Medicare Reform Presentation to PEBB

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Medicare ReformPresentation to PEBB
February 24, 2004
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Medicare Reform LegislationHighlights of new
legislation

• Most significant change to Medicare since its
  inception
• New prescription drug benefit (Part D) effective
  January 1, 2006
• Subsidy for employers and multiemployer plans
  providing prescription drugs to retirees eligible
  for Medicare
• Changes to structure of Medicare
• Health Savings Accounts HSAs
• Final details of the law will require
  clarification from government and consideration
  of how carriers and other vendors will respond
• Implementation is scheduled from 2004 to 2010 or
  even later

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Medicare Prescription Drug CoverageOverview

• Medicare does not currently cover outpatient
  prescription drugs
• New Part D provides partial prescription drugs
  coverage effective January 1, 2006
• Voluntary program for Medicare eligibles
• Standard Rx benefit (or actuarial equivalent)
• Benefit offered by private plans
• Government payments to private plans
• Beneficiaries pay premium
• Subsidies for low-income individuals

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Part D Prescription Drug BenefitStandard Rx
benefit has doughnut hole to meet cost goal

• Initial coverage Deductible of 250, enrollee
  coinsurance of 25 up to 2,250
• Doughnut hole No coverage until enrollee
  reaches out-of-pocket limit of 3,600
• Amounts paid by third parties (e.g., employers,
  individual coverage, etc.) do not count towards
  out-of-pocket limit
• Catastrophic coverage Above the out-of-pocket
  limit, enrollee coinsurance is the greater of 5
  or a fixed copay (2 generic or 5 brand,
  indexed)
• Amounts are indexed

5 Retiree Coinsurance (min. 2/5 copay)
95 Medicare Benefit (Catastrophic Coverage)
5,100
3,600 out-of-pocket reached (250500 2,850
3,600)
100 Retiree Coinsurance (no Medicare coverage
in doughnut hole) (2,850)
2,250
75 Medicare Benefit (Initial Coverage)
25 Retiree Coinsurance (500)
250
250 Deductible
5
Part D Prescription Drug BenefitGovernment pays
about three-quarters of cost

• Member pays roughly one-quarter of Medicare Part
  D premium (estimated 35 PMPM in 2006)
• Amounts indexed
• Subsidies for low income seniors
• Premiums may be increased for late enrollees
• Premiums may be deducted from Social Security
  benefits
• Medicare Part D benefits are primary
• Employer plan secondary if retiree enrolls in
  Part D

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Subsidy for Retiree Health PlansPlan sponsors
can maintain plan, receive subsidy

• Federal government offers subsidy to employers
  and other sponsors of qualified retiree health
  plans
• Qualified plan must provide benefits with
  actuarial value greater than or equal to Part D
  benefits
• Sponsor gets 28 subsidy for covered drug costs
  from 250 to 5,000 (indexed) per eligible
  participant
• Subsidy only for participants that do not enroll
  in either Part D or Medicare Advantage drug
  coverage
• Subsidy is not taxed to plan sponsor
• Recordkeeping and documentation requirements, but
  no details yet
• FASB now will allow immediate recognition of
  change in accounting for retiree medical benefits
  under FAS106 (GASB likely will be similar)

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Options for Plan SponsorsPrescription drug
coverage for Medicare-eligible retirees

• Plan designed by sponsor
• Receive government subsidy if at least
  actuarially equivalent to Part D
• Wrap around plan / integration with Medicare
• Medicare is primary, plan sponsor secondary
• With or without subsidy of Part D premium
• Medicare Advantage plan (formerly
  MedicareChoice)
• With or without sponsor subsidy of Medicare
  Advantage premium
• Drop coverage, with or without Part D premium
  subsidy

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Accounting and Financial IssuesSteps to estimate
financial impact

• Determine how much cost and obligation is
  associated with Medicare-eligible Rx
• Select options to consider
• Model the effect on per capita claims costs of
  the options under consideration
• Use actuarial projections to estimate effect on
  future cash costs and benefit obligations
• Apply current and potential accounting rules to
  estimate effect on FAS 106 expense

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Reflections . . .While quick action possibly
needed for accounting . . . more time likely
warranted for design details

• Some decisions may be needed quickly
• Decision to receive subsidy, wrap or terminate
  can drive financial reporting
• For details of 2006 plan design, dont rush to
  judgment
• Look at emerging PDP designs
• New ideas, information and designs will emerge
• Some opportunities may be better than what is
  known now
• New Medicare Advantage plans may create
  additional options
• Communicate with retirees
• Explain the changes to Medicare and how they will
  impact plan participants
• Help plan participants understand changes, if
  any, to their current program made as a result of
  the changes to Medicare
• Move carefully because interpretations of the law
  (and perhaps the law itself) may shift over time

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Other Medicare Related ProvisionsMedicare
Advantage plan, discount card, structural change

• MedicareChoice becomes Medicare Advantage
• New law allows 10 to 50 regional plans, plus a
  national plan
• Medicare Advantage plans can receive somewhat
  higher payments from Medicare than previously for
  MedicareChoice, at least initially
• Discount prescription drug card effective spring
  2004 until 2006
• Part B deductible will be increased to 110 in
  2005, then indexed
• Medicare Part B premiums will be tied to income
• Competition between traditional Medicare and
  private plans in 2010

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Options for Plan SponsorsMedicare Advantage plan

• If health plans offer national plan or regional
  plans at reasonable cost, Medicare Advantage
  could be a viable alternative for some plan
  sponsors
• Plans maintain managed care
• Benefits could potentially fill prescription drug
  doughnut hole
• But past history is problematic Growth in
  enrollment, followed by tight controls on
  reimbursement by Medicare, then reductions in
  enrollment

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Health Savings Accounts HSAsWhat Are They?

• Now available (since 1/1/2004) part of Medicare
  reform law
• HSA A savings / spending account held in trust,
  like an IRA or 401(k)
• Flexibility of design
• Employer may sponsor may choose to contribute or
  not, OR
• A person can open an individual HSA account, like
  an IRA
• Triple tax-favored, if conditions are met
• Pre-tax (or deductible) contributions by
  individual and/or employer
• Tax-free build up of investment earnings
• Tax-free distributions for medical expenses at
  any age
• 100 vested Spend it or grow it from year to
  year no use it or lose it

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HSAsEssential Linkage to High-Deductible Health
Plan

• To contribute Must be in a high-deductible
  health plan
• Definition of high-deductible health plan
  (HDHP)
• A health plan that covers the HSA account holder
• Sponsored by employer or spouses employer or
  private coverage
• High deductibles
• Not LESS than 1,000 for individual
• Not LESS than 2,000 for family
• Out-of-pocket limits not MORE than 5,000 /
  10,000
• Preventive care can be first-dollar, as much as
  100 covered
• Deductibles neednt apply to dental, vision, LTD,
  ADD, etc.
• But prescription drug coverage cannot be carved
  out
• Need not be in an HDHP when spending the HSA
  account balance

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HSAsSpending the HSA Balance

• Can spend in same year later year or in
  retirement
• Tax-Free HSA distributions are never taxed if
  spent on
• Medical expenses
• Broad definition Code 213(d), like HRA
  reimbursement account
• Neednt be covered health plan cost e.g.
  elective care otc items
• Not for paying premiums, except the following are
  allowed
• Post-65 Medicare and retiree plan premiums (but
  not Medigap)
• Premiums for COBRA, or while on unemployment
  compensation
• Long-term care insurance premiums
• Taxable For distributions for any other
  purpose
• Ordinary income tax applies, and
• 10 penalty tax applies, if prior to age 65

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HSAsAnnual Contributions

• Annual limit on combined employer and employee
  contributions
• Lesser of ? HDHP annual deductible, or
• ? 2,600 (single) 5,150 (family) indexed
  yearly
• Plus catch-up contributions
• If 55 or older
• Up to an additional 500 per year
• 500 increases to 1,000 by 2009 (in 100 yearly
  steps)
• Contributions must stop when Medicare coverage
  begins
• No contributions for a dependent on another
  persons tax return
• Rollover into HSA only from Archer MSA or
  another HSA
• Not from flexible spending accounts (FSAs) or
  health reimbursement arrangements (HRAs) or IRAs

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HSAsPlan Sponsor Options

• Offer an HSA-compliant HDHP
• Employees have option of setting up HSA on their
  own
• No cost to employer for HSA
• Offer an HDHP and sponsor an HSA for eligible
  employees
• Employees can contribute through employer or set
  up their own HSA
• Administrative cost for employer unless employees
  pay cost
• Offer an HDHP, sponsor an HSA, and make
  contributions to it
• Employer pays HSA cost plus administrative cost
  (unless paid by employees)
• Funding HSAs by employer is not a long-term
  liability but has a cash cost

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Mercers National Survey of Employer-Sponsored
Health PlansPresentation to PEBB
February 24, 2004
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About the survey

• Established in 1986, national probability sample
  used since 1993
• Largest annual survey on the topic
• Results are projectable to all US employers with
  10 or more employees
• Nearly 3,000 employers participated in 2003
• Todays presentation is based on employers with
  500 employees

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Total health benefit cost for 2003 rises more
slowly than expectedAll employers
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Total health benefit cost for active employees up
10.2Large employers
12.5
10.2
11.5
12.1
6.6
7.0
5.7
-2.8
Average increase projected for 2004
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Benefit reductions the key to slower cost growth

• In summer/fall of 2002, Mercer survey respondents
  predicted an average increase of 13.5 for 2003
• The 10.2 actual increase reflects subsequent
  benefit reductions, and may reflect a mid-year
  slowdown in medical trend (MCPI)
• No cause to celebrate health benefit cost is
  still rising 4 times the rate of general
  inflation

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Factors that affect average cost per
employeeLarge Employers by Region
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WA State and Govt type of plan offered
Percent of employers offering plan
24
WA State and Govt employee enrollment Percent
of covered employees enrolled
25
Washington State average cost per active
employee
14.1
16.5
4.3
12.1
17.6
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Prescription drug benefit cost increases continue
to outpace overall cost increase Cost increase
in primary medical plan
27
Average health benefit cost per retiree Based on
2003 respondents providing both 2002 and 2003 cost
14.3
11.2
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Significant plan design componentsWashington
State vs. National
PPOs WA Natl
Require in-network deductible ( of employers) 85 70
Median deductible 238 250
of employers who increased deductible 25
Median office visit cost-sharing 15 15
Out-of-pocket in-network maximum (median amount) 1,500 1,500

HMOs
Physician office copayment (average) 14 14
Require copay of 20 or more ( of employers) 20
Require hospital deductible Emergency room copay (median) 71 75 43 50
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How employers are addressing cost in 2004 and
beyond

• 49 (50 WA) of large employers expect to
  increase employee premium percentage in 2004
• 45 (60 WA) expect to increase employee
  cost-sharing in 2004
• 16 expect to change carriers in 2004, 12 expect
  to drop carrier
• 38 (39 WA) are engaging in consumerist
  strategies
• 58 offer one or more disease management
  programs, up substantially over 2002
• Health management activities up substantially
  over 2002
• 11 of large employers using networks within
  networks, another 17 considering

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The future

• Focus will be on managing consumer behavior and
  demand
• Consumerist strategies
• Higher-cost populations
• Forces that converged to drive up cost will not
  abate any time soon
• Demographics
• Lack of competition
• Technology

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Health Care Authority Budget Comparison

• FY 05 State Agency CY 05 Average
• Funding Rate Employee Contribution
• Initial budget (Spring 2003) 592.30
  110.58
• Governor Supplemental 581.52 97.54
• (February Update)
• Senate Chair Supplemental 578.84
  105.89
• House Chair Supplemental 600.85 65.00

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Open Enrollment Plan Changes
  Members Enrolled Members Enrolled Change Change
Health Plan December 2003 January 2004 Number Percent
Community Health Plan 2,125 8,156 6,031 284
Group Health 89,280 91,921 2,641 3
Options 11,904 13,391 1,487 12
Kaiser 7,015 7,265 250 4
No Plan 396 376 -20 -5
PacifiCare 30,245 26,147 -4,098 -14
Premera Foundation 41,543 0 -41,543 -100
RegenceCare 18,924 20,916 1,992 11
Uniform Medical 98,599 131,235 32,636 33
Neighborhood 0 1,662 1,662 N/A
Medicare Supp. E 2,647 2,703 56 2
Medicare Supp. J 6,081 6,041 -40 -1
Total Members 308,759 309,813 1,054 0.3
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Key dates for 2005 procurement

• April 8 Purchasing document released
• May 13 Proposals due
• June 22 Board votes and contracts awarded

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Informational bids

• 15 and 20 office visit copayment
• 100 emergency room and ambulance copayment