Health Meeting June 10-12, 2013 Baltimore, MD. Session 76 PD, Employer Decisions Under Material PPACA Regulations Modeling Dumping to Exchanges

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1 Health Meeting June 10-12, 2013 Baltimore, MD Session 76 PD, Employer Decisions Under Material PPACA Regulations Modeling Dumping to Exchanges Moderator: Kurt Christian Ringo ASA,MAAA Presenters: Geoffrey Kuhn FSA,MAAA,FCA Robert Wendler Erik Tecumseh Poppe FSA,MAAA

2 Society of Actuaries 2013 Health Meeting Session 76 PD: Employer Decisions under Material PPACA Regulations Modeling "Dumping" to Exchanges Erik Poppe, FSA, MAAA Actuary, EHIM June 11 th, 2013 Agenda Background on Employer Responsibilities under PPACA ModelingTool for Employers Assumptions in Tool Key Observations from Employers Dropping Coverage Alternatives Slide 2

3 Employer Shared Responsibility If the Employer is determined to be a Applicable Large Employer then are subject to the Employer Shared Responsibility (ESR) ESR requires an Employer to offer coverage that is affordable and meets the minimum value to full time employees or potentially face a penalty. Slide 3 Applicable Large Employer 50 or more Full Time Equivalent employees is considered an Applicable Large Employer In general, Full Time Equivalents includes employees who work on average 30 or more hours per week. Measurement period of full time equivalents for the 2014 plan year can be 6 to 12 months long. Measurement period must be completed 90 days before the plan effective date. Slide 4

4 Employer Shared Responsibility Employer is eligible for cost sharing subsidy (aka penalty) in one of two circumstances Employer does not offer substantially all full time employees (and their dependents) the opportunity to enroll in health plan Employer offers substantially all of its full time employees the opportunity to enroll, but some fulltime employees qualify for subsidized coverage in an Marketplace either because Coverage is unaffordable or does not provide minimum value or The full time employee was not among those offered coverage Slide 5 Penalty: No Coverage Offered Not Offering Insurance: $2,000 for each full time employee per year (monthly pro rated) employer can subtract the first 30 employees. Required to offer coverage to both employees and dependents. Does not apply if coverage was offered to more than 95% of employees (intended to prevent administrative error that would trigger penalty). The dd deduction of 30 employees must be distributed din proportion to all the common controlled companies (determined during the Large Group calculation). Slide 6

5 Penalty: Not Affordable / Minimum Value Penalty triggered when full time employee obtains subsidized coverage, which could be for one of the following reasons: Coverage Not taffordable: employee contributions tib ti is more than 9.5% of salary (under safe harbor rules) Coverage Does Not Provide Minimum Value: the plan does not cover at least 60% of the required costs Penalty is $3,000 per employee who obtains subsidized coverage per year (pro rated for partial years) The penalty cannot exceed the penalty of not offering any coverage to substantially all full time employees Slide 7 Employer Related PPACA Fees PCORI Fee (CER Fee) Patient Centered Outcomes Research Institute Also known as Comparative Effectiveness Research (CER) fee Either $1 or $2 Per Covered Member Per Year Funds for research to provide information about the best available evidence to help patients and their health care providers make more informed decisions Health Insurance Tax (Health Insurance Industry Fee) Estimated to be between 2% and 2.5% of premiums for 2014 Required to collect $8B in 2014, Fund the cost of implementing provisions of PPACA Only applies to fullyinsured premiums Transitional Reinsurance Fee $63 Per Covered Member Per Year Intended to stabilize premiums in the individual market for those with pre existing conditions. Slide 8

6 PPACA SMART EHIM has created a tool that is used by employers to analyze the financial impact of PPACA. Census based projection of expected costs in 2014 and a number of scenarios to offset the financial i impact. Scenarios Include Dropping Insurance Converting Employees to Part Time Incurring Penalty for Unaffordable Coverage Defined Contribution Plan Different Employee Contribution Strategies Slide 9 Assumptions in PPACA SMART Percent of currently waived full time employees will select the base plan to avoid an individual mandate fee. Annual inflation for health care premium Assumed marginal tax rate for Employer. For purposes of calculating the Health Insurance Tax a percentage of the health care dollars are fully insured. The Health lthinsurance Tax rate for 2014 is 2.25%. 25% Medicaid Eligibility Based on current employee salary and known family composition information. Varies by residence state of employee Slide 10

7 Sources of Highest Financial Impact Unaffordable Plan The employers who currently don t contribution much to the employees health care costs see the highest increase in costs due to affordability. If they fall in this category they have chosen to incur a penalty for unaffordable coverage if the employee receives a subsidy from the exchange. Currently Waived Employees The waived employees who are assumed to elect coverage in 2014 are a key driver to costs. PPACA Fees These are typically not substantial, but are unnecessary from the employers perspective. Slide 11 Key Observations All employers are interested in finding out what the financial impact of PPACA will be. There have not been any who view this as a good change since it adds a financial burden to their bottom line. All are interested in finding out about the cost related to dropping health care coverage completely. At this point we have not completed the analysis for an employer who is seriously considering dropping health care in 2014 Slide 12

8 Key Observations (Cont.) All employers are relieved to find out the actual financial impact. If an employer currently has a partial part time workforce they are open to moving more employees to part time to reduce costs. Slide 13

9 Session 76 Employer Decisions Under Material PPACA Regulations Prepared by Consulting Health and Benefits Why Employers Provide Health Care Benefits 1. Competitive Practice 2. Tax-Efficiency 3. Vested Interest in Health and Productivity 4. No Viable Individual Marketplace for All If your main competitor got out, what would YOU do? If YOU got out, would you energize collective bargaining? Proprietary & Confidential XYZ.PPT/026-J /2013 2

10 Why Are Employers Looking at Changing Now? Self-Insured Plans Will Suffer the Brunt of System-Wide Cost Shifting Cuts in Medicare reimbursements Cuts in Medicare Advantage payments to health plans Medical Loss Ratio margin pressure Exchange-specific reimbursement rates to hospitals Demographic Trends Do Not Favor a Softening of Health Spending Baby boomers moving through their 50s and early 60s Lifestyle risk factors increasing Utilization of services increasing Mix of services towards higher-cost services (e.g., specialty drugs) The Individual Mandate will Bring More People into Coverage Adverse risk selection expected in the individual market Employer-based risk selection is unknown Primary care physician shortage Employer Plans will be Measured on Affordability Many employers will have a hot zone population of employees who come close to the 9.5% AGI threshold, creating a possible employer penalty of $3,000 per employee Offering lower-valued plans with reduced employee contributions helps reduce the number of employees in this zone the test is on eligibility, not enrollment The Health Care Trend Cycle is Currently in a Valley But for How Long? As economic conditions improve, utilization of discretionary services will likely increase Hospitals are increasing their pricing leverage through mergers and acquisition of physician practices Measuring the inflection point is a rear-view mirror exercise Proprietary & Confidential XYZ.PPT/026-J / High-Level Strategies and Implications for 2014 and Beyond House Money, House Rules (HMHR) Continue wellness programs while providing increasingly significant incentives to improve health Embrace emerging network solutions and payment reforms Emphasize shared responsibility and improving health Modify offerings to minimize negative Health Care Reform (HCR) impact where possible Annual Trend Mitigation Continue self-insured model but shift dollars per trend increases Significant imbalance between health care trend and salary trend : % health care trend while salary increase rates projected at 2.0% Need to continue to shift costs to utilizers to control cost Private Exchange Reduce volatility via fully insured model Remove risk of health care trend by moving to defined contribution approach Improve employee sustainability of affordable health care via competition and regional rating Provide consumer model by providing incentives for health, but employees have complete choice of plans and how they spend their allocated dollars Exit Completely Pay $2,000 nondeductible penalty (likely to increase in future years) State-by-state availability of exchanges will vary as will design and cost Public exchange coverage cost is assumed to be 1.15 times more expensive than the employer market Employees have to pay full cost for coverage on state exchange, less eligible federal subsidies Employers and employees lose tax savings from current pretax contributions Proprietary & Confidential XYZ.PPT/026-J /2013 4

11 Strategies for 2014 and Beyond Pathways to Consider 63% 26% 5% 6% Proprietary & Confidential XYZ.PPT/026-J / Employer Strategic Considerations: Is an Exchange an Option? Reasons Not to Use an Exchange Our associates perceive unique value in the company medical plan, beyond the financial value of the subsidy We drive value through plan design and want to maintain complete flexibility We drive value through vendor management and want to maintain very close ties to our medical plan administrator We best serve associates by picking the one medical plan administrator that we believe is best-in-class We believe that we will lower cost through plan design, direct contracting, value-based design, etc. Value Perception Plan Design Vendor Mgmt. Vendor Choice Cost Drivers Reasons to Use an Exchange We should monetize our subsidy in the form of a defined contribution, which would be a more clear component of total rewards We should not be spending time managing the details of plan design We should not be spending time managing medical plan vendors; an exchange will motivate vendors through competition for individual members We best serve associates by giving them a variety of medical plan administrators to choose from We believe that exchanges will lower cost through competition, discount optimization and standardization Proprietary & Confidential XYZ.PPT/026-J /2013 6

12 Why Many Large Employers Won t Completely Exit Health Care Completely Getting Out The Simplified Math Total Health Care Premium $8,992 Employer Subsidy $7,015 Employee Contributions $1,977 ********************************************************************************************** Free Rider Penalty (non-deductible) $2,000 (?) Loss of Deduction (40%) $ 800 Net Expense of Penalty $2,800 Employee Comp. Increase (50% of Subsidy) $3,507 Tax Gross-up (30%) $1,503 Total Comp. Expense $5,010 Total Employer Cost After Exit $7,810 Proprietary & Confidential XYZ.PPT/026-J / Public versus Private Exchanges Public Exchange Private Exchanges Tax Benefits Risk Pool/Overall Costs Federal premium tax credits available; Excluded cudedfrom tax benefits e sunder section125 and prohibitions on stand alone HRAs Higher risk pool/expect higher premiums Depending on structure, can continue to take advantage of traditional favorable ab tax treatment e for employer sponsored benefits Favorable risk pools generally, similar to traditional group products Employer Involvement None/low Low to High Member Experience??? Service levels vary, but strong member experience in many exchanges ecages Number of Plan Options Set metallic levels Variable, can mimic public options or have additional choice Competition Yes Depends on exchange structure Proprietary & Confidential XYZ.PPT/026-J /2013 8

13 Modeling Health Care Reform Factors That Will Drive Individual Health Insurance Choice $ Demographics Age Family size Geography Financials Family income Premiums or contributions Protection Provider access Insurance coverage Loyalty Satisfaction with current insurance product Willingness to change Proprietary & Confidential XYZ.PPT/026-J / Modeling Health Care Reform Individual Employee Simulation Methodology Create Profile for Every Individual Determine Eligibility for Programs Estimate Costs of Eligible Programs Calculate l Likelihood for Each Option Simulate Choice Proprietary & Confidential XYZ.PPT/026-J /

14 Scenario Status Quo and Exit Completely Highly Paid Employees Population Option ER Plan State Exchanges Medicaid Waived Total Status Quo (No Migration) 2,059 1,376 3,435 Status Quo (With Migration) 2, ,362 3,435 Exit 2,063 1,372 3,435 Costs Option ER Subsidy PPACA Penalties EE Contrib EE OOP Cost Fed Subsidies Total Status Quo (No Migration) $13,015,668 $0 $6,900,556 $7,970,505 $0 $27,886,730 Status Quo (With Migration) $13,268,010 $0 $7,124,887 $8,038,772 $0 $28,431,670 Exit $0 $10,467,692 $21,363,367 $8,116,377 $105,316 $40,052,752 Costs Employee Distribution Option Win Loss Migration Status Quo (No Migration) Status Quo (With Migration) Exit 12 1,919 2,063 Assumes all employees made >$75,000. Population includes employees from across the country, with ages mixed between years. Proprietary & Confidential XYZ.PPT/026-J / Scenario Status Quo and Exit Completely Moderately Paid Employees Population Option ER Plan State Exchanges Medicaid Waived Total Status Quo (No Migration) 2,059 1,376 3,435 Status Quo (With Migration) 2, ,297 3,435 Exit 2,089 1,346 3,435 Costs Option ER Subsidy PPACA Penalties EE Contrib EE OOP Cost Fed Subsidies Total Status Quo (No Migration) $13,015,668 $0 $6,900,556 $7,970,505 $0 $27,886,730 Status Quo (With Migration) $13,531,986 $0 $7,276,478 $8,192,062 $0 $29,000,527 Exit $0 $10,467,692 $18,540,953 $8,045,586 $3,157,263 $40,211,494 Costs Employee Distribution Option Win Loss Migration Status Quo (No Migration) Status Quo (With Migration) Exit 60 1,833 2,089 Assumes all employees make between $40,000-$75,000. Population includes employees from across the country, with ages mixed between years. Proprietary & Confidential XYZ.PPT/026-J /

15 Scenario Status Quo and Exit Completely Low Paid Employees Population Option ER Plan State Exchanges Medicaid Waived Total Status Quo (No Migration) 2,059 1,376 3,435 Status Quo (With Migration) 1, ,151 3,435 Exit 2, ,121 3,435 Costs Option ER Subsidy PPACA Penalties EE Contrib EE OOP Cost Fed Subsidies Total Status Quo (No Migration) $13,015,668 $0 $6,900,556 $7,970,505 $0 $27,886,730 Status Quo (With Migration) $10,261,237 $2,395,385 $6,063,470 $6,990,772 $4,377,312 $30,088,176 Exit $0 $10,467,692 $4,880,328 $6,213,796 $18,087,437 $39,649,253 Costs Employee Distribution Option Win Loss Migration Status Quo (No Migration) Status Quo (With Migration) Exit 1, ,314 Assumes all employees made <$40,000. Population includes employees from across the country, with ages mixed between years. Proprietary & Confidential XYZ.PPT/026-J / Employer Pay/Play Analysis Pay/Play Analysis (Employer and Employee Costs Associated with not Offering Coverage to all FTEs) Assuming No Additional Income to Employees 2014 Impact Current Plan Eliminate Company Coverage in 2014 Employer Employee Employer Employee Healthcare Cost $38,215,200 $21,605,000 $0 $36,471,700 Net Premiums/Net Plan Cost $38,215,200 $9,610,300 $0 $20,886,100 Participant Out of Pocket (Deductibles, etc.) n.a. $11,994,700 n.a. $15,585,600 Penalties (with tax gross up) $0 n.a. $17,083,100 n.a. Additional Income $0 $0 $0 $0 Tax Impact $0 $0 $735,200 $3,137,800 Due to elimination of current pre-tax contributions $0 $0 $735,200 $3,137,800 Due to additional income $0 $0 $0 $0 Total $38,215,200, $21,605,000, $17,818,300, $39,609,500, Change From Current Plan ($20,396,900) $18,004,500 Proprietary & Confidential XYZ.PPT/026-J /

16 Employer Pay/Play Analysis Pay/Play Analysis (Employer and Employee Costs Associated with not Offering Coverage to all FTEs) Assuming Additional Income to Employees such that Company is Breakeven Eliminate Company Coverage in Current Plan 2014 Impact 2014 Employer Employee Employer Employee Healthcare Cost $38,215,200 $21,605,000 $0 $36,471,700 Net Premiums/Net Plan Cost $38,215,200 $9,610,300 $0 $20,886,100 Participant Out of Pocket (Deductibles, etc.) n.a. $11,994,700 n.a. $15,585,600 Penalties (with tax gross up) $0 n.a. $17,083,100 n.a. Additional Income $0 $0 18,947,400 (18,947,400) Tax Impact $0 $0 $2,184,700 $9,324,100 Due to elimination of current pre-tax contributions $0 $0 $735,200 $3,137,800 Due to additional income $0 $0 $1,449,500 $6,186,300 Total $38,215,200 $21,605,000 $38,215,200 $26,848,400 Change From Current Plan $0 $5,243,400 Proprietary & Confidential XYZ.PPT/026-J / Employers/Populations More Likely to Drop Coverage Select industries/demographic populations Pre-65 retirees Proprietary & Confidential XYZ.PPT/026-J /

17 Pre-65 Exchanges Future Outlook Many plan sponsors expect to change their Pre-65 retiree strategy to leverage the new state exchanges, with strategy changes taking place some time after 2014 In Light of the Opportunities Created by the State Exchanges, Health Care Market Reforms, and Federal Subsidies Beginning in 2014, Which of the Following Long-term Strategies Are You Favoring with Respect to Pre-65 Retiree Coverage? Defined Contribution Strategy with Individual Market/State Exchange-Based Benefit Sourcing 18% 12% 4% No Anticipated Change in Strategy 16% 9% 8% Eliminate Pre-65 Retiree Coverage and Subsidies Altogether 7% 9% 14% Other 2% 1% #1 Ranking #2 Ranking #3 Ranking (n=346) 0% 5% 10% 15% 20% 25% 30% 35% Source: 2013 Aon Hewitt Retiree Health Care Strategy Survey Proprietary & Confidential XYZ.PPT/026-J / Pre-65 Retiree State-Sponsored Exchanges The Opportunity Traditional Employer-Sponsored Environment (Pre-2014) Ongoing erosion in plan sponsors offering and subsidizing group-based Pre-65 retiree health care Subsides capped or eliminated, impacting retiree affordability Fragmented individual health insurance market characterized by high costs, limited coverages, and the ability to rateup or deny coverage based on health status in many cases Lack of access to affordable and comprehensive e e coverage may discourage retirement, and impact workforce planning Reformed Individual Market (2014+) Guaranteed access to a variety of comprehensive individual coverages regardless of health status Direct federal premium and cost-sharing subsidies based on income, which tends to decline in retirement Indirect subsidies inherent in plan premiums due to favorable rating rules, so that premiums for older participants are limited to 3X the premiums for the youngest Creates a viable individual health insurance market for 2014+, which allows plan sponsors to move to a tax-effective defined contribution subsidy strategy delivered through an HRA Health Care Reform creates a viable individual health insurance market for Pre-65 retirees beginning in 2014, which will directly address many current challenges and create new opportunities for plan sponsors Proprietary & Confidential XYZ.PPT/026-J /

18 Pre-65 Retiree State-Sponsored Exchanges Open Issues Theme Questions Risks Comments What insurers will participate, on what exchanges, and when? What plans will they offer and what will the prices be for these plans? When will we have a feel for state-by-state plan participation p and premiums? Will commissions be included in the individual plan premiums? What will the retiree experience be across the three types of exchanges? What will my role as plan sponsor be? PPACA may be changed in an unfavorable manner in the future undermining one or more of the key benefits of individual market-based benefit sourcing Exchanges may not be economical in many locations at the outset and/or over time Exchange customer service experience may not be favorable Income for some retirees may be too high to qualify for federal subsidies Federal subsidies may be reduced over time due to federal budget concerns Tax treatment of plan sponsor HRA funding may not be as favorable as expected Exchanges could create adverse selection concerns for the Pre-65 retiree groupbased health plan, if continued Plan sponsors will need to closely monitor the development and performance of the exchanges; some degree of variability in the retiree experience may need to be tolerated in at least the near term Proprietary & Confidential XYZ.PPT/026-J / Employee Reaction to Exchanges: Employee Engagement in Plan Selection The Tale of the Tape 42% of employees bought down to less expensive coverage and saved on payroll deductions 26% bought up to richer coverage than prior year (including many for whom the richer coverage had been previously unavailable) Less than 1/3 of employees remained at comparable level What s covered, including preventive care, is the same across plan levels Under a true DC application the employer s cost does not vary based on plan level chosen fostering real consumerism Proprietary & Confidential XYZ.PPT/026-J /

19 Employee Reaction to Exchanges: Employees Reaction to Exchange Concept Corporate Exchange enrollees who agreed with the following statements: Total I like being able to choose my own carrier 93% I feel confident that I chose the health plan that offered the best value 79% The benefits enrollment process was easy for me to understand. 76% I feel like (Client) tries very hard to make my benefits enrollment experience positive 76% I have a good understanding of how my employer and I share the cost of my medical insurance 75% Proprietary & Confidential XYZ.PPT/026-J /

20 Modeling Dumping to Exchanges Robert Wendler, MBA June 11, 2013 A nonprofit independent licensee of the BlueCross BlueShield Association Pay or Play Large segment - >1000 Contracts Discuss dropping coverage and want to investigate all options Expect most if not all of our customer to play Mid segment Contracts Discuss dropping coverage and want to investigate all options, will require detailed analysis Expect limited volume to drop, most will play Small segment - <250 contracts Often not aware responsibility and requirements Most likely to make uninformed decisions 2

21 Factors Influencing Employer Decision The three C s Cost What will be more cost efficient, how do they model it What will first year rates be and how much will they move in out years due to current year unknowns Culture What impact would putting one more thing on employees do to internal culture and employee satisfaction Competitiveness Health insurance has long been a part of global compensation and can be a determining factor in attracting and retaining employees 3 Health Plans Promote Group Coverage Who is most likely to drop coverage and how do we identify them before they make the decision? Do we share our modeling of current coverage vs. dropping coverage when we wont always like the answer? When there is a cost advantage to drop coverage, how do we convince them of the value of offering group coverage to minimize competitive exposer? 4

22 Model to Identify Groups at Risk Typical build or buy decision Option 1 - Vendor Strong full book evaluation functions but not as strong with employer group facing interface Option 2 - Vendor Strong focus on employer group interface and was designed specifically to work with them in decisions Option 3 Internal Building internal solutions from ground up but finding the time and resources is always challenging 5 Data Needs Factors needed for modeling that we did have Basic demographics, product and premium information Data needed for modeling that we didn t have Household income, participation rate and premium contribution 6

23 There is Cost Analysis What do employers pay in coverage today What is the cost trend How many more 30+ hour employees will elect coverage How does that compare to the cost of penalties of Not offering coverage Salary adjustments, increase in payroll taxes and penalty expenses Employees will most likely get less benefits at higher cost, both premium and out of pocket Offering coverage is not enough, it must be affordable (9.5% rule) 7 There is People Analysis Understanding employees reactions to Increased responsibilities in health coverage decisions Experience on the exchange Reduction in benefits and increase in cost Real or perceived reduction in compensation Unemployment impacts High rate makes it easier to attract without coverage As the rate decreases, quality employees will see the value employer coverage when choosing an employer 8

24 Building a Strategy for Retention Convey the whole story to employer groups Focus on the groups most at risk based on analysis and dindustry types Help them understand the not so obvious cost in deciding to drop coverage Discuss their strategy of employee attraction and retention 9 Looking Ahead Exchanges will be messy, few will jump in year 1 The extent of the mess will determine year 2 Year 3 likely to be the highest risk for dropping coverage One large visible employer dropping coverage may act as a tipping point While not part od PPACA, Defined contributions and private exchanges will play a role shifting our focus from small to larger employers 10

25 Thank You!