Health Care Reform: Getting Ready for the Next Phase October 15, 2013 George Lane [email protected] 202-331-5222 Mercer

Health Care Reform:Getting Ready for the Next Phase October 15, 2013

George Lane [email protected] 202-331-5222

Mercer

© 2013 MercerThis is for informational purposes only, and is not intended to be used as legal advice.

2April 19, 2023

*ProjectedSource: Mercer’s National Survey of Employer-Sponsored Health Plans; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April) 1990-2012; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey (April to April) 1990-2012.

The Problem: Health Benefit Cost Growth Dips to 4.1% After Employer Actions, But Still Surpasses Wages and Inflation

17.1%

12.1%

10.1%

8.0%

-1.1%

2.5%

0.2%

6.1%

8.1%

11.2%

14.7%

10.1%

7.5%

5.5%5.0%*

4.1%

6.1%6.9%

6.3%6.1%6.1%6.1%7.3%

2.1%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Workers' earningsAnnual change in total health benefit cost per employee

Overall inflation

2


3April 19, 2023

Patient Protection and Affordable Care Act (PPACA)Goals

• Enacted March 23, 2010, health reform’s goals were:– Provide access for 30+ million uninsured – Cost control– Quality

• Focusing on all three goals was a challenge

• Health reform is primarily health insurance reform

• It does not address major cost saving opportunities– Provider payment– Harmonization across payer programs– Tort reform


4April 19, 2023

• Temporary reinsurance fees first due in late 2014/early 2015

• Possible additional reporting and disclosure

• Employer shared responsibility

• Health insurance exchange coverage

• Individual coverage mandate6

• Financial assistance for exchange coverage of lower-income individuals

• State Medicaid expansion (possibly only some states)

• Dependent coverage to age 26 for any covered employee’s child2

• No annual dollar limits on essential health benefits2 (generally banning standalone HRAs)

• No pre-existing condition limits2

• No waiting period over 90 days2

• Wellness limit increase allowed2

• Health insurance industry fees

• Additional standards for non-grandfathered health plans, including limits on out-of-pocket maximums, provider nondiscrimination, and coverage of routine medical costs of clinical trial participants

• Small market, non-grandfathered insured plans must cover essential health benefits with limited deductibles (initially $2,000/individual, $4,000/family), using a form of community rating

• Insurers must apply guaranteed issue and renewability to non-grandfathered plans of all sizes

• Auto enrollment some time after 2014

• 40% excise tax on “high cost” or Cadillac coverage

Footnotes

1. Applies to all plans, including grandfathered plans, effective for plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans).

2. Applies to all plans, including grandfathered plans, effective for plan years beginning on or after Jan. 1, 2014.

3. Applies to non-grandfathered plans, effective for plan years beginning on or after Sept. 23, 2010, except that insured plan discrimination ban is delayed until regulations issued.

4. A temporary exemption applies to certain categories of employers.

5. Applies to non-grandfathered plans, effective for plan years on or after August 1, 2012.

6. A temporary exemption applies to employees of employers with non-calendar-year plans.

• $2,500 per plan year health FSA contribution cap (plan years on or after January 1, 2013)

• Comparative effectiveness group health plan fees first due

• Annual dollar limits on essential health benefits cannot be lower than $2 million

• Employers notify employees about exchanges by Oct. 1, 2013

• Medical device manufacturers’ fees start

• Higher Medicare payroll tax on wages exceeding $200,000/individual; $250,000/couples

• Change in Medicare retiree drug subsidy tax treatment takes effect

• Health Insurance exchanges initial open enrollment period

2013 20182014 2015

Health Care Reform Update – Employer Mandate Delayed Until 2015


5April 19, 2023 5

Key Areas of Impact2014, 2015 and 2018

• In 2014 and 2015, the majority of the key provisions will be effective, such as:– Launch of public exchanges (2014)– Individual mandate (2014)– Medicaid expansion, where applicable (2014) – Shared responsibility penalties (2015)

• For employer-sponsored plans, the key areas for potential cost increases include:– Current waivers joining the plan– Cost shifting from public plans (Medicare and Medicaid) to private insurance– Shared responsibility penalties

• One area for potential savings for employers is migration of current plan enrollees from the employer plan to Medicaid– This is complicated by the Supreme Court decision as states can independently

decide whether or not to expand Medicaid eligibility

• In 2018, an excise tax of 40% applies for employer plan costs that exceed certain dollar thresholds


6April 19, 2023 6

Two Public Programs 2014: Medicaid and Public Exchanges

• Medicaid: States will determine whether to expand Medicaid to anyone below 138% of federal poverty level (FPL)

– In these states, subsidies may be available for certain people to buy coverage

– Those ineligible for Medicaid or federal subsidies may have no option for coverage other than employer plan

• Public Exchanges: Insurance plan options available on exchanges that are operated by states or the Federal government (or a State/Federal partnership)

– Exchanges will conduct open enrollment from October 1, 2013 – February 28, 2014 (expect a communication blitz early to mid summer)

– If household income is between 138%-400% of the FPL, and individual does not have access to affordable employer coverage, the Federal government will provide subsidies to buy insurance on exchanges


7April 19, 2023 7

Who is Eligible for Subsidized Government Insurance?Assumes States Expand Medicaid to 138% FPL

Household income < 138% FPLEligible for Medicaid*

Federal Poverty Level (FPL) 2014 eligibility threshold estimates**

Family size of 2013 2014**Medicaid138% FPL

Exchange400% FPL

1 (single) $11,490 $11,835 $16,332 $47,339

2 $15,510 $15,975 $22,046 $63,901

3 $19,530 $20,116 $27,760 $80,464

4 $23,550 $24,257 $33,474 $97,026

5 $27,570 $28,397 $39,188 $113,588

6 $31,590 $32,538 $44,902 $130,151

7 $35,610 $36,678 $50,616 $146,713

8 $39,630 $40,819 $56,330 $163,276

Household income < 400% FPLCould be eligible for

subsidized exchange coverage

* Health reform legislation specifies income threshold of 133% FPL but also requires states to apply an “income disregard” of 5% of FPL in meeting income test; effective income threshold for eligibility is 138%

** Federal Poverty Level (FPL) assumed to increase 3% per year

7


8April 19, 2023 8

Individual Mandate2014

• All individuals must have health coverage*

• Pay a penalty

– 2014: Greater of $95(single)/$285 cap (family) or 1% of household income

– By 2016: Greater of $695(single)/$2,085 cap (family) or 2.5% of household income

OR

* Employers will be required to automatically enroll new and currently enrolled full-time employees in medical coverage sometime after 2014 (awaiting regulations). Estimated financial impact is not reflected below.


9April 19, 2023 9

Employer Shared Responsibility2015

Affordability Affordability

Minimum Value

Coverage

Minimum Value

Coverage

Full-time Employees

(and dependents)

Full-time Employees

(and dependents)

Employer Shared

Responsibility

• Employers not offering coverage to full-time employees* (and their dependents)

– Subject to penalty of up to $2,000 for each full-time employee if at least one full-time employee receives income-based assistance to buy coverage on insurance exchange**

• Employers offering coverage to full-time employees* (and their dependents)

– Lesser of: (1) up to $3,000 for each full-time employee eligible for income-based assistance**, or (2) up to $2,000 for every full-time employee

Pay or Play?

* Full time is defined as someone averaging 30 or more hours per week** No penalties for FT employees enrolled in MedicaidNote: Penalty not applied to first 30 employees


10April 19, 2023

What is the “minimum value” test?

• The plan must be designed to pay at least 60% of covered benefit.

• Approach for determining minimum value:– HHS minimum value calculator.– Proposed safe harbor plans (not final).– Actuarial certification for non-standard plan designs.

Proposed design-based safe harbors for minimum value

• $3,500 integrated medical and drug deductible, 80% plan cost-sharing, $6,000 maximum out-of-pocket limit.

• $4,500 integrated medical and drug deductible, 70% plan cost-sharing, $6,400 maximum out-of-pocket limit*, $500 employer contribution to an HSA.

• $3,500 medical deductible, $0 drug deductible,60% plan medical expense cost-sharing, 75% plan drugcost-sharing, $6,400 maximum out-of-pocket limit*, anddrug co-pays of $10/$20/$50 for the first, second andthird prescription drug tiers, 75% coinsurance for specialtydrugs.

• Notes: Based on 2014 guidance; subject to change in 2015. Assumes coverage of all EHB categories; *Still have to comply with OPM max limit rules.

Employer Shared ResponsibilityMinimum Plan Value

Minimum Plan Value Illustration

Claim $

<40 ¢

>60 ¢

10


11April 19, 2023 11

Employer Shared Responsibility 2015: Affordable Contributions

Projected 2014 Employer safe harbor contributions

With Medicaid expansion Without Medicaid expansion

138% of Federal Poverty Level (projected to

2014)

Employee contribution for

employer to avoid penalty

100% of Federal Poverty Level (projected to

2014)

Employee contribution for

employer to avoid penalty

Individual coverage $16,353per year

$129 per month

$11,850 per year

$94 per month

** Health reform legislation specifies income threshold of 133% FPL but also requires states to apply an “income disregard” of 5% of FPL in meeting income test; effective income threshold for eligibility is 138%

What is the “affordability” test?

• An employee’s required contribution for self-only coverage cannot exceed 9.5% of the employee’s household income

• OK to use employee’s W-2 wages as proxy for household income


12April 19, 2023 12April 19, 2023

Current Lowest-Cost Medical Plan Would Likely be Considered ‘Unaffordable’ for at Least Some Employees in 2014

12April 19, 2023

26%22%

14%12%

10%

5%

13%

Health careservices

Retail andhospitality

Transportation/Communication/

Utility

Other services Manufacturing Financialservices

All respondents

Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013


13April 19, 2023 13April 19, 202304/19/23

Likely to Take Action to Ensure Coverage is Affordable for all Eligible Employees

Lower employee contributions in a current medical

plan

Add a less expensive plan with lower

employee contributions than

the current plan

Introduce salary-based contributions

Raise dependent contributions to compensate for lower employee-

only contributions

Raise employee cost-sharing (deductibles,

etc.) to compensate for

lower contributions

13


Based on respondents that have employees for whom coverage would be considered unaffordable

Make no (or minimal) changes and pay shared responsibility

penalty as necessary


14April 19, 202304/19/23

The Most Disruptive Requirement for the Most Employers: Extending Coverage to all Employees Working 30 or More Hours per Week

Retail and hospitality

Financial services

Health care services

Government Other servicesTransportation/Communication/

Utility

Manufacturing

One-third of all survey respondents currently do not offer coverage to all employees working 30+ hours per week

Percent of employers that currently do not offer coverage in a qualified plan to all employees working an average of 30 or more hours per week

14

46% 46%42%

39%

34%

25%22%



15April 19, 2023 15

New Concept of Full-time Employee2015

• Employer’s own definition of full-time (and linked benefit eligibility) does not matter for employer shared responsibility

– 30 or more hours per week on average/130 hours per calendar month

• IRS set out optional approaches for variable hour and seasonal employees

– Allows a “lookback” measurement period of 3 to 12 months to determine average hours

– Requires a “stability” period of at least 6 months (and no shorter than the measurement period) when employees determined to work 30+ hours must be offered coverage

– Allows an administrative period up to 90 days

– Potentially means that employers should already be monitoring hours

• Employers meeting safe harbor won’t be subject to shared responsibility penalties

• Gives certainty at least through end of 2015


16April 19, 2023 16

Lookback and Stability Examples

Stability Period #1

Oct. 15

Standard Measurement Period #1 Administration Period #1

Employee B• Worked an average of

27 hours per week

Employee A• Worked an average of

35 hours per week

Oct. 15 Jan. 1 Jan. 1

Employee B• Not treated as a full-

time employee

Employee A• Treated as a full-time

employee

Example 1: Ongoing Employees


17April 19, 202304/19/23

Likely Response to ACA’s Requirement That all Employees Working 30 or More Hours per Week be Eligible for Coverage

10%

10%

30%

59%

<1%

Pay shared responsibility penalty as necessary

Make all employees eligible for the full-time employee plan(s)

Terminate medical coverage for all employees after the insurance exchanges become available

Add a new lower-cost plan option for all employees

Use segmentation strategy: Offer a lower-cost plan to newly eligible employees

Based on employers that do not currently offer coverage to all employees working 30 or more hours per week

17Source: Mercer’s Survey on Health Care Reform: The Road to Implementation – June 2013


18April 19, 2023 18April 19, 2023

12%

2%

21%

66%

20%

7%

21%

54%

All respondents

Retail/hospitality employers

Over One in 10 of all Surveyed Employers Will Reduce Some Workers’ Hours to Limit the Number of Newly Eligible Employees

Will reduce hours to limit the number of eligible employees

Will ask employees already

eligible for coverage to work

more hours

Will not change workforce strategy to

limit the number of newly eligible

employees

Already provide coverage to

employees working 30+ hours



19April 19, 2023 19April 19, 2023

After Taking These Steps, About Half of Respondents Affected by the Rule Still Expect a Significant Increase in Eligible Employees in 2014

43% 43%

3%

12%

68%

25%

5% 3%

All respondents

Retail/hospitality employers

Number of eligible employees will

increase

Number of eligible employees will stay

about the same

Number of eligible employees will

decrease

Don’t know

Based on respondents that currently do not cover all employees working 30+ hours

Among those expecting an increase in number of eligible employees,

average increase:All respondents: 11%Retail/Hospitality: 19%



20April 19, 2023 20April 19, 2023

How the Individual Mandate and Expanded Eligibility Will Affect Enrollment – and Budgeting – Remains a Tough Question for Many Employers

17%

42% 41%

35%

22%

43%

All respondents

Retail & hospitalityrespondents

Have budgeted for an increase in enrollment in 2014

Will not budget for an increase in enrollment in 2014

Don’t know yet whether or not to

budget for an increase

Those budgeting for an increase assumed

enrollment would rise by 10% on average

(16% for retail & hospitality)



21April 19, 2023

+ $90K

+ 1.6%

Summary and Cost ImplicationsKey Drivers of Potential Costs Under Employer Mandate Provisions

Best Estimate Scenario• 25% of current waivers w/ affordable coverage

elect CLIENT’s plan

•50% of current waivers w/ unaffordable coverage elect exchange

High Scenario• 50% of current waivers w/ affordable

coverage elect CLIENT’s plan


Total Net Cost After Reform

$ Change

% Change

$5.57M $5.72M $5.88M

+ $247K

+ 4.5%

+ $403K

+ 7.4%

Before-Tax Net Cost Impacts Low Scenario Best Estimate Scenario

High Scenario

Migration into plans by Waivers $0 $154K $308K

Migration from plans to Medicaid $0 $0 $0

Migration from plans to Exchange $0 $0 $0

Shared Responsibility Penalty $0 $0 $0

HCR Fees $90K $93K $95K

TOTAL $90K $247K $403K

Low Scenario• 0% of current waivers w/ affordable

coverage elect CLIENT’s plan


- Does not include ACA premium tax, estimated to be $160K for CLIENT- Totals do not add up to sum of components due to rounding- Assumes 67 US opt-outs based on census provided

21

Note: Compares CLIENT’s 2014 net cost after HCR against status quo plans with 8% medical trend applied.


22April 19, 2023 22April 19, 2023 22

Health Care Reform FeesSummaryFee Effective Year Who Pays Estimated Cost to CLIENT

Manufacturers of Branded Prescription Drugs

2011 and continues thereafter

Companies who manufacture or sell branded prescription drugs to certain government programs

Fees likely to be passed through indirectly to employers (impact unclear)

Patient-Centered Outcomes Research Institute (PCORI) Fee

Policy or plan year that ends on or after Oct. 1, 2012, and before Oct. 1, 2019

Insurer for fully insured plans; group health plan sponsor for self insured plans (e.g., employer maintaining a single-employer plan)

$1.00 PMPY for policy or plan years ending on or after Oct. 1, 2012 but before Oct. 1, 2013, increasing in subsequent years

Manufacturers of Medical Devices

2013 and continues thereafter

Companies who manufacture or sell medical devices

2.3% of every sale; Pass through cost paid by vendor; minimal impact

Fee on Health Insurance Providers

Begins in 2014 and continues thereafter

Health insurance companies offering fully insured coverage

Estimated 1.9% - 2.3% in 2014

Transitional Reinsurance Fee

2014 and sunsets in 2016

Insurance providers; self-insured plan is liable (but TPA or ASO may transfer fee at plan’s discretion)

Estimated $63 PMPY for 2014, decreasing in subsequent years


23April 19, 2023 23

Excise Tax2018

What is the Excise Tax?

• 40% excise tax on “high cost” coverage, including medical, health FSA contributions, onsite medical clinics, and employer contributions to HSAs– Does not include stand-alone insured dental and

vision coverage or certain other coverage types• Initial cap set at $10,200/single and $27,500 family

– Higher thresholds ($11,850/$30,950) for retirees and workers in high-risk professions

– Higher threshold ($27,500) for single multiemployer plan coverage

– Other adjustments possible for older groups and “higher than expected” health care trends between 2010 and 2018

– Indexed to CPI (for 2019 only, CPI+1%)• Aggregate cost determined using a methodology

similar to that used for determining applicable COBRA premiums

• Employers must determine aggregate cost– Insurers responsible for tax for insured coverage– Benefit administrators responsible for tax for self-

insured coverage– Employers responsible for tax for HSA

contributions

Based on current enrollment

Employer Tax (in $ '000s) - Status Quo Tax

Affected Employees

Employees 6252013 -$ - 2014 -$ - 2015 -$ - 2016 -$ - 2017 -$ - 2018 (first year of tax) 109$ 191 2019 157$ 191 2020 233$ 217 2021 316$ 222 2022 409$ 232 2023 509$ 232 2024 632$ 418 2025 779$ 418 2026 937$ 418 2027 1,108$ 418 2028 1,295$ 426 2029 1,501$ 426 2030 1,725$ 452

First Year Excise Tax Applies (2018-2030)Employee Only 2018Two Party 2028Employee + Family 2018


24April 19, 2023

Excise Tax CalculationScenario 1 – Bundled Plans (Medical/Dental/Vision/FSA)

• Based on current plan costs and FSA elections, CLIENT’s plans are expected to trigger an Excise Tax in the first year: 2018

• Since the Excise Tax thresholds are indexed by CPI (~3%) and historical trends are higher, the Excise Tax is expected to grow exponentially in future years

24

$108 $137 $182

$234 $312

$400

$497

$603

$714

$835

$966

$1,110

$1,264

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

CLIENT - Estimated Excise Tax (in $000's)


25April 19, 2023

Excise Tax CalculationScenario 2 – Unbundled Plans (Medical & FSA Only)

• If CLIENT decides to “un-bundle” the dental and vision benefits and leave them on a fully-insured basis, then the Excise tax is estimated to be lower

• Despite this change, the tax will continue to grow in a similar exponential manner in future years

25

$24 $47$85

$126$172

$222

$306

$400

$500

$608

$725

$854

$989

$0

$200

$400

$600

$800

$1,000

$1,200

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Client - Estimated Excise Tax (in $000's)


26April 19, 2023 26

Excise Tax CalculationConsiderations

• The estimates provided were performed under the current interpretation of the law. Final regulations have not been written.

• Potential changes to help mitigate Excise Tax implications include:– “Unbundling” of benefits– Eliminating FSA (affecting approximately 13% of enrolled population)– Medical plan design changes– Move towards CDHPs

Other Strategic Considerations


28April 19, 2023 28April 19, 2023

OPTION: Self-insurance vs. Fully-insuredPotential Impact of Health Trend Reduction (2014 – 2017)

Cumulative four-year

difference: $1.9M$380K annual average savings

Cumulative four-year

difference: $3.0M$600K annual average savings

• Rx Carve-Out

• Funding

• Wellness

• Focus on High Cost Population

• Plan Design with Incentives

• No ACA Premium Tax

TREND

Ann

ual C

ost (

in m

illio

ns)

Remaining fully-insured may create a significant barrier to achieving lower trend.


29April 19, 2023 29

OPTION: Private Health Care Exchanges

Percent of employers that would consider offering a private

exchange

Employer advantages

Cost control.

Choice for employees.

Streamlined management and administration.

Employee advantages

Cost-efficient, convenient buying.

Comprehensive coverage.

Personalized portfolios.

Advantages for Employers and Employees


30April 19, 2023 30

How Does Defined Contribution Relate To Exchanges?

With private exchanges, employers can successfully implement defined contribution.

• Offer employees an array of choices. • Encourage employees to “buy down” to lower-cost medical

coverage and use remaining dollars for other purchases.

Best achieved when employees can purchase other attractive products (life, accident, disability, critical illness, auto, etc.).

• Better meets employees’ personal needs. • Helps manage their benefit spend.

Defined contribution = Funding arrangement where employers manage their year-over-year increase in health and welfare benefits spend to a pre-defined amount


31April 19, 2023

How Do Private Exchanges Work?

Funding: DB or DC

Employer defined contribution

Employee contribution or combination

Administration

Eligibility determination

Data-driven events

Election management

Contribution calculation

HR profes-sionals

Reporting & premium data

Employee support

Online

Call center

Print & e-mail

Integrated benefit processes

PayrollDeductions

CarriersElection data

31


32April 19, 2023 32April 19, 2023

How Cost Would Affect the Decision to Switch to a Private Exchange Model

32April 19, 2023

28%

19%14%

34%

5%

Doesn’t matter what the cost savings,

would not consider switching

Might be willing to pay more than currently

for easier administration, more

attractive benefit

Might be willing to switch if change was

cost neutral

Would need immediate savings over current health

insurance

Would not need immediate savings,

but would need greater control over

future cost



33April 19, 2023 33April 19, 2023

OPTION: Limit Eligibility/Exclude Spouses

• What does it mean to “offer coverage”?– Must offer to dependents under age 26 but not spouses– Do not have to subsidize or make dependent coverage “affordable”

• Medical claim cost for spouse vs. child

• Options: spousal surcharge; exclude spouse with access to other coverage; totally exclude spouses

• If spouse is excluded from employer coverage, might qualify for subsidized coverage in the public exchange (whereas if employer 60% value affordable coverage is offered to spouse, spouse not considered subsidy-eligible)

Average annual claims paid by medical plan (after deductible, coinsurance, etc.)• Employee/Self $4,088.72 • Spouse/Partner $5,540.64• Child/Other Dependent $1,999.34


34April 19, 2023

Survey Data on Spouse Coverage

Larger Employers More Likely to Require a Surcharge Than to Exclude Spouses With Other Coverage Available

Source: 2012 National Survey of Employer Sponsored Health Plans34

Documents

Health Care Reform: Getting Ready for the Next Phase October 15, 2013 George Lane [email protected] 202-331-5222 Mercer