all subscribers supply these data.

30. 30 Product Growth (2005-2006) Healthcare Group Growth by Product

31. 31 HCG Enrollment by Product December 2006* 25,000 members anticipated December 2004 12,438 members September 2005 16,451 members May 2006 20,798 members * Expected

32. 32 HCG Enrollment by Product and Provider Network Total Membership as of July 11, 2006: 22,027 HCG Products 22,027 members HCG Networks 22,027 members

33. 33 HMO Product Migration December 2004 to April 2006* Deductible options were first introduced in October 2004. By April 2006, 25% of members had switched to a deductible option. *This period represents the migration behavior of 100% of membership following a complete contract renewal cycle.

34. 34 Evaluation Tools: Financials Actuarial Analysis (COG) Analytic Dashboard (Rates and Measures) Enrollment Reports Ad-hoc Analysis Risk Profiling (Medical Intelligence) Satisfaction Surveys Focus Groups Product Evaluation

35. 35 Actuarial Tool Box »Milliman Health Cost Guidelines (Industry standard) »Pricing Models »Reserving Models »Ad-Hoc Studies »National Studies (CMS, Kaiser Family Foundation, etc.) »Financial and Actuarial Education »External Actuarial Services Rate Analysis Tools

36. 36 Pricing Strategies Small groups are subject to significant fluctuations in premium rates –Community Rated Premiums Medical cost risk is spread across a larger group –Member “Out of Pocket” Costs Co-pay and co-insurance is used to pass on financial responsibility and mitigate premium rate increases

37. 37 HCG Member Satisfaction Member satisfaction with choice of …

38. 38 HCG Member Satisfaction Member satisfaction with choice of …

39. 39 HCG Member Satisfaction Overall member satisfaction with …

40. 40 Our first care is your healthcare