HEALTH CARE REFORM UPDATE WHAT YOU NEED TO KNOW

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1 HEALTH CARE REFORM UPDATE WHAT YOU NEED TO KNOW Marybeth Gray

2 Recent ACA Developments Health Care Proposals of Presidential Nominees CLINTON TRUMP Defend ACA, build on it Additional tax credits for Marketplace coverage Make Marketplace enrollment easier Incent states to expand Medicaid Work on a public option Crack down on prescription drug prices Build on delivery system reforms that improve value and quality Repeal ACA National marketplace, allow insurers to sell across states Individual tax deductions for insurance premiums Tax changes that promote HSAs Medicaid block-grants to the states Ease restrictions on importing prescription drugs Require provider price transparency 1

3 Recent ACA Developments Will Health Benefits Tax Exception Be At Risk? As the largest source of forgone federal revenue, favorable tax treatment of employer-sponsored health benefits may be on the table in proposed ACA replacement plans and tax reform talks (House Ways and Means Committee held hearing on tax treatment of health care in April 2016). Potential tax revenue not collected due to exclusion of employer contributions and Section 125 plan contributions from taxable income $2,673,780,000 Exclusion of ER-sponsored health coverage contributions $1,538,440,000 Exclusion of ER-sponsored pension plan contributions & earnings (DB&DC) Tax Expenditures, Fiscal years $1,068,910,000 Deductibility of mortgage interest on owner-occupied homes $660,280,000 $606,750,000 Deductibility of non-business state & local taxes Deductibility of charitable contributions, other than education & health Source: U.S. Office of Management and Budget (OMB), Analytical Perspectives, Budget of the Unite States Government, Fiscal Year 2016 Supporters of proposals to cap or eliminate taxable income exclusions for employer-sponsored coverage and implement a tax deduction for all Americans who purchase health coverage argue it would be more equitable because under the current system: Employer coverage is subsidized through the federal tax system but is not universally available. Purchasers of individual coverage do not receive the same favorable tax exclusion (even those receiving tax credit subsidies under ACA pay the balance of premiums with after-tax income). The tax exclusion for employer coverage is not needs-based and disproportionally benefits higher-income earners (e.g., if value of coverage is $5,000, an employee in 28% tax bracket saves $1,400 while employee in 15% tax bracket saves $750). 2

4 Recent ACA Developments High Value Plan Excise Tax ( Cadillac Tax ) Delayed Until 2020 Much discussion about whether 2-year delay could lead to total elimination of the tax, but finding replacement revenue will be difficult for legislators without a full ACA replacement plan. The recent legislation also makes it tax deductible when eventually imposed, which will significantly reduce true cost of the tax to employers. The tax is imposed on value of employer-provided coverage above statutory limits 2018 thresholds of $10,200 for single coverage and $27,500 for family coverage will be indexed to 2020 by general inflation rate rather than medical trend rate, so more employers will be subject to the tax in 2020 than would have been in Percentage of employers that will be subject to tax by year if no changes made to current plans. (Surveyed prior to delay) 29% 23% 31% 26% 34% 33% 39% 38% 43% 45% All employers with 50+ employees Large employers (500+ employees) Source: Mercer's National Survey of Employer-Sponsored Health Plans premium trended at 6%, tax threshold trended at 3.7% for 2019 and 2.7% for future years. 3

5 Employer-Related ACA Provisions Provision Details Implementation Date Employer mandate applicability 4980H employer shared responsibility becomes effective for employers plan year Employer mandate penalty amounts $2,160 for 4980H(a) / $3,240 for 4980H(b) Amounts TBD 2016 plan year 2017 plan year Employer mandate affordability safe harbors income threshold 9.66% 9.69% 2016 plan year 2017 plan year Employer mandate affordability Flex plan credits not limited to health care safe harbors required do not reduce employee contribution contribution 2017 plan year OOP cost-sharing limits (nongrandfathered plans) Health reimbursement arrangements (HRAs) Patient-centered outcomes research institute (PCORI) fee $6,850 per individual / $13,700 per family $7,150 per individual / $14,300 per family HRAs cannot reimburse for dependents not enrolled in group health plan $2.08 per covered life per year $2.17 per covered life per year Fee amount TBD 2016 plan year 2017 plan year 2017 plan year Plan years ending 10/1/14-9/30/15 Plan years ending 10/1/15-9/30/16 Plan years ending 10/1/16-9/30/17 Transitional reinsurance fee $27 per covered life per year Calendar year 2016 (final year) Health insurance industry tax Annual reporting Summary of benefits and coverage (SBC) Marketplace employer notices Tax on insured coverage temporarily suspended Reporting to IRS and employees Use of new SBC template required Employers may appeal employee Marketplace subsidy eligibility 2017 plan year Calendar year 2015 reporting due in 2016 Plan years on or after 4/1/17 (2018 for calendar year plans) Phased implementation beginning spring

6 ACA Annual Reporting Summary Who Health insurance issuers, self-insured health plan (SIHP) sponsors, others that provide Minimum Essential Coverage (MEC), and Applicable Large Employers (ALEs) must submit annual reporting to the IRS and provide statements to individuals included in the reporting. What Section 6055: health insurance issuers, SIHP sponsors, and others that provide MEC must report information about individuals covered during the CY and which month(s) they were covered. Why Section 6056: ALEs must report, for each EE who was ACA FT during the CY, information about the health coverage offered to the EE, whether coverage was offered to dependents, and whether employer safe harbor is applicable. Section 6055 information will be used by the IRS to confirm individuals compliance with the individual shared responsibility provision of the ACA. Section 6056 information will be used by the IRS to confirm ALEs compliance with the employer shared responsibility provision of the ACA and validate individuals eligibility for premium tax credits. When IRS reporting by last day of Feb. that follows the end of the CY if filing hardcopies or by Mar. 31 following the end of the CY if filing electronically (first due in 2016 for 2015 CY). Individual statements to EEs or primary insureds included in the IRS reporting by January 31 following the end of the CY (if mailing, requirement is met if mailed by the due date) (first due in 2016 for 2015 CY). How IRS reporting submit an information return form for each EE or primary insured being reported, along with a transmittal cover sheet for all individual forms combined. Individual statements provide a copy of each individual return form (or other statement containing the same information) to EE or primary insured who is the subject of the form. ALEs that must provide both 6055 and 6056 for an EE will use a combined individual return form. 5

7 ACA Annual Reporting IRS Reporting Forms Overview Two types of forms: 1095 Series Individual information return forms 1094 Series Transmittal cover forms Separate form completed for each EE or primary insured being reported Single form for aggregate data that accompanies a batch of individual information return forms Three versions of each type of form: C Forms 1094-C 1095-C B Forms 1094-B 1095-B A Forms 1094-A 1095-A Satisfy 6056 reporting and, when applicable, 6055 reporting Used by all ALEs to report on coverage offered to ACA FT status EEs Used by ALEs with a SIHP to report on EEs and other individuals (e.g., COBRA, retirees) enrolled in the SIHP (combines 6055 and 6056 data in one form) Satisfy 6055 reporting Used by non-ale employers with a SIHP to report on enrolled individuals (EEs and non-ees) Can be used by ALEs with a SIHP to report non-ee enrollees instead of 1095-C Used by issuers of insured group plans and off-marketplace individual policies to report on enrolled individuals Satisfy 6055 reporting Used by issuers of policies sold through the Marketplace to report on enrolled individuals 6

8 Plan Design Alternatives Big Jump In CDHP Offerings 25% of all covered employees are now enrolled in CDHPs, which is more than double the 2010 CDHP enrollment rate. Number of employees Expect to offer in 2018 All employers (10+ employees) All large employers (500+ employees) Jumbo employers (20,000+ employees) 20% 22% 23% 27% 29% 40% 32% 36% 39% 48% 59% 75% 48% 59% 63% 72% 73% 85% Source: Mercer's National Survey of Employer-Sponsored Health Plans

9 Plan Design Alternatives HSA-based CDHPs Reduce Excise Tax Exposure HSA-based CDHPs cost about 18% less than PPOs and HMOs in Medical Plan Cost Per Employee Per Year (includes employer contributions to HSA accounts) $11,212 $11,248 $9,228 PPO HMO HSA-eligible CDHP Source: Mercer's National Survey of Employer-Sponsored Health Plans

10 Network Management and Payment Strategies Pharmacy Benefit Management Strategies Implement step therapy programs that drive generic utilization 67% 9% 12% Evaluate pharmacy benefit contract terms 60% 18% 13% Adopt new coverage or utilization management as part of the specialty pharmacy strategy* 53% 14% 18% Exclude all compound drugs 39% 11% 13% Implement a more aggressive mail-order or 90-day incentive program 35% 9% 19% Conduct an audit of the pharmacy benefit manager 30% 15% 23% Evaluate and address specialty drug costs and utilization performance through the medical benefit 26% 21% 32% Implement coverage changes to influence site of care for specialty pharmacy through the medical benefit 18% 8% 34% Adopt a high-performance formulary with very limited brand coverage across the therapy classes 14% 4% 24% Offer a narrow retail network 13% 4% 22% Action taken/tactic used in 2015 Planning for 2016 Considering for 2017 or 2018 i.e. Require prior authorization or quantity limits based on clinical evidence. Source: Towers Watson/NBGH Best Practices in Health Care Employer Survey

11 ACA Financing The ACA offsets the cost of coverage expansion with a number of new taxes and fees levied on individuals, employers, insurers and medical manufacturers. YEAR TAX OR FEE PROVISION FINANCIAL IMPACT % tax on indoor tanning services Individual direct 2011 Tax on non-qualified withdraws increased from 10% to 20% for HSAs and from 15% to 20% for MSAs Individual direct Annual fees on pharmaceutical manufacturers/importers increases from $2.3B to $4.8B per year over 10 years, spread among entities by market share Annual fee on insured and self-funded health plans to fund Patient Centered Outcomes Research, applicable plan years ending 10/1/12 through 9/30/19 $1 per covered life in 1 st year, $2 in 2 nd year, $2.08 in 3 rd year, $2.17 in 4 th year, indexed thereafter Employee portion of Medicare tax increases from 1.45% to 2.35% for those earning $200K+/single or $250K+/couple; 3.8% tax also applied to investment income for same individuals Elimination of business expense tax deduction for Medicare D expenses for employers receiving Part D subsidies 2013 Annual fees on medical device manufacturers/importers 2.3% of product sale price Employer/individual indirect (product cost pass-through) Employer indirect for insured plans (premium pass-through); employer direct for self-funded plans Individual direct Employer direct 2013 $500K per person limit on tax-deductible salary expenses for insurance companies Insurer direct Employer/individual indirect (product cost pass-through) 2013 Threshold for itemized medical deductions increases from 7.5% to 10% of income Individual direct 2014 Penalty on individuals who do not maintain health care coverage Individual direct Annual fees on health insurers increases from $8B to $14.3B over 5 years and indexed thereafter, apportioned among insurers by market share Fees on insurers and self-funded plans for state transitional reinsurance programs for first 3 years marketplaces are available ( ) $63 per covered life in 1 st year, $44 in 2 nd year, and $27 in 3 rd year Penalty on large employers that do not offer health care coverage meeting ACA standards to full-time employees and their children Employer indirect for insured plans (premium pass-through) Employer indirect for insured plans (premium pass-through); employer direct for self-funded plans Employer direct % excise tax on value in excess of thresholds for high-value health plans Employer direct 10

12 ACA Individual Shared Responsibility ( Individual Mandate ) As of 2014, individuals must have MEC or pay tax penalty.* Potential annual penalties are: 2014: greater of $95 per person or 1% of household income.** 2015: greater of $325 per person or 2% of household income.** 2016: greater of $695 per person or 2.5% of household income.** Individuals with no offer of employer coverage or with an offer of employer coverage that does not meet ACA MV or affordability standards may be eligible to receive a federal premium tax credit to offset the cost of Marketplace coverage if household income is between 100% and 400% of FPL (and individual is not eligible for government-sponsored coverage, such as Medicaid, etc.). For the purpose of determining an individual s eligibility for premium tax credit for Marketplace coverage, employer coverage is affordable if EE single tier contribution for lowest-cost MV MEC offered to EE is no more than 9.5%*** of employee s household income. *Some exceptions apply. **Not to exceed national average cost for Marketplace Bronze plans ($2,448 per person/$12,240 per family in 2014 and $2,484 per person/$12,420 per family in 2015). ***Affordability threshold increases to 9.56% for plan years beginning in 2015, 9.66% for plan years beginning in 2016, and 9.69% for plan years beginning in

13 Questions? Marybeth Gray Senior VP of H&W Consulting Trion, a Marsh & McLennan Agency MBGray@Trion.com No part of this document may be reproduced, quoted, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or by any information storage and retrieval system), without express, prior permission, in writing from Marsh & McLennan Agency, LLC Company Marsh & McLennan Agency, LLC Company. All Rights Reserved.