The Changing Landscape of

Employer-Sponsored Healthcare

Presented to attendees of the

What’s IN OUT Back Economic Summit and Golf Tournament

September 7, 2012 Midway, UT

1. How Awesome is the Utah Health Exchange, Really?

2. Alternate Endings a. What’s Up with Federal Health Care Reform?

— Definition, Timelines, Functions, and States’ Progress

b. How Might Employers Be Affected By Federal Health Care Reform?

— Individual and Employer Mandates (including calculation) — Small Business Tax Credits

c. The Future of Health Care Reform • Review and Implications of the SCOTUS Decision • Remaining Uncertainties

AGENDA

IMPETUS FOR REFORM

• Why Utah?

– Strong leadership in Executive and Legislative branches

– Strong encouragement from Washington, DC

– Strong support from the business community

• Why health system reform?

– Cycle of growing uninsured population, increase in uncompensated care, rising premiums, employers dropping coverage

– Increasing consumer detachment

– Skyrocketing costs for businesses; threat to the state’s economic health

3

ESCALATING PREMIUM COSTS

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: GOPB analysis of data from the Agency for Healthcare Research and Quality Medical

Expenditure Survey and Kaiser Family Foundation Annual Employer Benefits Survey

CONSUMER DETACHMENT

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Private Health Insurance Payments

Source: GOPB Analysis of Centers for Medicare & Medicaid Services, National Health Expenditure Accounts

Consumer Out-of-Pocket Payments

FEWER FIRMS OFFERING COVERAGE

Percent of US Firms Offering Health Benefits

54%

56%

58%

60%

62%

64%

66%

68%

70%

2000 2001 2002 2003 2004 2005 2006 2007

Source: Kaiser Family Foundation

FEWER FIRMS OFFERING COVERAGE

Percent of Utah Firms Offering Health Benefits

40%

42%

44%

46%

48%

50%

52%

54%

56%

58%

2000 2001 2002 2003 2004 2005

Source: Agency for Healthcare Research and Quality Medical Expenditure Survey

IDENTIFYING THE UNINSURED

Utah’s Uninsured Population in 2007

• 12% (roughly 310,000 individuals)

• 1/3-1/2 were income eligible for a public coverage program • Medicaid

• CHIP

• Utah Premium Partnership

• Majority were employed

• Many were part-time workers w/multiple jobs

• Most worked for small firms • Small business state

• Less than 50% of small firms offering health insurance

• Many were “young immortals” (age 18-34)

8

9

CREATION OF THE DEFINED CONTRIBUTION MARKET

What are Defined Contribution arrangements?

• Employer-sponsored health plans that allow individual employees full control over their plan choice

• Rather than promising or providing a certain level of health benefit, the employer offers a pre-determined level of funding that the employee then controls and uses to purchase their choice of health insurance

10

ESTABLISHMENT OF THE UTAH HEALTH EXCHANGE

• Created within the Governor’s Office of Economic Development (GOED)

• Serves as a market organizer; does not contract with select carriers

• On-line comparison, application, enrollment, and premium aggregation

• Regulatory authority limited to establishment of electronic data standards

• Small Group

• Limited Launch, August 2009

• Full launch, September 2010

The Utah Model

11

Portal / Web site

Enrollment Interface

Carrier 1

Carrier 2

Carrier 3

Health Plan #1

Plan Comparison Interface

Health Plan #2

Health Plan #3

Health Plan #4

Administration Interface

Carrier 4

Communication Interface

Employee or

Consumer

True Exchange

Premium Aggregation

Admin, Life Events, etc.

Billing & Invoices

Employer

Consumer Decision Support Tools

ADVANTAGES OF THE NEW SYSTEM

EMPLOYERS

• Simplified Benefits

Management

• Predictable costs

• Expanded Coverage Choices

• Preserve Tax Benefits

EMPLOYEES

• Individual Control and

Choice

• Pay with Pre-tax dollars

• Greater Potential for Plan

Portability

• Premium Aggregation

• >100 plan choices available

• 296 employers participating

• ~6924 covered lives

• 93.3% employer renewal rate

• Employer contributions

– Lowest: $0

– Average: $438

– Highest: $2000

UTAH HEALTH EXCHANGE STATUS REPORT (AUG 2012)

UTAH HEALTH EXCHANGE STATUS REPORT (AUG 2012)

• 789 brokers trained to use the Exchange

• 33.5% of employers currently participating previously offered no coverage

• 24% of the business groups participating in the Exchange previously offered coverage with an insurance carrier not participating in the exchange

• 92% of the businesses participating in the Exchange use a broker

RESULTING SHIFTS

• Seller’s Market Buyer’s Market – Insurance carriers compete for business

• Employer Dollars Employee Dollars – Consumerism is reintroduced to the market

• Opaque Benefit Clear Value – Employees see insurance as a benefit rather than a cost

What’s Up with Federal Health Care Reform?

• Patient Protection and Affordable Care Act PPACA, Affordable Care Act, ObamaCare, federal health care

reform

Passed March 26, 2010

• Medicaid Expansion Up to 138% FPL*

• Insurance Market Reforms Individual and Employer Mandates

Guarantee Issue and Community Rating

Essential Health Benefits (EHB)

Federal premium subsidies up to 400% FPL**

Health Insurance Exchanges *$31,809 2012 Federal Poverty Guidelines

*$92,200 2012 Federal Poverty Guidelines

Brief Overview of PPACA

• Purpose Online marketplace that enables individuals to shop, compare,

and enroll in a health insurance plan

• Operator State-Based Exchange (SBE)

State-Federal Partnership/Hybrid

Federally Facilitated Exchange (FFE)

• Models Open Marketplace

Selective Contractor

Active Purchaser

What is an Insurance Exchange?

Two Types of Exchanges Under PPACA

Small Business Health Options Program (SHOP)

• Small businesses with up to 100 employees may purchase qualified coverage

• Premium subsidies are not available through the SHOP exchange (tax credits are available for qualified employers)

American Health Benefit Exchange (AHBE)

• Individuals and families may purchase qualified coverage through Qualified Health Plans

• Purchaser may be eligible for premium subsides—based on income level

States may choose to operate two separate exchanges or combine into a single mechanism

2010 2014 2013 2012 2011 2017 2016 2015 2018

Jan 1, 2013 HHS must determine if states have made sufficient progress in developing exchanges; will deem states as “Approved”, “Conditionally Approved”, or subject to FFE

Jan 1, 2014 Premium tax credits available for enrollees (100%-400% FPL)

March 23, 2011 Deadline for HHS Secretary to award Exchange grants

Jan 1, 2015 Exchange must be financially self-sustaining Jan 1, 2017

Large group Exchange to go live

Jan 1, 2014 State Exchanges required to go live

July 1, 2010 Healthcare.gov goes live, simulating first Exchange

Preliminary insurance regulations take affect

Jan 1, 2014 Employer & Individual mandates in effect

Jan 1, 2016 States must choose to engage in Health Care Choice Compacts

PPACA Exchange Timelines

Nov 16, 2012 States must submit Exchange Blueprint to HHS

The Utah Model

21

Portal / Web site

Enrollment Interface

Carrier 1

Carrier 2

Carrier 3

Health Plan #1

Plan Comparison Interface

Health Plan #2

Health Plan #3

Health Plan #4

Administration Interface

Carrier 4

Communication Interface

Employee or

Consumer

True Exchange

Premium Aggregation

Admin, Life Events, etc.

Billing & Invoices

Employer

Consumer Decision Support Tools

Mandated State Exchange Functions Portal / Web site

Enrollment and

Eligibility Interface

Carrier 1

Carrier 2

Carrier 3

Health Plan #1

Plan Comparison Interface

Health Plan #2

Health Plan #3

Administration Interface

Communication Interface

TREASURY

HOME LAND SECURITY

IRS

HHS

SOCIAL SECURITY

Verify Citizenship

Verify Income

Tax Credits

Verify Residency

STATE Medicaid

Eligibility

Reporting

Subsidies

Cost Reduction

TPA Customer Service Financials Risk Adjustment

Notifications

Pay Premiums

Employee or

Consumer

Billing or Invoices

Employee or

Consumer

Admin, Life Events, etc.

Customer Service

ONLINE CALCULATOR Display Total

Costs

Health Plan #4

Carrier 4

State Insurance

Agency

Certify, Recertify Decertify

Health Plans

Navigator Guidance

Federal Data

Services Hub

• Lack of timely guidance from HHS 1968 new or expanded powers given to the Secretary of HHS

• Heavy Technology Lift Systems development

Strained public/private sector resources

• Tough statutory timelines Agreement among state officials

Stakeholder buy-in

Barriers to State Exchange Implementation

Study Committee

Legislation Failed

Legislation Tabled/On Hold

Alternative Authority

No Bill

Establishment Legislation

State Exchange Implementation Authority

Hawaii

Alaska

DC

Submitted a letter of intent to establish a an exchange

Updated 07-25-12

• States making significant progress (5-10) Will be certified as “approved”

Will likely still rely on federal processes for some functionality

• States making some progress (30-35) Will be certified as “conditionally approved”

Will be considered a state-federal “hybrid”

• States making little or no progress (5-10) Will have a federally-facilitated exchange

May continue to work toward a state-based exchange

Likely State Scenarios in 2014

How Might Employers Be Affected By Federal Health Care Reform?

THE INDIVIDUAL MANDATE

No individuals will be required to purchase coverage under the law, HOWEVER

Beginning in 2014, most Americans must be enrolled in a health insurance plan that meets basic minimum standards as defined by HHS. Those who are not enrolled, will be subject to a tax. Waivers may be granted for persons for whom coverage is determined to be “unaffordable” (defined as cost sharing for 80 FTEs now exceeds 9.5% of employee household income )or for other reasons such as religious beliefs, hardship, incarceration, undocumented alien, etc.

CALCULATING THE INDIVIDUAL MANDATE TAX (I)

The tax shall be the greater of a flat dollar amount per individual or a percentage of the individual’s taxable income; with dependents under 18 years of age being taxed at half that amount. •The flat dollar amount per individual is $95 in 2014; $325 in 2015 and $695 in 2016. After 2016, the flat dollar amount is indexed to inflation. •The flat dollar penalty is capped at 300% of the flat dollar amount. •For example:

A family of three (two parents and one child under 18) would have a flat dollar penalty of $1737 in 2016; A family of four (two parents and two children over 18) would have a flat dollar penalty of $2,085 in 2016 because the 300 % cap would apply.

CALCULATING THE INDIVIDUAL MANDATE TAX (II)

•The percentage of taxable income is an amount equal to a percentage of a household’s income that is in excess of the tax filing threshold (phased in at 1% in 2014; 2% in 2015; 2.5% in 2016). •For example:

If an individual has a household income of $50,000, the percentage would be 1% of the difference between $50,000 and the tax threshold (which is $9,350 for an individual in 2010). Assuming the tax threshold is $10,000 in 2014, this individual would be subject to a percentage penalty of $400.

o$50,000-$10,000 = $40,000 o$40,000 x 1% = $400

Because this percentage penalty is greater than the flat dollar penalty for 2014 (which is $95), he would pay the percentage penalty.

THE EMPLOYER MANDATE

No employer will be required to purchase employee-sponsored coverage under the law, HOWEVER

Beginning in 2014, a penalty of up to $2000 per employee would apply to employers with 50 or more full-time employees that don’t provide employee coverage

50 or more FTEs during the preceding calendar year FTEs are those working 30 or more hours per week OR a combination of part-time employees (i.e. Two employees each working 15 hours a week would count as one FTE for the purpose of applying the penalty) Excludes those full-time seasonal employees who work fewer than 120 days during the year

CALCULATING THE EMPLOYER PENALTY •In 2014, the monthly penalty assessed to the employer for each full-time employee who receives a federal subsidy will be 1/12 of $3,000 (or $250) for any applicable month. •However, the total penalty for an employer would be limited to the total number of the firm’s full-time employees minus 30, multiplied by 1/12 of $2,000 (or $166.67) for any applicable month. •After 2014, the penalty amounts would be indexed by a premium adjustment percentage for the calendar year. •For example:

An employer with 100 FTEs has a mid-year plan renewal. Rates increase such that , beginning in July, cost sharing for 80 FTEs now exceeds 9.5% of employee household income, thus making them each eligible for a federal subsidy

o80 FTEs x $250 x 6 months= $120,000 o100 FTEs – 30 = 70 FTEs (70 FTEs x $167 x 6 months = $70, 140)

SMALL EMPLOYER TAX CREDITS The law makes tax credits to certain small employers to help them purchase coverage for employees Credit is available for a maximum of six years

In the years 2010-2013, the credit will cover up to 35% of the employer’s contribution to employee’s health coverage For two consecutive years beginning in 2014, the maximum credit available for non-profit and for-profit employers is 35% and 50% (respectively) of the employer’s contribution

Employer must be paying at least 50% of the employee’s insurance Employer must have fewer than 25 full-time employees whose average salary is below $50,000

Credit is phased out as the number of FTEs increases from 10 to 25 and as average employee compensation increases from $25,000 to

$50,000.

The Future of the Law

• Anti-Injunction Act The “shared responsibility payment” (SRP) is not a “tax”; rather

it is a “penalty”

• Individual Mandate Congress may not regulate inactivity under the Commerce

Clause Congress may impose a tax as a consequence of inactivity

• Imposing a tax “leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”

• Medicaid Expansion Expansion is optional; States choosing not to expand will not be

in danger of losing all Medicaid funding • Roberts concluded, “the financial ‘inducement’ Congress has chosen—

[the withdrawal of existing Medicaid funds]—is much more than “relatively mild encouragement’—it is a gun to the head.”

Review of the SCOTUS Decision

•Exchanges and Premium Subsidies Remain

•Tax Applies to Uninsured Individuals

•Medicaid Expansion Now Optional for States Expansion was supposed to account for approximately half of PPACA coverage expansion – about 15-17 million new enrollees

7 states have already announced opt-out

•Medicaid Doughnut Hole Boycotting states mean 11 million of the would-be newly eligible under the expansion could be left uninsured

Not eligible for Medicaid or premium subsidies through the Exchange

Some will be subject to the individual mandate tax

Implications of the SCOTUS Ruling

• Who controls the House and Senate and to what degree? Is actual repeal possible?

Will statutory timelines remain?

• Who will occupy the White House? Is “effective“ repeal by Executive Order possible?

Repeal and replace with……..?

• What about state elections? Compare with 2010

Remaining Uncertainties: 2012 Elections

• Exchange administrative costs Federal funding opportunities for exchange establishment

through 2014

On-going operational costs are the responsibility of the state

• Costs for current and expanded Medicaid populations Medicaid is 1st or 2nd largest or second largest line item on

every state budget

Crowds out spending on education, public safety, roads, etc.

Remaining Uncertainties: State Budgets

38

EVENT SCOPE ($$$) TIMING

Bush Tax Cuts

-$3.3 trillion over 10 years End 2012

Sequestration

-$1.2 trillion over 10 years End 2012

Payroll Tax Cut

-$804 billion over 10 years End 2012

Debt Ceiling

TBD October 2012

Sustainable Growth Rate

-27% cuts End 2012

Alt. Min. Tax Patch

-$505 billion over 10 years End 2012

Remaining Uncertainties: Federal Budget

39

•Automatic expirations mean About $650 billion would evaporate from the economy in early 2013 An additional $1 trillion automatic budget cuts over the next 10 years also slated to begin in 2013.

•In the absence of Congressional action, CBO projects

US economy will contract by 1.3% in the first half of 2013 US economy will sink back into recession

Remaining Uncertainties: The Fiscal Cliff

Leavitt Partners, LLC

Salt Lake City Office 299 South Main Street Suite #2300 Salt Lake City, UT 84111

Washington DC Office 1776 I Street, NW 9th Floor Washington, DC 20006

Phone: (801) 656-9716 www.leavittpartners.com