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Implications of the Affordable Care Act ACA Background & Fundamentals for Fully-Insured Small Groups

Blue Cross of Northeastern PennsylvaniaJuly 18, 2013

This presentation is not intended to be a comprehensive review of the content of the legislation, nor should it be interpreted as authoritative and/or legal advice on implementation. The presentation represents our best understanding as of the date of the presentation. In the event you have questions applicable to your business or employees, we recommend you request the advice of competent legal counsel.

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Key Considerations

1. Consumer protections in the ACA

2. Standardized products – Metallic plans and EHBs

3. Consumer subsidies

4. Distinct impact on small groups

5. Risk-stabilizing programs

Presentation will focus on 5 key considerations of the ACA

ACA Fundamentals

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Overview of ACA

Rights and Protections

• Elimination of annual and lifetime caps

• No medical underwriting

• Guaranteed Issue

• Essential Health Benefits (EHB)

• Coverage for preventive services

• Coverage for dependents up to 26

Reduce Consumer Costs

• Premium subsidies

• Cost sharing subsidies

• Age banding

• Minimum amount health plan’s must spend on medical costs (i.e. MLR requirements)

• Rate Review

ACA Fundamentals

The Affordable Care Act is primarily focused on offering consumer protections and providing financial support to purchase coverage

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PPACA (Patient Protection and Affordable Care Act ) Provisions 2010-2012

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March 2010 June/July 2010 September 2010 2012

ACA Fundamentals

• Enactment • Pre-Existing Condition Insurance Plan (a national high-risk pool) launched at pcip.gov

• HHS web portal launched at Healthcare.gov

• Temporary employer reinsurance

• Children under 19 may not be excluded for pre-existing conditions

• Dependent coverage to age 26

• Limits on rescissions

• Medical loss ratios 80% individual/small group; 85% group)

• No lifetime limits

• No cost-sharing on preventive services

• Summary of Benefits Coverage (SBC)

• Accountable Care Organizations

• State Notification of Intent to operate a state-based exchange

• PCORI Fee

Since the enactment of the ACA in March of 2010, many of the law’s provisions have already been put in place

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PPACA Provisions 2013+

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ACA Fundamentals

2013 2014 2018

• W-2 Reporting of Health Benefits

• Medicare Tax Increase

• Reduced FSA Contribution Cap

• CO-OP Health Insurance Plans

• Marketplace open-enrollment

• Guaranteed Issue

• Individual Mandate

• Health Insurance Marketplace

• Health Insurance Premium and Cost Sharing Subsidies

• No Annual Limits on Coverage

• Essential Health Benefits

• Temporary Reinsurance Program

• Employer “Play or Pay” (delayed to 2015)

• Health Insurer Annual Tax

• Excise tax on “Cadillac plans”

The ACA will bring about many additional regulations starting in 2014

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• October 1st

FFM sales begin (open enrollment)

• January 1st

Coverage effective

• July 31st

State certification complete

• September 4th

Carriers notified

2013 Pennsylvania Rate FilingsACA Fundamentals

• April 1st

Carriers begin submitting Federally Facilitated Marketplace (FFM) applications

• May 3rd

All FFM applications due

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2014

File Rate Review Market Rates Set

Note: Large Employers (more than 50 employees) are not impacted

Individual and Small Group plans have been developed and rates have been submitted

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Wellness BenefitsACA Fundamentals

Employers may offer incentives to employees for improving their health or obtaining education on how to do so

Participatory ProgramsHealth-Contingent ProgramsReward based on activities that promote health or prevent disease• Examples of these programs are:

‒ Attending health education seminars‒ Smoking cessation classes (regardless of

outcomes)

• There is no limit to the amount employers can offer employees

Reward based on achieving measurable improvements in specific health factors• Examples of these programs are:

‒ Activity based: Checking in at activity classes twice a week for 6 months

‒ Outcome based: Quitting smoking or meeting biometric screening goals

• Reward limited to 30% of employee premium

‒ Can also receive 30% off dependent coverage if eligible

Wellness benefit programs have no short-term impact on premiums paid to carrier

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Essential Health Benefits

Rehabilitative & Habilitative Services

(85%)

Prescription Drugs(82%)

Mental Health & Substance Abuse

(61%)

Ambulatory Patient Services

(99%)

Laboratory Services(99%)

Emergency Services(100%)

Hospitalization(100%)

Preventive & Wellness Services

(100%)

Maternity & Newborn Care

(34%)

Pediatric Services(24%)

Greater than 90% of Plans offer

70 to 90% of Plans offer

50 to 70 % of Plans offer

Less than 50% of Plans offer

Individual Plans that currently offer1:

10 Categories of Essential Health Benefits(percentage of Individual plans that currently offer in brackets)

(1) HealthPocket.com survey of 11,100 Individual insurance plans

ACA Fundamentals

Essential Health Benefits will provide 10 common categories of coverage, and are required in all Small Group and Individual plans

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Metallic Level

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Actuarial Value of Essential Health Benefits(not representative of actual premiums1)

Plan Responsibility(e.g. premiums)

SubscriberResponsibility

(e.g. deductible and co-insurance)

ACA Fundamentals

Estimate of average

covered medical costs for population

(1) Premiums will be higher than just medical costs as illustration does not show admin costs

Illustrative

Metallic level of a product is not directly related to richness of benefits, but rather amount that consumer is estimated to spend out-of-pocket relative to

premiums

Bronze Silver Gold Platinum

60% 80%

$2,400

70%

$1,800 $1,200 $600

90%

$3,600

$4,800$4,200

$5,400

$6,000/yr

Metallic level is associated with actuarial value, which is a measure of the percentage of expected health care costs a health plan will cover

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10Federal Poverty Level (FPL) set annually by the Department of Health

and Human Services1

Federal Poverty LevelACA Fundamentals

Household FPL

100 150 200 250 300 350 400

$11,731$17,597

$23,462$29,328

$35,193$41,059

$46,924

$23,791

$35,687

$47,582

$59,478

$71,373

$83,269

$95,164 Family of Four

Individual

Household Income

(1) Adjusted annually for inflation based on the CPI

Federal Poverty Level (FPL) will be used by the ACA to determine consumers’ eligibility for government subsidies

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FPL 110 125 140 160 175 190 210 225 240 260 275 290 310 325 340 360 375 390 410 $-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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Premium SubsidiesACA Fundamentals

2.0 % of Income

9.5 % of Income

Estim

ated

Pre

miu

m

Household FPL Level

Government Subsidies

Est. Premium for older demographic

Premium Cap (sliding scale)2

6.3 % of Income

8.1 % of Income

9.5 % of Income

Estimated Premiums and Subsidies in 2014(Single Subscribers)

Est. Premium for younger demographic Receive no Subsidies

• Market rates determine amount of subsidy

• Older consumers will receive a much greater share of government subsidies

• Price shock after 400FPL will be most significant to older populations

• Many younger consumers will have premiums below their premium cap

Illustrative

Premium subsidies guarantee a maximum cost-exposure level for the 2nd-Lowest Cost Silver Plan

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Cost-Sharing Subsidies

Silver Plan 70% AV

100-150% FPL 151-200% FPL 201-250% FPL

70% 70%

3%24%6%

27%Out of Pocket Share:

Base Actuarial Value:

Additional Protection:

1) Out-of-pocket maximums set by ACA: If under 200FPL, max is 1/3 of allowed HSA level (1/3 x $6,350 = $2,117), between 200-250 FPL max is fixed at $5,200

2) Total cost exposure will vary depending on where actual services were rendered along with combination of deductibles, co-payments, and coinsurance within each product

Est. Premium Cap: $1,900$295

Out of Pocket Costs1: $1,620$360

$3,520$655Net Cost Exposure:

94%

70%

17%13%

125FPL 225FPLIndividual Coverage: 175FPL$1,070

$780

$1,850

87% 73%Total AV:

Example

ACA Fundamentals

Covered Medical Costs of $6,000

Illustrative

Consumers with household incomes below 250% FPL will be eligible for cost-sharing subsidies that lower exposure to out of pocket costs

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Requirement/ExpenseSelf-Insured Plans (ASO)

Fully-Insured Large Group Plans

Fully-Insured Small Group Plans

Elimination of Lifetime Caps1

Dependent Coverage to Age 261

Preventive Services1

Minimum Actuarial Value

ACA Fees2

Affordable Coverage Penalty

Compliance with State Mandates

Insurance Premium Taxes

Essential Health Benefits

Modified Community Rating

New Requirements and Fees

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1) In effect prior to 20142) Reinsurance Fee, PCORI fee

ACA Fundamentals

ACA requirements will have varying impact on employer segments

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Employer Penalties

1) Penalties go into effect in 20152) Although the IRS has issued guidance providing a safe harbor for employers, the ACA law itself specific that affordability be calculated based off

of the employee’s total household income rather than the employee’s wage

ACA Fundamentals

Note: Penalties are levied as excise tax, so employer must pay penalty after tax which may will increase exposure substantially

• Employer has at least 50 full-time equivalent employees (excluding seasonal workers)• One or more eligible employees purchase subsidized coverage through Marketplace

General Penalty Criteria:1

$2,000 penaltyPenalty is assessed for every full time employee,

regardless if employee currently receives coverage from employer

Employer Does not Offer CoverageEmployer is penalized on all full-time employees excluding the first 30

No penalty for part-time workers1

Employer is penalized if employees’ premium contributions exceed 9.5% of household income2 or the plan covers less than 60% of healthcare expenses

Employer Offers Unaffordable Coverage

2 $3,000 penaltyPenalty is assessed for each eligible employee

that obtains a subsidy on the Marketplace

There are two ways in which employers may have to pay a shared responsibility payment (i.e. a penalty) in the post-reform market

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Penalty Assessment

0 29 58 87 116145174203232261290319348377406$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

Penalty Breakdown

ACA Fundamentals

$3,279 ($2,000 grossed up for taxes)

(1) Penalty is levied as an excise tax, so employer must pay penalty after tax. 39% average Federal + State tax rate used for illustrative purposes, which will vary depending upon employer-specific details

(2) Base penalty increases each year at the rate of medical cost inflation, assumed to be 6% in this example

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$2,000

$404$1,279

$3,683$3,279

Illustrative

If not offering coverage, hiring of 50th employee

in 2015 creates $60,000+ in post-tax penalties

Penalty per Full Time Employee

(by firm size)

Pena

lty p

er E

mpl

oyee

Firm Size

The financial impact of the penalty for not offering coverage are frequently underestimated

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Impact From Community Rating

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $2,500

$3,500

$4,500

$5,500

$6,500

$7,500

Prem

ium

s

Example of Potential Premium Cost Adjustments by Historic Risk Profile

High Risk Profile

Average Risk Profile

Low Risk Profile

Post-ACA

1) Employers with less than 50 employees must meet modified community rating and age adjusted premiums in 2014, same for employers with less than 100 employees in 2016

Considerations:

• Individuals & Small Groups must meet modified community rating guidelines1

• Premium increases post-reform correlated to flexibility in underwriting pre-reform

• Premiums adjusted only by age, and modified for smoking and regional factors

Premiums for low risk groups may rise by more than 50%

Avg. Increase ~1% to 10%

ACA Fundamentals

Individual and Small group market will face varying levels of premium adjustments

Illustrative

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Risk Stabilization Programs Established by the ACAACA Fundamentals

Source: Office of Policy and Representation. Risk Stabilization Program Guide. Issue brief. Washington, D.C.: Blue Cross Blue Shield Association, n.d. Print.

Mechanism Description Impact On Implications

Risk Adjustment(Permanent)

Enables transfer of funds from carriers with lower-risk populations to those with higher risk to protect against adverse selection

Small Group

Individual

Shifts margin away from lower-risk individuals to higher-risk individuals

Reinsurance(2014-2016)

Provides funding to Plans that incur high claim costs for enrollees for all non-grandfathered individual market products (on and off Marketplace)

Individual Offsets claims on the highest claimants through 2016

Risk Corridors(2014-2016)

Limits insurer losses (and gains) by adjusting for incorrect estimation of members’ total medical costs

Small Group

Individual

Can mitigate but not eliminate losses—initial pricing will be very important

HHS has created three programs to minimize risk associated with the emerging Individual market

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Health Insurance ExchangesACA Fundamentals

State and Federal Functions/Responsibilities in Exchanges

State-based exchange Federal partnership exchange

Federally facilitated marketplace

State operates all exchange activities but may rely on HHS for these activities:• Premium tax credit and

cost-sharing reduction determination•Exemptions•Risk Adjustment program•Reinsurance program

State operates activities for:• Plan management, or

•Consumer assistance, or•Both

States may perform these functions or rely on HHS:• Medicaid/CHIP eligibility

determination or assessment

HHS operates; states may perform:• Medicaid/CHIP eligibility

determination or assessment

HHS will also handle the following activities:• QHP Certification• Rate Review• Eligibility Determination

Source: HHS, “Blueprint for Approval of Affordable State-Based and State Partnership Insurance Exchanges”

States have option to create their own exchanges, to partner with the Federal government, or opt for the federally facilitated marketplace

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State Status of Health Insurance ExchangesACA Fundamentals

Source: Kaiser Family Foundation as of June 20, 2013

Default to federally facilitated marketplace

Declared state-run exchange

Planning for partnership exchange

WY

OR

WA

CACO

AZ

NV

NM

TX

SD

MT

ID

ND

LA

OK

NE

KS

MN

IA

MOUT

WI

AR

IL

MS

PA

IN

KY

OH

MI

TN

VA

AL GA

NC

ME

SC

WV

NJ

NH

DE

NY

VT

MD

MA

RICT

HI

AK FL

Approximately half of the states have chosen to default to the federally facilitated marketplace

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Employer Options

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Post-2014 Options become much more complex as they will have multiple channels as well as carriers to evaluate

Pre-2014 Typically shop for health benefits by comparing group products from different carriers

Cost Per Employee Consistent Cost Per Employee May Differ

ACA Fundamentals

1CARRIER 2

CARRIER

3CARRIER

ACME Inc.

Traditional Group

ProductsPrivate Group

Exchanges

Public Marketplace

ACME Inc.

Employers have increasing options to evaluate benefit options for their employees