Benefit Trends: Evaluating Consumer-Based Models

Presented By:

Christopher J. DeLoreyPresident

Telamon Insurance & Financial Networkcdelorey@telamonins.com

617-614-1215

Key Points

Factors driving trends

Employer options

Employee perspective

Consumer Driven Health Plans (CDHP)

What’s next?

Factors Driving Trends

Rising Health Insurance Costs

The national average for medical plan rate increases is 15% to 20%

These increases are driving employers to look for solutions

Fueling interest in consumer models

Factors Driving Trends

Health Care Cost Drivers:◦ Skyrocketing Rx costs

◦ Rising hospital and physician costs

◦ Advances in technology

◦ Increase in chronic conditions

◦ Increased utilization

◦ Aging population

◦ Lack of consumer involvement in purchase

Factors Driving Trends

In 1960, consumers paid for 50% of health care costs

In 2003, they pay for only 15%

Consumers don’t know the true costs of health care

Factors Driving Trends

Entitlement Perspective in America◦ Corporations are bottomless pits

◦ Unrestrained desires

◦ Employees are unaware of the actual costs

◦ “Want it All” for a $10 co-pay

Employer Options

Medical Cost Outlook ◦ Impossible for employer to pay for all the future drug/medical

technology and services desired by employees

◦ Employers have a few options:• Drop coverage• Absorb the cost• Pass on the premium increase to employees• Reduce coverage• Offer a consumer-based model

Employer OptionsMoving Toward Consumer Models ◦ Determine level of medical benefits needed to recruit/retain

employees

◦ Provide a menu of group medical options

◦ Set employer subsidies based on efficient plans or base year subsidy level

◦ Encourage employees to select efficient medical plans

◦ Motivate employees to “own” their personal health status

◦ Facilitate employee use of pre-tax flexible spending accounts

Employee Perspective

Educate them on health care costs

Educate them on products

Provide them tools

Employee Perspective

Are Your Employees Ready for Consumerism?◦ 87% of employees confident in choosing a health plan

◦ 70% of employees understand how to navigate the health care delivery system

◦ 87% willing to take on more responsibility for researching, choosing, and maintaining their health coverage

◦ 49% want full responsibility for purchasing their own health care coverage

Consumer Driven Health Plans (CDHPs)

A concept, not a product

Often referred to as “consumerism”

Engages the consumer in making health care decisions and purchases

Encourages better health

Many variations

History of CDHPs

MERPS (Medical Expense Reimbursement Account)◦ Allowed tax-free reimbursement to employees

◦ 100% employer-funded

◦ Sometimes called 105(h) plan or direct reimbursement plan

◦ Uncertainty as to ability to rollover unused funds or spend downs

◦ Typically did not include any health tools or health assessments

History of CDHPs

Health Flexible Spending Accounts◦ Allowed for tax-free reimbursement to employees

◦ Typically funded via employee salary deduction or flex credits

◦ No rollover allowed

◦ Individual insurance premium ineligible

Web-Based Resources & CDHPs

Carrier Resources◦ Current balances

◦ Claims activity

Medical Libraries◦ Johns Hopkins

◦ First Data Bank

◦ Reuters News

◦ The Natural Pharmacist

Personal Health Tools◦ Health risk assessments

◦ Health calculators

◦ Personal health records

◦ Drug interaction information

Provider Search

Healthcare Prices◦ Diseases/conditions

◦ Procedures and providers

◦ Visits

◦ Prescription drugs

Marketplace◦ Online shopping

Types of Consumer Driven Health Plans

Popular emerging options:◦ Defined Contribution Plans

◦ Health Reimbursement Accounts (HRAs)

◦ Health Flexible Spending Accounts (FSAs)

Defined Contribution Plans

Defining the contribution employers will spend and passing the rest of the cost onto the participant

An employer gives employees a fixed sum of money to purchase one of several healthcare plans; if an employee chooses a plan that costs more than the amount provided by the employer, the employee pays the difference

Defined Contribution Plans

Establish a high deductible plan which is partially funded by the employer; any employer monies not spent by the end of the year may be rolled over to the next year

Employer defines the amounts of reimbursement to providers, thus encouraging the participant to negotiate directly with provider to accept the plan’s reimbursement as payment in full

Defined Contribution Plans

Add additional co-pays for care at more expensive

facilities

Providers are grouped into mini-networks based on

cost/quality; employee pays a higher contribution in

order to access higher cost providers (Patient Choice

Model)

Defined Contribution Plans

ProEmployees◦ May have choice of plans

◦ Become better consumers

Employers◦ Predictable cost

ConsEmployees◦ Member responsibility

◦ May be more involved in negotiating with providers

Employers◦ Potentially complex

enrollment

◦ Employee education

Health Reimbursement Arrangements (HRAs)

IRS Sec. 105 Plans

Allows employer to reimburse employees tax free for medical expenses

HRAs - Financing

HRAs must be paid by employers

HRAs may be unfunded or funded

◦Typically, employers use unfunded “credits”

HRAs may accept some after-tax employee contributions

(e.g., COBRA premiums)

HRAs may not accept pre-tax employee contributions,

either directly or indirectly

Use of debit cards when employer pays first

HRAs - Reimbursement

HRAs can reimburse deductible “medical expenses”

◦ Health expenses not reimbursed by other plans

◦ Health insurance premiums (including LTC, unless HRA is a

health FSA)

HRAs can’t reimburse non-health expenses

◦ Can’t pay bonus, severance, or death benefits

◦ Can’t reimburse premiums paid with pre-tax dollars

How Does a High Deductible Plan Work?

Either member or HRA

pays first

100% for preventive

Rollover of account is an

option

Member Responsibility

HRA

Preven

tive 100%

Deductible

Health Coverage

HRAs and COBRA

HRAs are subject to COBRA rules

Issues to consider:◦ Notices

◦ Elections

◦ Reimbursement amounts

◦ Duration of coverage

◦ Premiums

Non-Discrimination rules apply

Coordinating HRAs with High-Deductible Plans

An HRA may be offered as a stand-alone option◦ Employees can be required to elect high-deductible coverage to

receive an HRA

◦ Employees can pay for the high-deductible coverage with pre-tax contributions (but can’t subsidize HRA coverage with pre-tax dollars)

HRAs may be coordinated with high-deductible health plansNo fixed coordination rules; typically, HRA pays first and covers same expenses as high-deductible plan

HRAs and the Rollover Feature

Provides incentive to save for future needsIf an employee knows they are leaving they may spend quickerPrevious rollovers may encourage higher dollar claim submissionBe aware of “look back loophole” (HRAs can cover expenses from previous years)How do you have a COBRA premium “actuarially determined?”How do employees get health care cost information?Can create a future liability for plan (plan can cap the rollover)

EducationEducation

EducationEducation

CommunicationCommunication

Personal Health Management ToolkitOnline provider information

Online prescription drug cost informationHealth Risk Appraisals24-hour nurselineeWellness program

Preventive Care Covered 100%

Prescription & OTC Alternative Drugs

Covered 70%

Personal Care Account$1,000 Employee only

$1,500 Employee + 1 dependent$2,000 Employee + 2 or more dependents

Bridge – Employee Deductible$2,000 Employee only

$3,000 Employee + 1 dependent$4,000 Employee + 2 or more dependents

Catastrophic Health Coverage90/70 PPO Plan

Designed to encourage network utilization

Preventive care is carved out of the program and is

provided at 100%

The employer funds this portion

The employee funds this portion

Employer and employee share the premium cost of this traditional

PPO plan

Prescription drugs carved

out and provided on a coinsurance

basis

Employee uses this first to cover healthcare expenses. Unused

portions are carried over to next plan year.

Once the PCA is exhausted, employee is responsible for 100% of

healthcare expenses until the maximum is

reached.

PPO plan covers employee after

bridge deductible is met.

HRA Pros and Cons

ProEmployees◦ Rollover of unspent funds

◦ Employee directs own care

◦ Preventive coverage

◦ Decision support tools

Employers◦ Less involved in coverage

◦ Cost control

◦ Shares risk of cost/utilization w/employee

ConsEmployees◦ Member responsibility

◦ Cost, if chronic disease

Employers◦ Adverse selection

◦ Actual cost savings

◦ Accuracy of actuarial assumptions

◦ High HRA administrative cost

Health Flexible Spending Accounts (FSAs)

Allowed for tax-free reimbursement to employees

Typically funded via employee salary reduction

No rollover allowed

Individual insurance premiums ineligible for reimbursement

HRA Coordination with Health FSAs

HRAs may be offered in lieu of FSAs

HRAs may be offered in addition to FSAs

Coordination rules◦ Health FSA may reimburse expenses before the HRA is

exhausted if written into both plan documents

◦ FSA can also pay first if expenses are different expenses than HRA

HRA – FSA Rules Ignored

HRAs are not subject to “use-it-or-lose-it” rule◦ Permits carry forward of unused amounts

◦ Accumulations may be capped

◦ Terminated employees may spend down accumulations

HRAs are not subject to “uniform coverage” rule◦ Permits HRA credits/contributions to accrue by payroll period, or

less frequently (e.g., monthly, quarterly, semi-annually)

Health Savings Accounts (HSAs)

Tax deduction for amounts contributed

Employer and employee contributions

Must offer with high deductible health plan

May not be covered by any other health plan

Self employed individuals are eligible

May include in cafeteria plan

HSA Pros and Cons

ProsEmployees◦ Rollover of unspent funds◦ Own account◦ Can reimburse some

insurance premiums◦ Can save tax free for later

use

Employers◦ Limits liability◦ Employees may put cost

pressure on health care providers

◦ Employer contribution may be used as employee incentive

◦ Employer contributions not subject to FICA

ConsEmployees◦ More cost sharing

◦ New information to learn

◦ Must take more responsibility

Employers◦ Requires a high deductible

plan

◦ Trustee requirement can add cost and complexity

◦ HDHPs may cause employee resentment

◦ Can’t control employer contributions

HSAs – Open Issues

Claims adjudication & substantiation

ERISA

DOL claims rules

COBRA

HIPAA

Comparison of HSA, HRA, FSA:HSA

(Health Saving Account)

HRA

(Health Reimbursement Arrangement)

FSA

(Health Flexible Spending Account)

Account Overview Tax Exempt trust or custodial account created to pay for the qualified medical expenses of the account holder and his/her spouse or dependents.

An employer funded account used to reimburse employees for qualified medical care expenses.

A cafeteria plan authorized under Section 125 of the IRC. FSAs can be created to reimburse for qualified medical expenses, health insurance premiums for Premium-only account, or dependent care expenses.

High Deductible Health Plan? (HDHP)

Required Customary Not Required

Who can fund the account? High Deductible Health Plan?

Employee and/or Employer Employer Only Typically only the Employee. However, Employer can also contribute

Are there any contribution limits?

$2,900 | $5,800 F **

Catch-up contributions: $900/yr – age 55 by end of tax year. Reduced by MSA contributions in same year

There are no limits to the amount an employer can contribute.

There are no limits to contributions for a health care FSA. However, employers typically set a limit.

Who owns account? Participant Employer Employer

Comparison of Tax-Advantaged Accounts:HSA HRA FSA

Can unused funds be rolled over from year to

year?

Yes Yes, subject to COBRA No, but in some cases employee may elect COBRA through end of plan year.

What expenses are eligible for

reimbursement?

Section 213 (d) medical expenses

-COBRA premiums

-QLTC premiums

-Health premiums while receiving unemployment benefits

-If Medicare eligible due to age, health insurance premiums except medical supplement policies.

Section 213 (d) medical expenses

Health Insurance premiums for current employees, retirees, and qualified beneficiaries, and QLTC premiums. Employer can define “eligible medical expenses”

Section 213 (d) medical expenses

Expenses for Insurance premiums are not reimbursable

Employer can define “eligible medical expenses”

Must claims submitted for reimbursement be

substantiated?

No Yes Yes

May account reimburse non-medical expenses?

Yes, but taxed as income and 10% penalty (no

penalty if distributed after death, disability, or eligible

for Medicare)

No No

Is interest earned on tax-advantaged account?

Yes, accrues tax-free Yes, paid to the employer No

Comparison of HSA, HRA, FSA Continued…

HSA

(Health Savings Account)

HRA

(Health Reimbursement Arrangement)

FSA

(Flexible Spending Account)

Is plan Year Carry Over Allowed?

Yes Employer Choice Employer

Is fund portable? Yes Employer Choice No

Substantiate claims to withdraw money?

No No No

How are Allowable Medical Expenses

Determined?

Medical IRC 213 (d), Some premiums, non

medical

Medical IRC 213 (d), Some Premiums, non

medical

Medical IRC 213 )d)

Uniform Coverage No Employer Choice Required

Applicable IRC Section 223 Section 105 Section 125

Comparison of FSA, HRA and HSA

FSA HRA HSA

Eligibility All Employees All Employees Anyone not eligible for Medicare

Contributions Employer and/or employee Employer Employer and/or employee

Contribution Limits None None Generally the less of annual deductible or $2,650 single/$5,250 family for 2005

Tax Status of Contribution

Excluded for employee Excluded for employee Deductible for employee and employer

Roll-over No Yes, but not required Yes

Portability None Depends on Plan Full

Withdrawals allowed Qualified medical Qualified medical and premium Qualified medical, limited premiums; penalty for other

Where Are We?93% of US companies offer some type of health promotion program (Hewitt Associates 7/02)

First view of 2002 CDHP customers cut cost increases by 60% with greater consumer incentives and choice (Humana SmartSuite)

PricewaterhouseCoopers' touts:◦ Reductions in number of Rx & office visits by 5% - 25%

◦ Overall utilization dropped 10%

◦ First year health care trend was in the range of 5% to 10%

58% of HMOs either have or plan to have a CDHP within 1 year (Milliman 2003 Intercompany Rate Survey)

What’s Next?

We need to start somewhere…

Develop a strategy

Educate employees on healthcare costs◦ Will help eliminate the “entitlement” perception

◦ It’s “our” money being spent

Explore CDHP plans in our market

Create/evaluate contribution strategy

What’s Next?

Employer creates consumerism incentives◦ Encourage employee self-care

◦ Utilize community wellness resources

◦ Tie financial incentives to participation in programs

◦ Maximize disease management programs

◦ Promote Web tools by carriers/TPAs

Review

Factors driving trends

Employer options, status quo won’t work

Employee perspective, ready

Consumer Driven Health Plans (CDHP)

What’s next?