The Affordable Care Act and it s Impact on Employers

The Affordable Care Act and it s Impact on Employers Presented by Avalere Health, LLC Eric Hammelman, Vice President Mairin Brady, Senior Manager

Agenda > The ACA Today: Implementation Update > Major Provisions Affecting Employers in 2013 and Beyond > Potential Employer Impact > Questions and Discussion

The Affordable Care Act Today: Implementation Update 3

The Affordable Care Act Has Three Major Goals 1 Coverage & Insurance Market Reform Make insurance more accessible and affordable for all 2 3 Delivery & Payment System Reform Pay for quality instead of volume of care Financing Find sustainable funding to pay for reform provisions

The CBO Projects ESI Steady Through 2022 Source: Congressional Budget Office, Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision, July 2012; Congressional Budget Office, March 2012 Medicare Baseline, March 2012 ESI = Employer-Sponsored Insurance

Second Wave of Insurance Reforms Imminent Limitations on Rescissions Prohibition of Pre- Existing Condition Exclusions for Kids <19 Prohibition of Lifetime Limits Extension of Dependent Coverage to Age 26 Federal Review of Premium Increases Grandfathering Requirements Medical Loss Ratio Requirement Report Aggregate Value of Health Benefits on W-2s Employers to Notify Employees of Exchanges and Potential Eligibility for Tax Credits Limit FSA Contributions Wellness Incentives Increase to 30% of Total Plan Costs Individual and Employer Mandates Rating Limits and Benefit Requirements Prohibition of Annual Limits Guaranteed Issue and Renewability Exchange Coverage Goes Live 2010 2011 2012 2013 2014

Overview of ACA Provisions Affecting Employers: 2013 and Beyond

Select ACA Provisions May Affect Employer Coverage Decisions > Employer Mandate > Individual Mandate > Insurance Market Reforms > Exchanges > Premium Tax Credits/Cost Sharing Subsidies > Small Business Tax Credit > High-Cost Plan Excise Tax

Employers With at Least 50 FTEs Must Offer Coverage or Face Penalties Does the employer offer coverage? Employer offers coverage but has at least one full-time employee receiving a premium assistance tax credit to purchase exchange coverage Employers do not offer coverage or the coverage does not meet minimum standards Applicable penalties Penalty will be the lesser of: (a) $2,000 times the number of full-time employees excluding the first 30, or (b) $3,000 times the number of full-time employees receiving subsidies in an exchange Penalty will be $2,000 times the number of full-time employees in the business, not counting the first 30

FTE is Defined as One Working At Least 30 Hours per Week > All employees (including seasonal workers) who were not full-time employees for any month in the preceding calendar year are included in calculating the employer s full-time equivalent employees by (i) calculating the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not employed on average at least 30 hours of service per week for that month, and (ii) dividing the total hours of service in step (i) by 120. > look-back measurement period methods will be employed to determine full-time status. The measurement period may be up to 12 months, followed by a stability period of like length during which coverage must be offered without regard to hours as long as the individual remains employed. > Allows employers to use administrative periods in between measurement periods and stability periods (during which coverage is offered) in order to make necessary determinations of eligibility and enroll employees. IRS G Source: Internal Revenue Service. Proposed Rule. Shared Responsibility for Employers Regarding Health Coverage. http://www.irs.gov/pub/newsroom/reg-138006-12.pdf.

The IRS Has Proposed a Safe Harbor for the Affordable Coverage Requirements Affordable Coverage Safe Harbors: As employers generally do not know their employee s household income, which is one prong of the employer responsibility test, the IRS proposed three optional safe harbors: Form W-2: Employers could use employees W-2 forms to determine wages Rate of Pay: Employers could determine affordability based on monthly salaries (for hourly employees, the monthly salary would be employees hourly pay rates multiplied by 130 hours per month) Federal Poverty Line (FPL): Employers could consider employer-provided coverage affordable if employees self-only coverage costs do not exceed 9.5% of the FPL for a single individual IRS = Internal Revenue Service Source: Internal Revenue Service. Proposed Rule. Shared Responsibility for Employers Regarding Health Coverage. http://www.irs.gov/pub/newsroom/reg-138006-12.pdf. FAQ available here: http://www.irs.gov/uac/newsroom/questions-and- Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act

Large Employer Plans Must Provide Minimum Value To Avoid Penalty Minimum Value (MV) means that plans should provide at least 60% Actuarial Value (AV). Additionally, annual Out-Of-Pocket (OOP) Maximum limit is tied to HSA values ($3,250 for self-only plans, $6,450 for family plans in 2013). A minimum value calculator will be made available by the IRS and the Department of Health and Human Services (HHS). Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. FAQ available here: http://www.irs.gov/uac/newsroom/questions-and-answers-on- Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act

Individual Mandate Penalties Begin in 2014 > The ACA requires individuals to obtain minimum essential coverage, such as: Government sponsored plans (Medicare, Medicaid, CHIP, TRICARE, the veteran s health care program, Peace Corps health plan) Employer-sponsored plan Plans offered in the individual market in a state A grandfathered plan Other coverage, such as state high-risk pools, as determined by the Secretary of HHS in coordination with the Treasury > The ACA sets penalties for noncompliance Year Penalty Amount 2014 The greater of $95 or 1 percent of income 2015 The greater of $325 or 2 percent of income 2016 The greater of $625 of 2.5 percent of income 2017 and thereafter The greater of $695 (+ COLA) or 2.5 percent of income

Exchanges Will Offer Premium and Cost- Sharing Subsidies to Eligible Individuals Income Premiums Limited to % of Income <133% FPL 2.0% 133 150% FPL 3.0-4.0% 150 200% FPL 4.0 6.3% 200 250% FPL 6.3 8.05% 250 300% FPL 8.05 9.5% 300 400% FPL 9.5 % Household Income Reduction in OOP Limit Actuarial Value 100-150% FPL 2/3 94% 150 200% FPL 2/3 87% 200 250% FPL 1/5 73% 250 400% FPL None, given AV level 70% FPL = Federal Poverty Level OOP = Out-of-Pocket

Individual and Small Group Markets Are Subject to New Requirements 10 Categories of Minimum Essential Health Benefits Out-of-Pocket Limits (OOP) Actuarial value requirements Platinum, Gold, Silver, Bronze benefit levels Small Group Deductible Limits $2,000 for individuals and $4,000 for families

New Rating Rules Go Into Effect in 2014 > Beginning in 2014, all insurers in the individual and small group markets must use a form of modified community rating ACA Minimum Requirement Individual Age rating limited to 3:1 Tobacco rating 1.5:1 Geography rating permitted Family status rating permitted Small Group Same restrictions as individual Wellness incentive rating permitted No group size rating The out-of-pocket cap will apply to all plans The ACA s community rating will likely cause premiums to rise in the group marketplace

The ACA Creates Three Programs to Mitigate Risk Program: Reinsurance Risk Corridors Risk Adjustment What: Provides funding to plans that enroll highest cost individuals Limit issuer losses (and gains) Program Oversight: State or state option if no state-run exchange HHS Who: All issuers and TPAs Qualified Health Plans contribute funds; new (QHPs) (inside exchange) individual market plans eligible for payments, inside and outside exchange Why: Offsets high cost outliers Protects against inaccurate rate setting Transfers funds from lowest risk plans to highest risk plans State option in a state-run exchange Non-grandfathered individual and small group market plans, inside and outside exchange Protects against adverse selection Time Frame: 3 years (2014-2016) 3 years (2014-2016) Permanent Source: Federal Register, Vol. 77, No. 57. Friday, March 23, 2012. 45 CFR Part 153. Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk Adjustment; Final Rule. Page 17221. http://www.gpo.gov/fdsys/pkg/fr-2012-03-23/pdf/2012-6594.pdf

Exchanges Create New Marketplaces to Purchase Insurance 25M enrollees* 20M subsidized individuals; No subsidies for those with ESI* Exchange Governing Body Individual Exchange SHOP Exchange Unknown number of groups with 100 workers Exchanges offer a central place to purchase insurance for individuals and small groups Website will compare products and offer price quotes in individual market Small group exchange offers employee choice and consolidated billing *Individuals with an offer of employer-sponsored insurance (ESI) are not eligible for subsidies unless their individual employer premium exceeds 9.8% of their income or does not provide minimum value. Source: Congressional Budget Office, Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision, July 2012; based on 2022

Federally-Facilitated or Partnership Exchange Dominant Model in 2014 CA OR AK WA NV ID AZ UT Insurance Exchange Operational Model MT WY CO NM ND SD NE KS TX OK MN IA MO AR WI LA IL MS* IN MI TN AL KY OH GA WV PA SC VA NC FL NY VT NH MA CT NJ ME DE MD D.C. RI HHS Approved State-Run (18) State-Run Blueprint Submitted (1) Partnership (7) Likely Partnership (5) HI Federal (16) Likely Federal (4) *HHS will not conditionally approve Mississippi s state-run exchange until Mississippi determines whether the insurance commissioner has the authority to unilaterally create the exchange. Gov. Bryant (R) opposes the insurance commissioner s efforts to develop a state-run exchange.

Federal Law Specifies Key SHOP Features Participation SHOP is open to businesses with 100 workers*; states may elect to expand the SHOP to the large group market in 2017 Application and Enrollment Plans in SHOP must use a uniform application form; SHOP must permit rolling enrollment for small groups; plan year is 12 months Plan Choice SHOP must offer an employee choice option, but SHOP may allow employers to limit or expand employee choice** Premiums Premium Collection and Billing QHPs must make changes to rates in a uniform timeframe either monthly, quarterly, or annually. QHPs may not vary rates for an employer during its plan year SHOP must provide consolidated billing; SHOP must act as the intermediary and collect premium contributions and payments from the employer and remit total amount to plan *States can limit SHOP exchanges to employers with up to 50 employee for plan years before January 1, 2016. ** Employee choice is when the qualified employers select a benefit tier and employees may choose any plan within that tier. SHOP exchanges may create alternative enrollment options for employers, and employers may elect to limit employees to just a single plan or permit employees to select plans from multiple benefit tiers

SHOP Exchanges Must Offer Employee Choice Option Choice Model 1: Required* Platinum Plan A Gold Plan B Employer Silver Employee Plan C Bronze Plan D *Choice model 1 is the minimum required level of choice for employees in SHOP exchanges; however, state SHOP exchanges can offer other choice models, including traditional employer choice

Role of Brokers in Exchange is at Discretion of States States are given the option to permit agents and brokers to enroll small businesses and individuals in qualified health plans (QHPs) An exchange may elect to provide information about agents and brokers on its website A broker website that operates separately from the exchange will still be required to display all QHPs available in the market

The ACA Makes Available Small Business Tax Credits Today Maximum tax credit is 35% of employer premium payments for small employers and 25% for small tax-exempt employers January 1, 2014 Maximum tax credit will increase to 50% and 35% respectively Firms with fewer than 10 workers with an average salary of less than $25,000 are eligible for the full tax credit. Small businesses with an average salary higher than $25,000 and greater than 10 workers will see a sliding scale reduction of the maximum tax credit.

What Are Some Tax Credit Scenarios? Auto Repair Shop Foster Care Non-Profit Restaurant with 40 Part Time Employees Employees: 10 Employees: 9 Employees: 40 (the equivalent of 20 full time workers) Wages: $250,000 total or $25,000 per worker Employee Health Care Costs: $70,000 Current Tax Credit: $24,500 (35%) Wages: $198,000 total or $22,000 per worker Employee Health Care Costs: $72,000 Current Tax Credit: $18,000 (25%) Wages: $500,000 total, or $25,000 per full-time equivalent worker Employee Health Care Costs: $240,000 Current Tax Credit: $28,000 (35% credit with phase-out) 2014 Tax Credit: $35,000 (50%) 2014 Tax Credit: $25,200 (35%) 2014 Tax Credit: $40,000 (50% with phase-out) Source: IRS Small Business Health Care Tax Credit Scenarios. http://www.irs.gov/pub/irsutl/small_business_health_care_tax_credit_scenarios.pdf

Potential Employer Impact

Employers Are Evaluating Coverage Options Potential Employer Choices for Providing Coverage Purchase defined benefits using a broker (current model) Privately run exchange, possibly with defined contributions Small Employer (SHOP) Exchange* Drop coverage, shift employees into individual market via exchanges ACA Initiated SHOP = Small Employer Health Options Program * Beginning in 2017, a state may select to expand the SHOP to the large group market.

Employers Will Have Different Responses to ACA Provisions Employer Type Provisions Driving Employer Response Potential Effect on ESI Firms with predominantly low-wage workers Firms with high cost employees/ early retiree costs Firms with Fewer than 25 Employees and Microbusinesses (<10) Small Businesses» Premium subsidies» Insufficient pay or play penalties» Health insurance exchanges» High-cost plan excise tax» Small business tax credits» Health insurance exchanges» Individual mandate» Health insurance exchanges» Individual mandate

ESI is Expected to Be Stable in the Near Term But Uncertain in the Long Term 2014 2015 2016 2017-Beyond Employer Coverage Likely Stable Post-2014 Estimates suggest most employers will offer coverage» Microsimulation models predict net changes of -4% to +3%» Stability is driven by large firms continuing to offer health benefits Employers are conservative and want to make sure exchanges work Long-Term Uncertainty Remains Greater erosion over 10 to 20 years is possible» Me too effect If exchanges offer greater value, larger employers and workers may seek access to the exchanges

The Generosity of Coverage Will Vary, High-Cost Sharing Likely Insurance Plan Actuarial Value Typical Employer Plan (HMO) 1 93% Platinum 90% FEHBP Blue Cross Blue Shield Standard Option (PPO) 1 87% Typical Employer Plan (PPO) 1 80.0% - 84% Gold 80% Medicare Parts A, B and D 1 76% Silver 70% Bronze 60% The actuarial value tiers are set at levels lower than typical employer-sponsored plans today, suggesting that cost sharing will be higher for individual and small group enrollees in 2014 and beyond 1.CRS, Setting and Valuing Health Insurance Benefits, 2009 Actuarial Value = A measure of a benefit generosity that is expressed as percent of expenses paid by the insurer Typical ESI HMO defined as a plan with no deductible; $20 copays for office visits; 250 copay for inpatient hospitalization copay; no cost-sharing for lab or x-ray; and three tiers of copayments for prescription drugs Avalere Health LLC Typical ESI PPO defined as a plan with a $700/$400 annual deductible; 20% coinsurance for office visits, inpatient hospitalization, lab Page and x-ray.; 29 HMO defined as a plan with no deductible; $20 copays for office visits; 250 copay for inpatient hospitalization copay; no cost-sharing for lab or x-ray; and three tiers of copayments for prescription drugs; and $3,500/$2,000 overall out-of-pocket maximum

Levers Used By Plans Today to Manage Risk Will Be Largely Unavailable in 2014 Health Plan Underwriting Tools Today* Vary rates based on range of factors including health status Health plans are able to deny individuals with pre-existing conditions Flexibility to set out-of-pocket limits and deductible levels Plans have flexibility to design high deductible plans or plans with low actuarial values Individual & Small Group Plans Post - 2014 Rate variation limited to: 3:1 by age 1.5:1 for tobacco use Guaranteed issue requires that all applicants be accepted by health plans Bounds on out-of-pocket spending and deductibles** All plans must hit set actuarial value tiers (platinum, gold, silver, bronze) No requirements for benefits covered Plans must cover the essential health benefits * Select states have outlawed some/all of these underwriting practices already **Deductible caps are only applicable for small group plans

Private Exchanges Offer an Alternative to ACA-Created Exchanges Health Insurance Other Ancillary Products* Dental/ Vision Insurance Private Exchange Employee Wellness Programs Health Savings Accounts Life Insurance *Other ancillary products include: pet insurance, retirement-related products, disability insurance, and long-term care insurance, travel insurance, critical illness insurance, accident insurance and discount cards for services such as chiropractic care and prescription drugs

Multiple Factors Will Influence Employer Decisions to Self Insure > Self-insured plans are exempt from many of the ACA s insurance market reforms, including community rating > Self-insured plans are able to define their benefit packages > Access to stop-loss policies with low attachment points may make self insurance more appealing to small employers by reducing their exposure to risk and helping them avoid state and federal insurance laws However, the availability of comprehensive stop-loss policies will influence the attractiveness of these policies The Internal Revenue Service (IRS) is assessing the impact of lowering of attachment points, which may limit small employers ability to transfer risk, and therefore self-insure In April 2012, IRS issued a preliminary request for information regarding the use and terms of stop-loss insurance among group health plans and their plan sponsors. Specifically, the IRS was interested in understanding the prevalence and consequences of stop-loss insurance at low attachment points. Source: https://webapps.dol.gov/federalregister/pdfdisplay.aspx?docid=26054.

Questions and Discussion