Maintaining an Affordable Health Plan

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Maintaining an Affordable Health Plan
Deborah Tompkins, CLU
Tompkins Benefit Group, Inc. 1800 SW First Ave.,
Suite 220 Portland, OR 97201
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Introduction

• Update on health plan cost increases
• Employers responses to increasing costs
• What matters most to employees morale impact of
  cost shifting
• New concepts to control costs Consumer Driven
  Healthcare
• Defined Contribution Strategies
• Health Reimbursement Arrangements
• Health Savings Accounts

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Top Ranked Financial Concerns
Source 2003 MetLife Study of Employee Benefit
Trends
4
Health Plan Cost Increase Factoids

• National average cost of healthcare increased 15
  in 2003
• Nationally, employers expect health plan costs to
  go up by 14.7 for 2004
• Locally, insurers are projecting healthcare
  trends of 14.5 for 2004

Source 2004 Segal Health Trend Survey
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2002 Healthcare Cost Drivers
Source Pacificsource Benchmark Analysis 2002
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If Food Were Health Care
The cost of various food products had they risen
at medical inflation rates since the 1930s

• 1 dozen eggs 45.83
• 1 pound apples 6.99
• 1 pound sugar 7.83
• 1 roll toilet tissue 13.83
• 1 dozen oranges 61.66
• 1 pound butter 58.33
• 1 pound bananas 9.17
• 1 pound bacon 69.99
• 1 pound coffee 36.67

Source Employee Benefits Journal, March 2002 How
to achieve an ROI on your health care dollars
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Prescription Drugs and Medical Advancements as
Cost Drivers

• Outpatient prescription drugs increased in 1998
  2002 by 13.6, 17, 17.4, 19.5 and 21.0
• Radiology and screening has had a 9 increase
  between 2000 and 2001 in the number of images
  performed
• Advanced screening procedures like colonoscopy
  (1,376) are rapidly outpacing sigmoidoscopy
  (161) as a preferred technique

Source Pacificsource Benchmark Analysis 2002
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2002 Top 10 Filled Prescriptions
SourcePacificsource Benchmark Analysis 2002
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At the same time prescription drug costs are
increasing and new more expensive drugs are
coming on the market, the average co-pay for a 30
day supply of medication has remained steady at
20.
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Average Costs for Common Diagnostic Procedures
Source Pacificsource Benchmark Analysis 2002
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Although average salary, minimum wage, and the
price of almost everything has increased over the
years, health insurance co-payments have, until
recently, remained just about the same. This
lack of co-payment adjustment has shielded
healthcare consumers from the true and rising
cost of healthcare.
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Annual Cost Trend Averages

• Indemnity Medical 17.0
• PPO Medical 14.8
• POS Medical 14.6
• HMO Medical 13.8
• Prescription Drug 20.6
• Indemnity Dental 7.8
• Scheduled Dental 3.7
• Indemnity Vision 3 .2

Source Buck Consultants, National Health Care
Trend Survey, second half, 2002
13
2004 Projected Increase in Provider Reimbursement
Rates
Source 2004 Segal Health Plan Cost Trend Survey
14
The Nations Health Dollar
Where It Came From
Where It Went
Source CMS - 2002
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Cost Sharing of Premiums
SourceBureau of Labor and Industries Data Center
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What are Employers Doing?

• 59 are changing plan designs
• 48 are introducing a 3 tier co-pays
  (prescription and hospital charges)
• 31 are consolidating their health plans
• 25 are replacing HMO plans with open access PPO
  plans
• 1 are going to consumer driven health plans

Source Towers Perrin Health Care Cost Survey
Report of Key Findings, 2002
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What Plan Changes Are Employers Making?

• 37 are increasing co-pays
• 17 are increasing deductibles
• 15 are increasing out-of-pocket maximums
• 3 are decreasing eligible reimbursable expenses

Source Towers Perrin Health Care Cost Survey
Report of Key Findings, 2002
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Short Term vs. Long Term Views

• If you keep shifting costs to keep the employer
  costs manageable, youre very soon going to reach
  a point where its unaffordable for the
  employees. Then its as bad or worse than having
  no plan at all.
• Shifting of these costs also does not help
  employees become better consumers of healthcare.

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Involving Employees is Good Medicine

• According to a Watson Wyatt 2002 survey,
  employers who involved their employees in the
  decision-making process to modify plan design,
  incurred a lower plan utilization rate than did
  those employers who arbitrarily told the
  employees what the changes would be.

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What Matters Most to Employees

• Stability of coverage
• Comprehensive benefits in event of catastrophic
  claims
• Benefits are affordable
• Employees are not forced into changing providers
  when plan changes occur
• Employees are given choice and decision-making
  capability in their own health care

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Modest Change is the Key

• Introducing modest cost sharing can have the
  same effect as cutting out entire aspects of a
  benefit plan.

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Cuts vs. Co-pays

• Eliminate pharmacy, prevention, hearing and
  vision, durable medical equipment and substance
  abuse/mental health benefits along with capping
  benefits at 100,000/yr
• 21.5 decrease in premium

• Increasing co-payments from 15 in-network, to a
  250 deductible with 20 coinsurance
• 22.1 decrease in premiums

Source Actuarial study published by Jason Lee
and Laura Tollen, June issue, Health Affairs
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Another Modest Change that Works

• Increase co-payments for prescription drugs and
  office visits but offset the added cost to the
  employee by seeding employee flexible spending
  accounts
• According to a study in the October, 2002 issue
  of Employee Benefit News, an employer saved 14
  on premium by increasing co-payments. After
  seeding 200 into each employees FSA, to offset
  these higher employee costs, they still saved 8
  in premium.

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Consumer Driven Health Plans

• Defined Contribution Plans
• __________
• Health Reimbursement
• Arrangements
• __________
• Health Savings Accounts

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Key Features
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How Do Employees Research Healthcare?

• Personal Doctor or Nurse 68
• The Internet 64
• Reference books 37
• Family and friends 30
• Newspaper/Television 30
• Health magazines 22
• Employer provided information 14
• Insurer provided information 10
• Self-care guide 4
• Hospital/nurse advice line 2

Source Kaiser Family Foundation 2002 Healthcare
Survey
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Goals for Consumer-Driven Healthcare Models

• Increase consumer involvement
• Conscious choice of provider based on outcomes
  data and fees
• Shift in expectations
• Employee control over health care spending
• Decrease medical expenses
• The concept of wise use of health care dollars

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Defined Contribution Plans

• Economic incentives designed to reduce overall
  costs..

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Defined Contribution Plans

• Defined contribution plans allow an employee to
  choose the plan that best suits them from a
  variety of 2-4 plans.
• The DC plans differ in benefits and/or providers.
• The employer sets a dollar amount the they will
  pay for each of the plans and the employee is
  free to choose which plan best suits their
  healthcare needs and budget.

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Sample Defined Contribution Plan

• HMO Plan
• 10 OV co-pay
• 50/day hospital
• 700 max OOP
• 10 Rx co-pay
• Premiums are 250/employee, 500/employee and
  spouse and 750/family

• PPO Plan
• 250 deductible
• 90/70 coinsurance
• 1,500 max OOP
• 20 Rx coinsurance after deductible
• Premiums are 175/employee, 350/employee and
  spouse and, 525/family

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Premium Cost Sharing
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Health Reimbursement Arrangements

• Nobody spends somebody elses money as carefully
  as they spend their own.
• --- Milton Friedman, Nobel
  prize-winning economist

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Health Reimbursement Arrangements
Health Reimbursement Arrangements allow an
employer to put money into an account that can
be rolled over year to year if it is not used
to help employees pay for health care expenses.
These accounts are in addition to a health plan,
generally set up with a higher than normal
deductible.
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How it Works

• Employer provides seed money for HRA
• Employees use seed money to cover medical
  expenses first-dollar, if they choose
• If the entire account is used, employee will be
  responsible to satisfy the plan deductible.
• If the entire account isnt used, the funds are
  rolled over into the next plan year
• If the plan deductible is satisfied, the health
  plan then starts to pay the medical bills.

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Graphic Demonstration
Health Plan Deductible
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Perceived Advantages to Employers

• A means to help employees make informed
  healthcare decisions
• A tool to address rising healthcare costs
• A benefit that will give employees the greater
  choices they want flexibility and information
  to help in choosing providers and treatment
  options

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Perceived Advantages for Employees

• First dollar coverage for expenses up to the
  amount contributed by the employer
• A broad range of providers and services (may
  cover services not covered by the health plan
  like lasik surgery, acupuncture, contacts, etc.)
• Tools to help make informed healthcare decisions
• Lower premiums and more predictable out-of-pocket
  maximums
• Roll-over feature if the funds arent used in a
  year

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Specifics of HRAs

• HRAs must hold only employer dollars
• It may be used to reimburse employees, former
  employees, retirees, and/or their tax dependents
  for medical care expenses defined under Code
  Section 213.
• HRAs may be offered in conjunction with FSAs,
  but no part of the HRA can be funded with pre-tax
  dollars.
• HRAs may not be cashed-out, but retirees may
  use them for post-retirement medical expenses.

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What if an Employee Leaves?

• If employees leave the company, plan design may
  require the funds are forfeited, or may allow
  continuing reimbursements.
• If an employee opts for COBRA, the employer must
  maintain that employees HRA throughout the COBRA
  coverage period.
• COBRA premiums may be paid for out of the HRA,
  but this would virtually guarantee 100 COBRA
  elections.

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HRAs and FSAs together

• An employer can offer both an HRA and an FSA.
  The HRA is funded solely by the employer and the
  FSA is funded solely by the employee.
• The plan must designate if HRA funds are paid out
  first, or FSA funds. One account must be
  exhausted before the other is tapped.

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Dealing with the Use It or Lose It Rule

• Given that FSAs continue to have the use it or
  lose it rule, it may be wise to require that FSA
  funds be utilized first, then HRA funds. This
  will allow for carry-forward of funds from year
  to year that can be used for future expenses, or
  taken out at retirement.

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Health Savings Accounts

• Similar to HRAs but with a new twist..

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Health Savings Accounts (HSAs)
Out-of-Network Benefit 70
In-Network Benefit 90
Annual Insurance Deductible 1,000
Optional Preventive Care Rider
Employee Contributions
Employer Contributions
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HSA Highlights

• Effective 1/1/04
• Tax free savings accounts used to pay for medical
  expenses
• HSAs must be coupled with a high deductible
  health plan
• Annual deductible must be at least 1,000 per
  individual or 2,000 per family
• Out of pocket maximums cant exceed 5,000 for
  individuals and 10,000 for families
• Can be employer-sponsored or individual coverage

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HSA Highlights

• Individuals, employers or both can contribute up
  to deductible amount or 2,600 for individuals
  and 5,150 for families
• Can be used for deductibles, co-payments
  prescriptions, and/or any eligible health expense
  that would be deemed deductible by IRS
• Unused money at the end of the year can be rolled
  into the next year tax-free
• HSAs are portable and can be used in retirement

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HSA Highlights

• Double coverage is not allowed with an HSA
• Specified disease, vision, dental, accident and
  disability coverage do not count as other
  coverage
• Flexible Spending Plans are not allowed with an
  HSA
• Guidance expected June, 2004
• If the deductible is 1,000 for an individual, it
  will be 2,000 for a family (possibly incurred by
  all one person)

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HSA Highlights

• Office visit copays are not permitted
• Drug cards are not permitted
• Out of pocket maximums include deductibles and
  coinsurance
• Eligible person must not be entitled to Medicare

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HSA Contributions

• Contributions by an employer are not taxable
  income to employee and not subject to FICA taxes
• Contributions by an employee are pre-tax
• Individuals cannot take a deduction on their tax
  return for medical expenses paid through an HAS
• Interest and earnings on contributions are not
  taxable while in HSA

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HSA Contributions

• Contributions may be made at any time of year not
  to exceed April 15 of the following year
• The contribution limit is calculated on a monthly
  basis partial years will have partial
  contributions
• An employee opens an HSA account in January but
  buys a high deductible policy in June with a
  2,000 deductible, the maximum he can contribute
  to the policy is 1/12th of 2,000 for 7 months,
  or 1,166.69.

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HSA Distributions

• Balances remaining at the end of the year roll
  over tax-free
• Distributions can be made via debit card
• If a person becomes ineligible for an HSA, they
  can still use the funds for qualified medical
  expenses.
• Including COBRA, LTC and Medicare premiums
• Amounts spent for non-qualified medical expenses
  will be taxed along with an additional 10 excise
  tax.

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Challenges to Consumer-Driven Healthcare Models

• Dependence upon employees having ready access to
  sources of health care to make informed health
  care decisions. Currently, there is limited
  outcome and financial information available to
  employees.
• No proven track record that these types of models
  will save money for employers and employees.

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Questions???