3rd Annual Health Care Symposium

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Year In Review

Large Increases

Additional cost shifting to employees

Employers and Employees can not handle much more

Greg ShieldsVice President

Today’s health insurance market is in anAffordability Crisis!

The #1 concern for most business owners today is the high cost of medical insurance.

The same could be said for employees!

Next to payroll, health insurance is the single largest expense for most companies.

The Healthcare Market

Double-digit cost increases are crippling employers Premiums have been experiencing double-digit increases over

the past 3-5 years Premiums are predicted to continue these double-digit increases in the coming years No end in sight

Employees are vulnerable to huge cost increases that they already have trouble affording

Reasons

Technology

Prescription Drugs

Aging Population

Malpractice

Uninsured Public

“Rich” Health Insurance Plans

Current Rich Insurance Plan Designs

The consumer has been insulated from the true cost of their healthcare because of low copays and/or no (or low) deductibles.

This Is Starting to Change

To this point, employers have had to react… Shifting more of the cost over to the employee Making changes to the plan designs

Higher deductibles Higher office visit copays Prescription copays

Is This Enough???

Unfortunately – NO!

Consumer Driven Health Plans(CDHPs)

Today’s movement to consumerism is the most significant change in health benefits since the

mid 1970’s.

What are CDHP’s?

Combines a high deductible health insurance plan with a funding program to help employees pay for their medical expenses

Addresses affordability and over-insuring by providing significant health insurance premium savings

Allows consumers to become more actively involved in the entire healthcare process

KEY

The consumer must have a greater financial responsibility for healthcare purchases to serve

as an incentive to make prudent decisions!

Consumer Out-of-Pocket Expenditures

0

5

10

15

20

25

30

35

40

1970 1975 1980 1985 1990 1995 2000

Consumer

Out-of-Pocket

Expenditures %

34% in 1970 to 14% in 2000

Less OOP expenses leads to less consumerism!

Aetna 2003

Skin in the game

Consumers spend their own money more carefully than they do their health carriers’

money.

New OpportunityConsumer-Driven Health Plan Market Size

The market potential of CDHPs is sizable. The current $2.5B market is projected to grow 142% annually to reach $88B by 2007.

$500

$400

$300

$200

$100

$02000 2002 2004 2006 2008 2010

CDHP Premiums(US$ billions)

Consumer-directed health planswill account for $88 billion in 2007,

a sixfold increase over 2005.

How do we move employees to the new high deductible plan designs?

Align consumer expectations with the true purpose of

health insurance To protect people from financial hardship due to illness and injury

Align consumer habits with a more realistic understanding of the costs of healthcare

Reverse the trend to over-insure

Insured Claims Experience

80% of insureds have claims < $3,000

70% of insureds have claims < $2,000

55% of insureds have claims < $1,000

Milliman USA (2002)

How to Get Started

Employers will need to be more creative

Employees role will have to change

Examples of CDHPs

HRA

HSA

HRAs

Health Reimbursement Arrangement

Legislation passed June 26, 2002

Combination of a high deductible health insurance plan (at usually a lower cost) with an employer funded spending account.

HRA Plan Designs

KEEP IT SIMPLE

Employee pays first Employer pays first Split deductible

Employee Pays FirstEmployer saves the most money AND employee responsibility

increases

$2,000 Deductible

Employer Pays FirstFirst-dollar benefits, high deductible transition,

nice way to introduce the concept in a positive manner

$2,000 Deductible

Split Deductible50/50 sharing of expenses

$2,000 Deductible

What is an HRA? Side funding arrangement to coincide with a high

deductible health insurance plan

Funds are used to help pay for services not covered by the deductible

Health insurance plan continues to maintain copays for office visits and Rx

Funds are provided with employer dollars only

Employer retains ownership if employee leaves the company

Employer has complete control of the funds

Employer is not required to set up separate accounts for each employee

Employer can fully fund the arrangement in the first year or spread the contributions throughout the year (control of cash flow)

Employer determines where the dollars can be spent

Employees can rollover any unspent dollars to the following year

Employer can set caps on accumulation amount

Available to any size company (with some limitations)

HRA Administration

Insurance company administers

Third Party Administrator of your choosing Debit card Checkbook

Self administer

Two moving parts!

HSA

Health Savings Account “The IRA of Health Insurance”

Legislation passed December 8, 2003

The White House estimates 3 to 5 million accounts being created in 2004 alone and up to 40 million in the next decade

What is an HSA?

Side funding arrangement to coincide with a high deductible health insurance plan

Contributions can be made by the employees and/or employer tax deductible

A tax favored savings account designed to pay for qualified healthcare expenses

Contributions are pre-tax (through a cafeteria plan) Funds grow tax deferred Withdrawals are tax free if used for qualified medical expenses

Funds can be invested in a number of investment options (low risk to high risk)

Money market funds, mutual funds, stocks, bonds

Maximum contributions for 2004 are $2,600 (singles) and $5,150 (families)

Contributions can not exceed the plan deductible Additional contributions of up to $500/year are allowed for people 55 and older in 2004 Limits are indexed for inflation

Funds belong to the employee (regardless of who contributes these funds)

Funds are portable

Unused funds rollover from year to year with no limits or caps - there is no “use it or lose it” provision

Health insurance plan does not have copays for office visits or Rx

Comparability rules apply (if employer funded) Equal dollar or equal percentage

Available to any size company

Qualified Withdrawals

Medical expenses as defined under Section 213d Medically necessary services Deductibles and co-insurance Vision Dental

Qualified long-term care insurance and expenses

COBRA premiums

Medicare health insurance premiums (parts A&B) Not medicare supplement premiums

Non-Qualified Withdrawals

Under age 65 Ordinary income tax plus a 10% penalty

65 or older Subject to income tax, but likely at a lower rate No penalty

Health Insurance Plan

High deductible plan Minimum individual deductible of at least $1,000 and maximum out-of-pocket expenses not exceeding $5,000 Minimum family deductibles of at least $2,000 and a maximum

out-of-pocket expenses not exceeding $10,000

No office visit copays or Rx copays Discount Rx card

HSA/HRA Comparison

HSA HRAAvailability Individuals and any size

groupAny size group

with limitations

Maximum Contributions

Lesser of deductible or $2,600 or $5,150

Maximum reimbursement determined by employer

Additional Contributions Allowance

Allowed for age 55 and older

Not applicable

Eligible Contributors Individuals, Employers and or Employees

Employers Only

HSA HRATax Deductibility – Employer

Contributions are tax deductible

Reimbursements are tax deductible

Tax Deductibility – Employee

Contributions are pre-tax if offered through a

cafeteria planNot Applicable

Fund or Account Ownership

Employee Employer

Portable Yes No

Rollover of Funds Yes Employer determines if allowed and can set caps

Funding Required Yes No

HSA HRAPlan Types High deductible plan with

no copaysNo plan restrictions

Deductibles Singles –2004

$1,000 Minimum No limits

Deductibles Families – 2004

$2,000 Minimum No limits

Out-of-pocket Maximum

Singles – up to $5,000

Families – up to $10,000

No limits

Ultimate Goal

Provide employees with dependable coverage at lower premium costs

Give incentive to employees to become better consumers when dealing with healthcare costs

Improve utilization of health plan

Provide employees with a savings vehicle to put away money for healthcare tax-free (HSAs)

Keys to Making CDHPs Work

High deductible health plans must save employers money

Instill “consumerism”

Should have a positive impact on utilization

Employees must be well informed

Summary

Why have HRA’s not taken off? Companies have not had to react (yet) Pricing not competitive enough Awareness level

Why is the excitement level so high for HSA’s? White House support Tax advantages to employees True consumer type health plan design

Summary (cont.)

Challenges… Insurance companies (products & pricing) Education of employees Claims process

Additional Concepts

Fill exposure to high deductible plans

Supplemental medical expense insurance plans Medical reimbursement plans

Supplemental Medical Expense Plans“Gap Plans”

Provides coverage for costs related to high deductibles, coinsurance, and copays

Stand alone policies sold on a group platform

Policies can be employer paid, employee paid, or some combination

Benefits help pay for expenses as a result of: Inpatient hospital expenses Outpatient covered hospital expenses Emergency room treatment Ambulance transportation

All benefits are paid directly to the insured

Pre-existing condition clause may apply

Executive Medical Reimbursement Plans

Excess medical policy that reimburses costly exclusions and limitations found in health insurance plans on a tax favored basis

Deductibles Coinsurance payments Out-of-pocket expenses Rx drugs Psychiatric expenses Infertility procedures Dental and vision expenses

Can be done on a discriminatory basis Officers/Managers – key employees

Saves dollars for the company AND provide benefits for key employees

Premiums paid are deductible by the business

Benefits received by the insured are exempt from taxable income

Executive Medical Reimbursement Plans

Todd HonsVice President

Capital BlueCross

PPO 123 – Available to companies with over 100 employees

Health Savings Account – currently being developed

Wellness Programs – customized to each employer

Keystone Health Plan Central – wholly owned subsidiary

HealthAmerica and HealthAssurance

New PPO & POS plans for small and large companies

Enhanced HMO product to include out of area students

New HMO plans with deductibles and coinsurance

HRA plans available to groups 2 or more

Health Savings Account (HSA) available in January 2005

Wellness programs

HealthAmerica and HealthAssurance

Lehigh Valley Lehigh County

3 hospitals 178 primary care doctors 549 specialists

Northampton County 2 hospitals 73 primary care doctors 259 specialists

Highmark Blue Shield

New Products: Blue Account, BlueChoice, PPOBlue 90/70, PPOBlue 80/60, DirectBlue 90/70, DirectBlue 80/60

Health Savings Accounts – currently being developed

Wellness programs – “HealthPlace@Work”

HealthGuard – wholly owned subsidiary Current licensed in 10 countries: Adams, Berks, Cumberland, Dauphin, Lancaster, Lebanon, Lehigh, Northampton, Perry, York

Other Carriers

Aetna

Cigna

Geisinger Health Plan

Inter County

John Alden (HRA, HSA)

Oxford

Starmark

Third Party Administrator

United Healthcare

Networks

Berkshire Health Plan

Central Susquehanna Healthcare

Eastern PA Health Network

Preferred Healthcare

Preferred Healthcare Systems

Valley Preferred

PrimeSource Health Network

South Central Preferred

Vantage Healthcare Network

Alliance

Devon

Susquehanna Healthcare

Pennsylvania’s Preferred Health Network (PPHN) (combines 8 of the above networks into one

Alpha Benefits’ Survey

Alpha is often asked what plans and contributions are most common. We surveyed our clients to get

a representation of:

Employer/Employee Contributions Average plan designs

Here are the results

Single Employee Premium:Employer Contribution

0

5

10

15

20

25

30

35

% o

f C

om

pa

nie

s

100 90 85 80 75 70 60 55 50 0

Percentage of Employer Contribution to Cost

Dependent Premium:Employer Contribution

0

5

10

15

20

25

30

% o

f c

om

pa

nie

s

100 90 70 50 45 40 30 25 20 15 10 0

Percentage of Employer Contribution to Cost

What Does This Mean?

86% of companies surveyed pay 75% or more of the single contribution

43% of companies surveyed pay 20-25% of dependent costs

22% pay nothing toward dependent cost

Almost 100% said they envision increasing the employees cost next year

Additional Comments

Grandfathering

Based upon salary

Defined contribution vs defined benefit

Buy-up Option

Spousal Rule

Typical Office Visit Copays

0%

5%

10%

15%

20%

25%

30%

35%

40%

$10 $15 $20 $25 > $25 Plan Copay Amount

% o

f C

om

pa

nie

s

Plan Deductibles

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$0 $1 - $249 $250 $251 -$499

$500 > $500

% o

f C

om

pan

ies

Plan Type

Traditional Indemnity 5%

PPO 66%

POS 14%

HMO 15%

Prescription Drug Coverage

70% have a 3-tiered formulary plan

15% have deductibles then coinsurance

12% have a 2-tiered copay (usually 10/20)

3% have straight coinsurance

Future Healthcare Costs

Next 2 to 3 years: Double digit increases

Hopefully better than what we have experienced over the last two years

10 Years From Now:Concerns

Aging population The fastest growing segment of our population…

people 85 years of age or older.

Over the next 16 years… the number of people over 50 will grow by 74%, while the people under 50 will grow by only 1%!

In the US, we have more seniors than Canada has people.

10 Years From Now:Concerns

Direct to consumer advertising of the pharmaceutical companies

Pepsico spent $125 million on Pepsi

Anheiser Busch spent $146 millon on Budweiser

Dell Computer spent $160 million on their top brands

Pharmaceutical companies spent $2.5 billion! (Campaign for VIOXX alone equaled Dell’s total annual advertising expenditures)

10 Years From Now:Concerns

Technology

Does it increase or lower costs?

Thank you for attending!

This presentation is available for download at:

www.alphabenefits.com/seminar