1. Rich Bailey FSA, MAAA, FCA
Richmond, VAIs it Time for Employers to Move Away From the Traditional Ways of Providing Employee Benefits? November 3, 2004
2. AgendaThe Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics1
3. AgendaThe Environment
Medical Trends
Legislation
Marketplace Changes
Population Demographics
Employer Outlook
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics2
4. Double-Digit Increase for Second Year in a RowPer employee costs in excess of $5,600 per year-2.9%+6.2%+7.3%+8.1%+11.2%+14.7%Source: 2002 Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans3
5. Annual CPI Trend U.S. health care costs rise, despite continuing economic recessionThe gap between CPI-U and medical care component is increasing4
6. Comparison of Overall Growth Cumulative medical care CPI 89% greater than overall CPI since 1967Data based on January 1 CPI values5
7. Employers’ Cost Increases Out-Pace Other Indicators Largest increase since 1990 (all employers)Includes medical, dental and pharmacy
Source: 2002 Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans
Results for Employers with 500 or more lives6.9%18.6%16.7%17.1%12.1%10.1%8.0%-1.1%0.2%6.1%7.3%8.1%11.2%14.7%2.1%2.5%-2.00%0.00%2.00%4.00%6.00%8.00%10.00%12.00%14.00%16.00%18.00%20.00%1987198819891990199119921993199419951996199719981999200020012002EmployersCPI-MedicalCPI-All Items6
8. Aggregate Health Care Spending (1980 – 2010) Government portion of payments increasing; total projected to be over $2 trillion by 2009Source: CMS7
9. Medical TrendsPop Quiz
How many years will it take gross medical costs to double, assuming no specific employer interventions or national health care?
10 or more
9
8
7
6
5 or fewer8
10. Medical TrendsResponses from a group of 25 actuaries who had time to get their calculators9
11. LegislationMedicare Prescription Drugs
If made into law, will have major impact on retiree benefits and strategies
Initial confusion aside, should have positive impact on retiree plans
Expect cost shifting to negatively impact active plans
EEOC Proposed changes in ADEA regulations
Cline vs. General Dynamics
Wells Fargo case
Appears to allow pre-funding (and tax-deductibility) of entire retiree liability
an ILP approach
won’t be exactly same number as FAS liability
funding in years 2+ would be limited to service cost
IRS weighing its options
10
12. Proposals to Increase Coverage Among Early RetireesFew government programs except for financially indigentCOBRA extensions and/or Medicare buy-ins
Prohibitions on post-retirement benefit reductions
Expanded pre-funding for retiree medicalStill few viable products for pre-65 in individual market that overcome access and affordability issues.11
13. ADEA IssuesImpact on retiree medical coverageAge Discrimination in Employment Act (ADEA) prohibits discrimination against persons age 40 or older in terms and conditions of employment
Age-based distinctions in employee benefit plans are permissible only if:
A specific statutory exception applies, or
Equal benefit/equal cost test is satisfied
Plan must provide equal benefits for older and younger workers, or
Plan must incur equal costs for older and younger workers
Third and Sixth Circuit Courts reach different conclusions
EEOC reviewing ADEA regulations12
14. Marketplace ChangesConsolidation of Major Health Care Carriers Employer options are greatly reduced, carriers have more cloutUnited HealthcareHealthSourceProvidentCIGNAEquicorMetrahealthUS HealthcareAetnaTakeCareFHPPacifiCareHealthSourceCIGNAAetna US HealthcareNYLCarePrudential HealthCareFHPPacifiCareProvidentTransamericaEquitableHCAMetropolitanPartnersAetnaGSDHPLincoln National HPsTakeCarePacifiCareHealth Plan of AmericaWellPoint/Blue Cross of CaliforniaHancockMass MutualTravelersUnited HealthcareAetnaPacifiCare Health SystemsWellPoint/BlueCross of CaliforniaCIGNABCBS of GeorgiaMultiple BCBS PlansFewer
Major BCBS13
15. Marketplace Changes PBM consolidation continues; three major national PBMs remainCPIAPICPNRxNetValue RxDiagnostekPerformHCSHPIDiagnostekValue RxRxNetColumbiaValue RxExpress ScriptsExpress ScriptsNPADPSExpress ScriptsPAID
MEDCOAdvanced ParadigmAdvanceMedcoIntegrated Prescription Solutions (IPS)PCSFoundationMerck-MedcoMerck-MedcoProadvantageSystemedParadigmMerck-MedcoMedcoAdvance PCSMajor InsurersMajor
InsurersMPSPCSClinical Pharmacy Advantage14
16. Population TrendsAging baby boomers will increase the elderly and near elderly populationsData Source: U.S. Census Bureau State Population Projections
Baby Boomers Year of Birth 1946 to 1964Source: U.S. Census Bureau as of January 2000U.S. Population, 2000Projected PopulationMillions15
17. Negative Tidal Wave of Available Talent Pool of “prime workers” will be decreasing Source: DRI, World at Work Journal, fourth quarter 2001Percent Change in Population by Age Group, 2000-10-20%-10%0%10%20%30%40%50%60%5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79The “Echo boom”ages 15-29Shrinking Pool of“Prime workers”ages 30-44Aging “Baby boomers”ages 45-6916
18. Impact of Demographics on Health Care Cost Cost increases with age0.000.501.001.502.002.503.0020-2425-2930-3435-3940-4445-4950-5455-5960-6465+AgeRelative Cost by AgeMaleFemaleAverage employer cost = 1.0Relative Costs By Age and Gender17
19. Health Deterioration A cause and a consequence We eat too much -- 64.5% of adults overweightPopulation with diabetes increased over 50% in last decade*Overweight is roughly 10 to 30 pounds over an ideal weight. Obesity is roughly 30 pounds over an ideal weight
Source: National Health and Nutrition Examination Survey45.0%47.0%47.0%56.0%64.5%18
20. Issues Facing Businesses The perfect storm Low ambient inflation; high medical inflation
Advances in medical technology likely to lead to higher costs, difficult decisions
Legislative uncertainty
Consolidating medical delivery and financing system
An aging workforce
Increased longevity
Slowing economy
Disappearing over-funded pension plans
Few, if any, obvious and easy alternatives to managing health care costs
19
21. Employer OutlookEnvironmental outlook spurring employer action
Employers acutely aware of trends
Heightened interest in cost saving strategies (active and retiree)
Greater emphasis on longer term cost projections and on the “bottom line”
Projection results have induced “fight or flight” responses
20
22. Retiree Medical Coverage Employers continue to drop retiree medical coveragePercentage of Employers
Offering Coverage to Future RetireesBased on employers of 500 or more lives responding to the
2001 Mercer/Foster Higgins Survey of Employer-Sponsored Health PlansWhen coverage is offered, retiree premiums and out-of-pocket costs often increase21
23. AgendaThe Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics22
24. The Catch-22Reducing employer cost typically implies increasing employee/retiree cost
Eventually runs against employer’s sensibilities regarding fairness, paternalism (if present), and the concept of benefits generally
Example (FAS 106): “Lower my liabilities significantly but don’t do anything harsh to our retirees…they won’t accept it”
To the extent that retirees represent the bulk of the liability, this is a very difficult proposition
Opportunities exist to change eligibility, design , etc. for future retirees
If we don’t take cost out of the system, either the employer or the employees/retirees will pay the increases23
25. AgendaThe Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics24
26. Paths Away from Traditional Delivery: Two CampsEmployers that become more involved in
Changing employee behavior
Changing provider behavior
Changing providers that they work with
Changing the laws
Employers that reduce their involvement by
Increasing employee responsibility
Limiting employer cost
Limiting employer risk25
27. Employers Becoming More InvolvedCollective Purchasing
High Performance Networks
Direct Contracting
Consumer Accountability
Leap Frog
Lobbying
Disease Management/Preventive Care
What these approaches share is an eye toward reducing cost from the employer’s system, and in some cases, the entire health care system.26
28. Collective PurchasingUse employer and plan manager clout to negotiate favorable payment arrangementsBackground
Traditional network negotiations are volume driven
Approaches to achieve lower costs include
Aggregated purchasing to improve negotiating strength
Coalitions
Formal alliances
Informal alliances
Directing care to most cost-effective source of quality care
Reviewing effectiveness, efficiency and “fit” of current vendor relationships; changing as appropriate27
29. What is a HPN? High Performance Network: A health plan performance improvement method that steers care to providers that meet specific efficiency and quality criteria28
30. Rationale for HPNs New management approaches are needed in this era of cost acceleration
Patients and physicians are the key drivers of health care costs
But they have limited or no incentive to care about costs
The heart of the High Performance Network concept is to change the provider selection behavior of patients and/or physicians29
31. High Performance Networks Network modelsLimited Network
A subset of an existing provider network comprised of high performing providers
Tiered Network
Employee copay/coinsurance differentials to encourage use of high performing providers
Physician Partnering
An arrangement with (typically) primary care physicians to enhance efficiency
Consumer Driven
Deployment of performance information to consumers to improve provider selection30
32. Direct Contracting Large employers with significant market presence
May be able to achieve significant savings by contracting directly with health care providers
May need group of regional employers to achieve critical mass31
33. Promote Consumer AccountabilityHelp patients be better consumers of health careBackground
If half of cost is due to lifestyle and half of chronic patients do not follow treatment plan, what can we do?
Get members’ attention – make them aware of consequences
Approaches to encourage consumer involvement include
Coordinated health promotion, disease prevention and educational programs
Tying employee cost increase to trend
“Defined contribution” health plans
Consumer directed health care
Re-introduction of coinsurance32
34. Efforts to Improve Quality of Care in Hospitals Leapfrog initiative The Leapfrog Group: Background
Formed in response to Institute of Medicine study of errors in health care
Goal: Major gains in patient safety, customer service and health care affordability
Sponsored by Business Roundtable
Employers in Leapfrog Group use purchasing power to encourage health care providers to adopt patient safety standards
Leapfrog standards include:
Computerized systems in hospitals to improve the accuracy of physicians’ prescriptions and minimize medication errors
Staffing of intensive care units by physicians trained in critical care medicine
Referral of patients requiring certain complex procedures to hospitals offering the best results33
35. Lobbying Some employers making presence felt on Capitol Hill
Many have been active for years and are recognized as important voices
Some large associations have similar goals and represent large voting populations34
36. Preventive Care and Disease Management Across theHealth Care Continuum Programs should be tailored to the needsPrevention
ScreeningsHealth Risk Assessment
Targeted Risk Reduction Programs
Risk ModelingNurse Advice Line
Web Tools
Consumer DirectedHealth PlanDiseaseManagement
Incentive Design
Self ManagementTraining
Case Management
Decision Support
Predictive ModelingWell
No Disease
At Risk
Obesity
High CholesterolAcute Illness/Discretionary Care
Doctor Visits
Emergency VisitsChronic Illness
Diabetes
Coronary Heart DiseaseCatastrophic
Head Injury
Cancer85% members = 15% cost15% members = 85% cost35
37. Employers Becoming More Involved SummaryTypically the larger employers
“Fighting” to change the way health care delivered to own employees
Goal is to produce better outcomes……
And lower cost36
38. Employers Becoming Less Involved (Camp 2)Employers desire to “know their cost”
Dollar-based plans (often account-based)
Reimbursement plans
Access Only plans
“Capped Plans”…typically retiree medical
What these approaches share is an eye toward reducing employer cost at the expense of employees/retirees37
39. Account-Based ApproachesDefines employer’s commitment as a defined dollar contribution instead of a defined medical benefit
Commitment can be monthly, annual, aggregate
Commitment can be based on retiree-only or recognize dependents
Amounts available for health care only; employer contributions are tax-free to the retiree and deductible for employer under Sections 105, 106 and 162 of IRC
Can be funded or unfunded
For Medicare-eligible, Medicare+Choice, Medigap and traditional Medicare available; HIPAA may eventually make this a viable option for pre-Medicare retirees38
40. Account-Based ApproachesExamplesMonthly/annual promise
Retirees receive monthly (or annual) credits of a specified dollar amount (e.g., $100/monthly; $5/month/year of service for 20 years of service)
Fixed or increases annually; “flat” or tied to service; amount not used can be carried over or not
Aggregate (“lump sum”) promise
Employer promise is one-time credit (e.g., $30,000; $1,000 per year of service for 30 years of service); accounts earn interest (e.g., at T-bill rate) or not; no employer pre-funding required
Payment options
“Draw-down” on funds (retiree uses funds to pay portion of retiree medical cost; ends when fund exhausted), or “lump sum” is converted to an annuity (multiple options)39
41. Reimbursement Plans Employer often requires submission of receipts for health care expenditures
Premiums
Out-of-Pocket costs
Typically defined with a maximum reimbursable limit (e.g. $75/month)
Most common is reimbursement (or pre-payment) of Medicare Part B premium for Medicare eligible retirees
Current cost $58.70 per month with moderate year-to-year trends
Employer motivated to ensure Part B in effect for Medicare-eligible retirees
Part D reimbursement may become popular
Employer achieving
Escape from plan sponsorship (for whichever segment of his population the plan applies to)
Fixed costs; increases subject to employer discretion
Not a tax-advantaged approach40
42. Access Only Plans Employer “sponsors” company health plans (stays “in the business”)
By doing so, retains group underwriting, pricing and risk profile
Employer contemplates no subsidy
Full cost and annual increases absorbed by employees/retirees
Fully insured plans
Works best
Costs known in advance
Premiums fixed in advance
Self-insured plans
Requires more management
Costs not known in advance
But premiums must be fixed in advance
Caution regarding active/retiree subsidy
May impact other accounting (FAS 106)41
43. Capped Plans “Employer cost will be capped at 2 times the 1993 cost”
Implication is that employer share becomes a fixed dollar commitment at some point in the future
Typical action taken in early to mid 1990s for retiree programs in response to FAS 106; liabilities approximately ½ of uncapped plans
Many caveats
Usually applied only to those retiring post-announcement
Evaluate separately for pre-Medicare eligible vs. Medicare eligible, or in aggregate
Evaluate per retiree or in aggregate
Definitions of “premiums” and “costs”
cross subsidy of actives/retirees can cloud calculations
Need clear definition of how costs and contributions are calculated before cap is hit
Enrollees will understand concept, but likely won’t be prepared for eventual increases42
44. Employers Becoming Less InvolvedSummary Focusing on approaches that allow a fixed employer commitment
Risk transferred to employees/retirees
In some versions (caps), no immediate impact felt by participants
Communication is critical
Employers concerned about participant response43
45. The Two Camps SummarizedFight or FlightThe largest employers seem willing to try to change the world
Mid sized and smaller employers seem to want to “get out” of the responsibility
Neither reflects the traditional way of providing benefitsFocus on employers reducing involvement, using a generic defined
dollar (defined contribution) approach44
46. AgendaThe Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics45
47. Where can we apply “Defined Contribution” approaches most easily?Active employees/early retirees
Employers will still need to “sponsor” a plan
Can set employee contributions to meet desired cost share and allow employees to buy back into a self-insured plan
Easiest calculation if underlying plan is fully insured
Medicare Eligible Retirees
Employers may actually be able to get all the way out
Even if company sponsors no Medicare eligible retiree plan, options available in market for retirees to choose from
Some with little or no underwriting (removes access problem) but eligibility/timing important46
48. DC Health Plans in the Spectrum of Employer Contributions% of Cost
Employer pays X%(e.g., 80%) of cost of
health plans; employee pays
the remainder.% for Benchmark; DC for Others
Employer pays X% of cost
of one specified Plan A
(“preferred” or “employer” plan).
The amount of employer
contribution for Plan A becomes the
defined dollar contribution for
Plans B, C, …; the employee pays
the balance in cost.Pure DC
Employer pays $Z per
employee. Employee must pay
balance for whatever plan is
picked. The employer
contribution
is not tied directly to the
cost of any plan.Employer Contribution LevelDC Health Plans% of
CostNo
Contribution
(wages only)% for
Benchmark
Plans; DC
for OthersPure
DCFull
CostHighLow47
49. Medicare+ChoiceHealth plan takes risk, receives “capitated” paymentMedicare “Part C” (Medicare Advantage?)
Health plan offered by private insurance companies, usually on an HMO-like basis
Benefits broader than Original Medicare
Reduced out of pocket expenses for deductibles and copayments
May offer prescription drug coverage
Medicare pays a set amount of money to private insurer
May be additional premium cost over Part B premium (fully insured to employer)
Available only in certain areas
Recent private insurer profitability poor and insurers have curtailed availability and increased costs to retiree48
50. Medicare+Choice HMO EnrollmentEnrollment declined for first time in 2000Source: Medicare Managed Care Contract (MMCC) Plans - Monthly Summary Reports - from CMS Website (CMS.hhs.gov/statistics/MMCC.asp)49
51. 2002 Medicare+Choice HMO AvailabilityEven after pullbacks, slightly more than three-quarters of Medicare Eligibles still live in counties which offer at least one M+C plan in 2002PFFS Plan Locations
Cover Approximately 35% of Medicare EligiblesOver 58% of Medicare Eligibles
Live in M+C HMO AreasSource: CMS Medicare Plan Compare Data &
Sterling Life Insurance Company
Coverage Data as of 3/31/02350
52. Medigap Overview Plans supplement “original Medicare” benefitsSold to individuals age 65+ (and certain other Medicare Eligibles under 65)
Medigap carriers must accept all applicants for the first six months of eligibility
The basic benefits included in every Medigap plan are
Part A coinsurance (for admissions of more than 60 days)
Coverage for 365 additional hospital days after Medicare benefits exhausted
Part B coinsurance
The first three pints of blood each year
Product types
Standard products
A through J sold from 1992 to present
Only H, I and J cover prescription drug
Medicare Select
Provides Medigap benefits with network discount and lower prices51
53. Medigap Policies Overview AARP and BCBS plans offer majority of productsOnly individual insurance plans permitted by law that can be issued to Medicare Eligible individuals
Carriers cannot customize plans and must offer “standardized” plans
Regulated by state insurance authorities within federal government guidelines
Major providers include AARP, Blues plans, some insurers
AARP in all states with Plan A through J
Blues in all states but limited offering, particularly of plans H, I and J
Most plans underwrite where allowed
Exception is AARP, with minimal underwriting requirements (only ESRD) except on plans H, I and J52
54. Medigap Policies Policy features ItemPlan APlan BPlan CPlan DPlan EPlan FPlan GPlan HPlan IPlan JBasic Benefits*Skilled Nursing CoinsurancePart A DeductiblePart B DeductiblePart B ExcessForeign Travel EmergencyAt Home RecoveryDrugs**Preventive CareApproximate Monthly Premium Range$55-$150$90-$190$100-$210$90-$200$100-$200$110-$210$100-$230$150-$230$160-$250$200-$290*Basic Benefits = Part A coinsurance plus 365 extra days of hospital care plus Part B coinsurance plus three pints of blood/year**$250 deductible, 50% coinsurance to contract limit53
55. Medicare SelectSame standardized plan designs (A through J) as other Med Supp policies
AARP offers it on Plan C only
Works like a Preferred Provider Organization (PPO)
Full supplemental benefits available if network providers used
Reduction or loss of supplemental benefits if non-network providers used
Always retain full Medicare benefits
Most common provider networks are hospitals only
Hospital can waive Part A deductible via safe harbor from anti-kickback statutes
Limited ability to affect Part B cost
Negotiations with other vendors possible
Lower cost than Medigap: typically 20% discount
AARP example: Ohio Plan C: $122; Ohio Medicare Select-C: $9454
56. AgendaThe Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics55
57. The AnswerYes, it may be time for employers to consider new approaches
But which direction are your clients heading?
Standing still is likely not an option56