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Unlocking CDHC October 5, 2011
The Current Environment• Higher Co-pays
• Rising Premiums
• A Crumbling Economy
• Health Care Reform
The Perfect Storm is Forming…
Can you weather it?
Acronym Overload
HRA
LTC
LTD
HMO
POS
PPO
HDHPNAHU
FSA
HSA
PAHU
GPAHU
MSA
HCR
ERISA
PPACA
HIPAA
COBRA
LOA
STD
LPFSA
CMS
CRA
DCA
MERP
PHI
= CDHC (Consumers Don’t Have a Clue)
CHIP
TPA
EAPVEBA
IRS
POP
OTC
Driving FactorsThe Failure of Managed Care to Control Costs
• U.S. health plan cost trends will continue to be more than four times greater than the annual increase in average hourly earnings
• Average health premiums for family coverage is $13,772 in 2010
• Since 1999, family premiums have risen 119%
• By 2017, it will total nearly $4.3 trillion and will represent 20% of our GDP
Why?
• Baby boomers and aging population
• Prescription drug explosion
• Increased government intervention creating complex regulatory and compliance environment
• Rising consumer consumption and expectations with continued insulation from costs
• Increasing medical inflation and costly emerging technologiesSource: Centers for Medicare and Medicaid Services; 2004 Annual Survey, Employee Health Benefits; The Kaiser Family Foundation; Charting the Cost of Inaction, National Coalition on Health Care, May 2003; MSNBC 2007Study – Centers for Medicare and Medicaid Services
Contributing Factors
Average Annual Worker and Employer Contributions to Premiums and Total Premiums for Family Coverage, 1999-2010
$5,791
$6,438*
$7,061*
$8,003*
$9,068*
$9,950*
$10,880*
$11,480*
$12,106*
$12,680*
$13,375*
$13,770*
* Estimate is statistically different from estimate for the previous year shown (p<.05).
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2010.
Driving FactorsEconomic Implications
• Healthcare spending is 4.3 times the amount spent on national defense
• Healthcare spending rose 2 times the rate of inflation between 8/2000 and 8/2010
• Increasing number of uninsured/underinsured
• In 10 years, health care will account for $1 out of every $5 spent in the U.S.
Anticipated Results
• Businesses resistant to continued cost increases
• Insurance plans build in cost shifting measures that impact employees
• Unhappy and uneducated consumers sent satisfaction levels plummeting
• Providers continue to feel the squeeze and look to find alternative delivery systems
• Agents and brokers are left to decipher a solution
Source: Centers for Medicare and Medicaid Services; 2004 Annual Survey, Employee Health Benefits; The Kaiser Family Foundation; Charting the Cost of Inaction, National Coalition on Health Care, May 2003; MSNBC 2007Study – Centers for Medicare and Medicaid Services; Health Leader’s Media reference to Standard and Poor’s 2010 Study
PRIVATE BUSINESS REACTION
Continuing to struggle with complex and changing regulatory and compliance issues – Section 125, COBRAUnable to absorb continued double-digit increases in order to maintain a fully-funded employer sponsored plan
Passing premium costs to employees
The average employee contribution to company-provided health insurance has increased more than 120% since 2000
Average out-of-pocket costs for deductibles, co-payments for medications, and co-insurance for physician and hospital visits rose 115 percent during the same period
Continually downgrading benefits if not dropping them completely
U.S. has two million more workers than it did in 2000, but two million fewer people with private health insurance*
*Source: Wall Street Journal, April 11, 2006
National Coalition on Health Care, 2009 Report-The Henry J. Kaiser Family Foundation. Employee Health Benefits: 2008 Annual Survey. September 2008
PRIVATE BUSINESS REACTION
Demanding innovative solutions from brokers and agents to:
Control costsMaintain employee satisfactionCommunicate Value of Core Benefits (The Hidden Paycheck)Address Individual employee needsProvide LONG TERM solutions
Contributing Factors
Among Firms Offering Health Benefits, Percentage of Firms that Report They Made the Following Changes as a Result of the
Economic Downturn, by Firm Size, 2010
*Estimate is statistically different between All Small Firms and All Large Firms within category (p<.05).
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2010.
TOP 5 EMPLOYER PRIORITIES
Source: Deloitte Consulting (2006) Copyright © 2006 Deloitte Development LLC. All rights reserved.
Employers’ number one employee benefit priority is to control healthcare costs.
BROKER/AGENT REACTION
► Spread sheeting and downgrading of plans► Cost-Shifting to employees► Broker emphasis on new business acquisition and growing
block of business► Searching for value-added services
► Online enrollment► Enhanced customer-service department► HR Services► Developing one-stop shopping for ancillary services
► Consolidating and selling blocks of business to improve competencies
► WHAT ARE YOU DOING?
VB AGENT REACTION
Pushing products to meet new business numbers
Focusing on VB Commission schedules to recruit brokers
Focusing on product differentiation to drive sales
Learning core benefits to compete in broker market
Developing online enrollment capabilities
Trying to find employee $$ to spend on VB products
WHAT IS DIFFERENT TODAY?
Broker/VB AGENT HistoryThe Reluctant Partnership
The Broker• Concerned about competition
• Worried about losing their case
• See limited value in VB products
• Don’t want to threaten their existing relationship with the group
• Believe they can sell products themselves
The VB Rep• Trying to expand market reach by
heavily recruiting agents
• Concerned brokers will take lion-share of commission
• Don’t think they need the broker
• Focus on product differentiation and commission to gain access to brokers
What has your relationship been like?
TOP 5 EMPLOYER PRIORITIES
Source: Deloitte Consulting (2006) Copyright © 2006 Deloitte Development LLC. All rights reserved.
Employers’ number one employee benefit priority is to control healthcare costs.
ENTER CDHC
A STEP IN THE RIGHT DIRECTION
Controls costs by delegating more direct responsibility to consumers (and beneficiaries) of health insuranceInstitutes higher co-pays, deductibles, co-insurance in an effort to lower premiumsDesigned to use higher out-of-pocket costs as lever to drive consumers to responsible utilizationMake consumers aware of the true cost of their careOnly the beginning
TOOLSTOOLS• FSA• HRA• HSA• Voluntary
THE
The Solution
A Consumer-Driven Benefits Approach
FSA True Cost Savings
FSA
Offer employees the ability to pay for eligible out-of-pocket medical costs and dependent day care expenses with pretax dollars
In July 1998, the Transportation Equity Act was enacted into law allowing for the pretax of qualified transportation expenses.
Free up tax dollars to be spent on additional benefits.
AHEAD OF THEIR TIME?
FSA True Cost Savings
FSA
Employee –employee contributions to FSAs reduce Federal and FICA taxable compensation. Based on 2006 tax rates, potential savings range from 17.65% to 35.65% depending on federal tax bracket and state of deduction (varies by state)
Employer – realizes direct, bottom-line savings in the form of reduced FICA & FUTA taxes, as well as disability and worker’s compensation premiums (varies by state)
FSA Key Points
FSA
• There are two primary types of FSA plans that can be included under a Section 125 plan– Health (or medical reimbursement) FSA– Dependent Care Assistance Plan (DCAP)
• Contribution Limits– FSA – the employer sets the contribution limit*
• Set to change in 2013 to $2500
– DCA - $5,000
• Over-the-counter (OTC) medicines and drugs (except insulin) require a prescription– Other OTC items such as band aids, insulin and contact lens
solution are still eligible without a prescription
FSA Win-Win Situation
EMPLOYEREMPLOYEREnhance employee benefits
Improve recruitment and retention
Increase FSA participation
Unlock new FICA savings
BROKER/VBBROKER/VB SPECIALISTSPECIALISTFSA options “free’s up” dollars to spend on voluntary benefits
Employee savings help cushion increases in out-of-pocket expenses
Offer employers an opportunity to offer enhanced benefits at no additional cost – the more employees that enroll, the greater the savings
Help employees take the 1st step in managing their own healthcare dollars
EMPLOYEEEMPLOYEEAccelerate personal cash flow
Manage account via internet
Achieve immediate reimbursement
End “shoe box” administration
Reduce lost and unfiled claims
Decrease FSA forfeitures
Health Reimbursement Accounts
HRA
Internal Revenue Code Section 105•100% Employer funded Medical Expense Reimbursement.•No Employee contributions allowed.•IRS Notice 2002-45 and Revenue Ruling 2002-41.•May permit (not required) carryovers of unused amounts and/or spend down of unused balances at termination.•Also may be known as 105 plans, MERPS, Personal Care Accounts, etc.
HRA’s Continued
HRA
• Internal Revenue Code § 213(d) expenses (health, dental , and vision) may be eligible for reimbursement.– HCRC 2011: Dr’s Rx required for OTC medications (except
insulin).• HRA may be limited to certain expenses or certain
categories of expenses.• Restricted by plan design.• Claims substantiation required. Claims police.• Unused balances cannot be converted to cash.• Cannot name a beneficiary.• Account is not portable.
HRA
• Lower overall premium cost by opting for a HDHP.• Soften the blow of increased medical costs if paired with HDHP.• No IRS imposed minimum amount required. Unlike on personal
income tax returns where you are required to meet the 7.5% of income threshold (HCRC 10% in 2013).
• Deduct most dental and optical expenses even if you do not have specific insurance coverage.
• Flexibility of providing medical benefits on a tax-free basis with carryovers (claims and balances) and spend downs.
Why Have an HRA?
HRA
• Who will be eligible?• What type?• What expenses will be eligible?• What are Maximum limits on Employer
contributions? One level or tiered?• How will HRA be funded?• Permit Carryovers?• Permit Spend-downs?• Ordering Rules. Will HRA pay 1st or 2nd?
HRA Design Considerations
HRA
• Current and Former Employees and their dependents.
• Retirees.• Participants in Employer-sponsored HDHP.• Employees without a specific insurance plan.• Full-time or Part-time Employees.
– Note: Eligibility subject to plan design.
Who Can Participate in an HRA?
HRA
• Sole proprietors• Partners in a partnership• Members of a LLC• 2% or greater shareholders of S Corporation
– Note: Unlike sole proprietors, the family members of partners or 2% or more shareholders cannot participate in a cafeteria plan maintained by the partnership or S Corporation due to the stock attribution rules contained in IRS Code § 318.
Who Cannot Participate in an HRA?
HRA
Employer A has 22 Employees on the health plan.
The deductible is $250 per person and 3- $250 deductibles per family. There is a $20 office visit co-pay and a drug card with co-pays of $5/$20/$40.
The insurance rates are as follows:
Rate/Mo Total/Mo Total/Yr 12 Single $411.04 $4932.48 $59,189.76
5 Ltd Family $842.65 $4213.25 $50,559.00
5 Family $1171.52 $5857.60 $70,291.20 $15,003.33 $180,039.96
Sample HRA Analysis
HRA
Employer A has 22 Employees on the health plan.
The deductible is $250 per person and 3- $250 deductibles per family. There is a $20 office visit co-pay and a drug card with co-pays of $5/$20/$40.
The renewal insurance rates are as follows:
Rate/Mo Total/Mo Total/Yr 12 Single $485.03 $5820.36 $69,844.32
5 Ltd Family $993.33 $4971.65 $59,659.80
5 Family $1382.38 $6911.90 $82,942.80 $17,703.91 $212,446.92
Sample HRA Analysis
HRA
Employer A still has 22 Employees on the health plan.
•Employer A has elected to increase the deductible to $1000 per person and a maximum of 2-$1000 deductibles per family.•The $20 office visit co-pay and a drug card with co-pays of $5/$20/$40 remains part of the plan design.•Employer A implements an HRA and will require the Employee to pay the first $250 on each deductible and will then reimburse them the remaining $750 ($251-$1000) per person from the HRA.•The Employee will be required to submit an Explanation of Benefits (EOB) for reimbursement from the HRA. (Manual vs. Automatic)
Sample HRA Analysis (cont.)
HRA
The High deductible insurance rates are as follows:
Rate/Mo Total/Mo Total/Yr 12 Single $331.21 $3974.92 $47,694.24
5 Ltd Family $678.98 $3394.90 $40,738.80
5 Family $943.95 $4719.75 $56,637.00 $12,089.17 $145,070.04
Sample HRA AnalysisSample HRA Analysis (cont.)
HRA
High deductible health planRates save the Employer as follows:
Renewal HDHP Savings/YrRate/Yr Total/Yr
12 Single $69,844.32 $47,694.24 $22,150.08
5 Ltd Family $59,659.80 $40,738.80 $18,921.00
5 Family $82,942.80 $56,637.00 $26,305.80$212,446.92 $145,070.04 $67,376.88
Sample HRA AnalysisSample HRA Analysis (cont.)
HRA
HRA uses savings generated by HDHP for HRA Claims:
Max HRA Pay* HDHP Net Savings/Yr Savings
12 Single $9000 ($750 x 12) $22,150.08 $13,150.08
5 Ltd Family $7,500 ($1500 x 5) $18,921.00 $11,421.00
5 Family $7500 (1500 x 5) $26,305.80 $18,805.80$24,000 $67,376.88 $43,376.88
*Worst case scenario: Assumes all participants file maximum claims.
Sample HRA AnalysisSample HRA Analysis (cont.)
Health Savings Accounts
HSA
Internal Revenue Code Section 223•IRA-type accounts that individuals, covered by high deductible health plans (HDHP), can establish after January 1, 2004 to pay for medical expenses.
•IRS Code § 223 enacted as part of the Medicare Prescription Drug and Modernization Act (Dec. 8, 2003).
•Replaces the Medical Savings Account (MSA), IRS Code § 220. (Archer MSA pilot project ended 12/31/07.)
•Individually owned HSA accounts are required to rollover unused balances from year to year and may earn interest tax-free.
Health Savings Accounts Basics
HSA
REQUIREMENTS•Must be covered under a qualified High Deductible Health Plan (HDHP).
•HSA eligibility is determined on a monthly basis.
•A HSA must be set up in a medical trust. A trustee can be a bank or an insurance company, or any other person or organization approved as a non-bank trustee by the IRS.
•An eligible individual is any taxpayer including sole proprietors, partners, members of LLC, and S Corp shareholders.
•HSA not required to be an employer-sponsored. Note: Employers don’t want to “sponsor” HSA. Sponsorship would make HSA subject to ERISA.
HSA Limits 2011
HSA
Annual HSA Contribution Limit:Self-only: $3,050 Family: $6,150
HDHP Limits:Minimum Deductible:Self-only: $1,200 Family: $2,400
Maximum Out-of-pocket:Self-only: $5,950 Family: $11,900
Catch Up Contribution: $1,000 per year (Individual over the age of 55)
HSA Limits 2012
HSA
Annual HSA Contribution Limit:Self-only: $3,100 Family: $6,250
HDHP Limits:Minimum Deductible:Self-only: $1,200 Family: $2,400
Maximum Out-of-pocket:Self-only: $6,050 Family: $12,100
Catch Up Contribution: $1,000 per year (Individual over the age of 55)
HSA: Ineligible Plan Designs
• HDHP cannot “pay out” on an individual deductible that is embedded, prior to the entire family hitting the $2,400 family deductible. (NOTE: You may need to purchase at least a $2,400 individual deductible and $4,800 per family in 2011 and 2012 to avoid this potential problem.)
• Eligible Individuals cannot be covered by another low or no-deductible plan, including flexible spending accounts, MSA, and HRA plans. (Exception: Coverage for accident, disability, dental, vision, and long-term care, or for specified diseases are permissible.)
• No first dollar coverage (i.e. RX drug plans with co-pays) permitted for anything other than preventative care. Preventative care includes items such as annual physicals and wellness type tests and visits. No Drug Card.
HSA: Contributions
• Employee only-direct to the HSA custodian.
• Can be made via salary reduction inside a cafeteria plan*. – *Avoid HSA comparability rules. – *Plan Document requirement. – *Gain FICA and Medicare Tax savings.– *State Tax savings subject to State Tax rules – *Not subject to Change of Election Rules. – *Can change as frequently as once per month.
• Employer contributions (optional) and Employee contributions through the cafeteria plan.
HSA: Contributions (cont.)• Contributions can be made up until April 15TH for the previous
calendar year.
• Contributions may be made in a lump sum or periodically during the year.
• Anyone can contribute to your HSA.
• All contributions to the HSA are tax deductible to the HSA accountholder in the year they are deposited into the HSA, regardless of whether your withdraw the funds or incur medical expenses in that year.
• Contributing more to the HSA than allowed is subject to 6% excise tax penalty plus income tax consequences.
• May have investment options and any growth is tax-free.
Employer Contributions To The HSA
• Employer contributions to the HSA must be coordinated with any employee contributions. Annual limit.
• Carefully consider the frequency of the Employer contributions to the HSA.
• Once an Employer contribution is made it CANNOT be reversed.– Only 2 exceptions (HSA Grab Bag Guidance 2008):
• Contribution was for someone who was NEVER eligible. • Contribution made exceeds statutory max for the year.
Employer Contributions To The HSA
• Employer contributions made outside a cafeteria plan are subject to the HSA comparability rules
• Permissible contribution methods:– Same dollar amount or same percentage of the HDHP
deductible.– Permit differences based upon tiers of coverage as long
as everyone in the tier is treated the same.– Exclude collectively bargained employees.– Permit more generous treatment of Non- HCE
Rules For Using Your HSA
• No third party claims adjudication requirement. No claims police
• SHOE BOX RULE: Taxpayer must retain all records to prove tax deductible status of withdrawals in the event of an IRS audit.
• Withdrawals are tax-free for qualified medical expenses.
• Any use of HSA funds in a non-qualified way are subject to 20% penalty in 2011 and years after and will be considered taxable income in the year it is withdrawn.
Qualified HSA Distributions
Two categories of expenses qualify for tax-free treatment of distributions.1.Out-of-pocket medical expenses
– Amounts paid for medical care as defined in Code § 213(d). HCRC 2011: Dr’s Rx for OTC medications (except insulin).
– Amounts must be incurred after the HSA is established.– Once the HSA exists, tax-free distributions can be used
for qualified medical expenses even after the HSA account holder is no longer eligible to make contributions.
Qualified HSA Distributions (cont.)
2. Certain insurance expensesGenerally, health insurance premiums are not qualified except the following categories:
– COBRA coverage– Health Insurance while receiving
unemployment– Qualified Long-Term Care Contracts– For Individuals age 65 and over (still HSA
eligible)• Any health insurance other than a Medicare Supplement• Medicare premiums Premiums for individual health
insurance policies(not Medigap policies)• Retiree medical premiums under an employer plan
HSA Advantages
• HSA can be invested and growth is tax free.• Balances rollover at the end of each year.• Portable because they are individually owned
accounts.• Not subject to ERISA and COBRA.• No claims police. Self adjudicated.• Accumulated balances could be used for non-
medical reasons (subject to tax penalties).• Both Employer and Employee can contribute.
HSA Disadvantages
• Employer has no control over what the HSA money will be used for.
• Conflict with traditional FSA and HRA models that may exist at time of implementation.
• Need qualified HDHP to establish a HSA.• Incompatible with some disease management
programs and some on-site medical clinics.• Bank fees often charged for account set up and
maintenance.
How To Avoid HSA Headaches
• Make sure you have the appropriate HSA compatible High Deductible Health Plan (HDHP). Not all HDHP are HSA compatible.– Spousal benefit plans (including Health FSA) may
disqualify you!
• Make sure employees understand that there is no first dollar coverage on office visits and Rx. All expenses go towards satisfying the HDHP deductible.
Note: Paying your current HDHP medical premiums pre-tax through a cafeteria plan DOES NOT effect HSA eligibility.
How To Avoid HSA Headaches (cont.)
• Caution: General-Purpose FSA and HRA participation may disqualify employees from receiving or contributing amounts to the HSA.
• Work Around:– Limited-Purpose Medical FSA (dental, vision,
preventative care)– Post Minimum HDHP Deductible Medical FSA (expenses
limited to dental, vision, preventative care until the minimum required HDHP deductible has been satisfied, then general expenses are eligible.)
– Possible to suspend HRA coverage.– Individuals cannot individually elect to convert to
Limited-Purpose Medical FSA mid-plan year. Possible to convert entire plan via employer amendment.
IntegrationIntegration
• FSA• HRA• HSA• Management Technology
THE
Card will not work at non-qualified vendors
The Emergence of Technology
THE SIGNIFICANCE OF
SIMPLICITY
Debit Cards eliminate the hassle of traditional FSA/HRA/HSAs
IIAS Abilities
Ease of use and understanding = satisfaction with the plan
Single platform for multiple accounts
FSA/HRA/HSA payment connectivity
CDHC REQUIRES AN‘individual consultative sell’
Beyond price, your client may have additional concerns:
“Is CDHC right for my company?”
“Are my employees ready for a consumer-driven plan?”
“We’ll have a learning curve here. We’ll need solid communications to
get our workers up to speed on CDHC.”
Even when the price is right, a CDHP requires that you communicate to your employees on an individual level.
LET CLIENT PROFILE GUIDE PRODUCT SALEEmployer Assessment
Dia
gn
ost
ic
Bear Bull In the zone P&L Outlier Low-cost commodity
Core to the business Conservative Innovative
Satisfied with Existing Desperate for New Solutions
Financially healthyHealth benefit trend in line with companyPaternalisticScarce labor market
Financial Benefit Labor Culture Picture Spending
Profitability
Growth
Capital
Valuation
Competitor cost structure
Global markets
Dollars per employee
Medical trend
Percent of total compensation
Supply and demand
Commodity or strategic
Percent of expense base
Union climate
Paternalism
Risk attitude
Social role
Community/ political affairs
Deal Makers = Motivated Employers
Health costs outstripping financial capacity
Slow growth and/or eroding marginsWorkforce less resistant
HSA
Dia
gn
ost
ic
Completely Unprepared Ready Now
Deal Makers = Motivated Employers
Understanding Healthcare Employee Technology Financial of health benefits status expectations savvy capacity
Source: 2004 ChapterHouse LLC
LET CLIENT PROFILE GUIDE PRODUCT SALEEmployee Assessment
What’s covered
Copays and deductibles
Affordability of selected health plan options
Generally healthy
Chronic diseases
Attitudes toward health care benefits (who pays)
Awareness of the macro problems
Provider preference and perception
Comfort with Web tools
Trust in using Web tools for personal information
Workforce pay scale
Socioeconomics
Ignorant Expert Ill Healthy Right Privilege Technophobe TechnophileLow
WageHigh
Income
Deserve it all for freeMinimum wageUnionized
Sophisticated employee baseSensitive to health care challenges – shared
concern for consequencesFamiliar with Web-based tools
Deal Breakers = Apprehensive
employees with deeply rooted
behaviors
A Combined Broker/VBBenefits Strategy
Control and lower costs.Deliver a benefits solution that satisfies both ER and EE needs.Empower clients with options that enable them to control costs.Fill the gaps inherent in a consumer-driven health care plan.Free up employee dollars through tax-advantage savings plansTap in to employee needs through individual communication that addresses family and socio-economic concerns