implementing health care reform — opportunities, costs and risks

© 2010 Towers Watson. All rights reserved.

Implementing Health Care ReformOpportunities, Costs and Risks

March 24, 2010

1towerswatson.com© 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Speakers

Randy Abbott Ann Marie BrehenySteve Raetzman Julia Weston


Today’s discussion

Towers Watson’s point-of-view

Overview of legislation

Managing health benefits Immediate and long-term impact

Implementation

Next steps


Towers Watson’s point-of-view The effect of health reform will continue for years: some

changes are immediate; many will evolve over the next 3 – 5 years

UnprecedentedScale and Impact

Current TacticsRemain Attractive

Focus onWorkforce Healthand Productivity

Reward and BenefitStrategies

Could Change

Opportunities InRetiree Medical

Attractive tactics include: account-based health plans, value-based strategies, well placed incentives, incentives, quality and delivery system improvements, vendor optimization, consumer engagement, workforce health improvement and wellness initiatives, etc.

Improving workforce health and productivity will increase in importance: best performers have an advantage

Implications can go beyond just health benefits to Total Reward strategy and workforce health and productivity initiatives

“Exit” strategies and alternative delivery options may emerge

New opportunities will emerge to review strategies and benefits for current and future pre-65 and post-65 retirees

Overview of legislation

towerswatson.com 4© 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.


Key elements Direct impact on employers

Excise tax on high-cost group health coverage exceeding specified thresholds

Thresholds in 2018: $10,200 for single coverage, $27,500 for family coverage

Indexed CPI-U+1% in 2019, CPI beginning in 2020 Adjustments for age and gender demographics, high-risk populations,

early retirees Separate vision, dental benefits exempted; account contributions included

Excise tax

Offer employees who work at least 30 hours per week coverage or pay penalties

Automatically enroll new employees in coverage Provide vouchers to help certain low-income employees purchase

coverage through insurance Exchanges Comply with new benefit mandates and reporting requirements

Employer mandates

Provisions Key Element


Key elements Direct impact on employers (continued)

Increases HIPAA limit on financial incentives for participation in wellness programs from 20% to 30%; permits government to increase limit to 50%, if appropriate

HIPAA wellness programs

Requires employers to disclose aggregate value of employer-provided health coverage on employee Form W-2

W-2 reporting

Imposes immediate and longer-term requirements for plans, such as

No lifetime and restricted annual dollar limits

No preexisting condition exclusions for those 18 and younger

Extended dependent coverage for those up to age 26

No annual limits on essential benefits

Plan design requirements



Key elementsImpact on individuals/employees

Guaranteed issue, renewal, no rescissions, premium rating restriction, other consumer protections

Standard benefit designs and insurance Exchanges

Insurance market reform

Established by states to structure market for individuals and employers Initially for individuals and small groups; then expand to large employers

Health Insurance Exchanges

Medicaid expanded Private, nonprofit Health Insurance Cooperatives and federally-

administered multistate options through Exchanges

New and expanded public programs

Federal premium subsidies for individuals earning up to 400% of the federal poverty level (FPL)

Cost-sharing subsidies to reduce out-of-pocket expenses Available only for coverage obtained through Exchanges, not through

employer-sponsored plans

Premium and cost-sharing subsidies

All individuals required to enroll in basic health coverage or pay penalty Limited exemptions

Individual mandate



Key elementsImpact on individuals/employees (continued)

Limits pre-tax health FSA contributions to $2,500 per year, indexed for inflation

Increases penalty to 20% for HSA funds used for non-qualified medical expenses prior to age 65

Prohibits OTC medicine reimbursement in health accounts (e.g., FSA/HRA/HSA), unless prescribed

Account plan limitations

Increased tax on wages in excess of $200,000 for individual taxpayers and $250,000 for joint-filers; employee wages

New 3.8% tax on certain unearned income for individuals with income over $200,000 for individual taxpayers and $250,000 for joint-filers

Medicare HI tax



Key elementsImpact on retiree plans

Eliminates business deduction for employer 28% Part D retiree drug subsidy payments. Creates an immediate accounting issue that may have significant P&L impact

Elimination of tax advantage for RDS

Creates temporary reinsurance program to reimburse employers for part of pre-65 retiree health expense (80% of cost per enrollee in excess of$15,000 and below $90,000)

Reinsurance for employer-provided retiree health coverage

The excise tax applies to retiree plansExcise tax capProvisionsKey Element


Key elementsImpact on retiree plans

Includes one-time $250 rebate for seniors hitting donut hole in 2010

Narrows the donut hole over time to achieve 25% cost-sharing throughout by 2020

Provides 50% discount off negotiated price for brand-name drugs covered under Part D for drug costs incurred during coverage gap (i.e., donut hole)

Filling of Medicare Part D donut hole and drug discount

Medicare Advantage plans payments reduced through new benchmarking program

Part D prescription drug premiums makes Medicare Part D premium income-related

Other Part D changes

ProvisionsKey Element


Implementation begins right away andwill take several years

Presidential election2012

Immediate coverage reforms (calendar year plans) Extended dependent coverage No lifetime and restricted annual limits No preexisting condition exclusions for individuals 18 and younger

W-2 reporting of aggregate value of employees’ health coverage HSA withdrawal penalty increased No reimbursement of OTC medicines from account-based health plans CLASS* Act long-term care benefit enrollment Begin phasing out Medicare Part D donut hole

2011

Accounting recognition of change in taxability of RDS payments Reinsurance for retiree medical coverage $250 rebate for seniors who hit Medicare Part D coverage gap Immediate coverage and consumer protection requirements for non-calendar

year plans starting 6 months after effective date (see requirements below)

2010

* CLASS – Community Living Assistance Services and Supports Act


Implementation begins right away andwill take several years (continued)

Cross-border sales of health insurance 2016

Excise tax on high-cost group health plans 2018

Employer mandates: play-or-pay, automatic enrollment, free-choice vouchers Individual health coverage mandate Health Benefit Exchanges operational Premium and cost-sharing subsidies for low- and middle-income individuals Medicaid eligibility expanded Additional consumer protections and market reforms, such as guaranteed issue,

premium rating restrictions, prohibition on excessive waiting periods, prohibition on annual dollar limits, etc.

2014

Deduction for employer Part D retiree drug subsidy eliminated Medicare payroll tax increased for high-wage employees and new tax on

unearned income Cap on salary-reduction contributions to health FSAs

2013

Managing health benefits



Decision-making within a strategic framework

FinancialPerformance

Consumer Engagement

Change Management

Desired Outcomes From Health Benefits

Corporate Goals (illustrative)

Attract, develop and retain talent; improve productivity Achieve operational excellence, profitability and positive free cash flow Reward and benefit programs support corporate goals

Population Health Improvement

Strategy and Governance DesignDeliveryFinancial

Management

Strategic Levers

Benefit and Corporate goals aligned

Metrics and measurement

Executive sponsorship and governance

Cost trend management

Budgeting Funding and risk

management Rating and

pricing

Administration Health

improvement and care management

Vendor optimization

Integration Performance

management Compliance Enrollment

Meaningful choice

Plan design Incentives Account-based

plans Contribution

strategies and steerage

Workforce health and wellness

Member accountability and engagement

Line manager and executive roles


Key immediate implications for 2010 – 2011 and employer actions All active plans Cover adult children up to age 26 who are not otherwise eligible for a

plan No lifetime limits; only “restricted” annual limits; change OTC benefit No pre-existing condition exclusions for children under age 19 Monitor insured plan renewals Grandfathering assessment Funding and risk management profile Determine impact of non-discrimination requirements CLASS* enrollment W-2 disclosure

* CLASS – Community Living Assistance Services and Supports Act


Key immediate implications for 2010 – 2011 and employer actions All pre-65 plans Collect reinsurance payments Cover adult children up to age 26 who are not otherwise eligible for a

plan No lifetime limits; only “restricted” annual limits; change OTC benefit No pre-existing condition exclusions for children under age 19 Monitor insured plan renewals Grandfathering assessment Funding and risk management profile

All post-65 plans Accounting impact from RDS taxation Impact of donut hole reduction Medicare Advantage changes


2014 – 2018: Long-term strategic considerations for active plans Evaluate employer role – opportunity to re-define? Continue to offer Attract and retain employees using competitive plans and

cost sharing Comply with new mandates and costs Avoid excise taxes and “free-rider” fees Rebalance rewards package to reflect changes in health

benefits Exit? Pay penalty and define contribution


2014 – 2018: Managing active employee health benefits

Tax Cap Ceiling

Change Benefits, Rewards and Taxes

MinimumPlan Floor

>= 9.5% AGIand < 400% of FPL

8% - 9.8% AGIand < 400% of FPL

Pay Taxes and Vouchers for Employees Using Exchanges

Proactive, comprehensive management:• Decisions reflect business, workforce and reward strategies• Competitive benefit cost, value and efficiency• Engaged consumers• Improve workforce health and productivity

2014

2018


2014: Pay/exit yields significant loss of value to employees Viable individual market

But, employees lose value Employers will deduct

after-tax penalty cost Pay is taxable

What if tax penalties rise?

Impact on benefit and reward strategies and ability to recruit? $467

EETaxes

$5000Current Employer Pre-Tax Contribution

$3333 Employer Cost($2000 non-deductible fee)

$1200Net EE

Pay


2014 – 2018: Long-term strategic considerations for retiree plansPre-65 plans Evaluate employer role – will

availability of viable market and subsidies affect employer role?

Continue to offer Comply with new mandates

and costs Avoid excise taxes Proactively manage costs and

delivery Exit? Transition to exchange

enrollment, subsidies and capping employer cost

Post-65 plans Evaluate employer role – as

Medicare benefit improves, what role for employers?

Continue to offer Change benefits and designs

to account for change in RDS taxation, PDP plans, Medicare Advantage plans and filling the Part D donut hole

Change delivery model if PDP plans become more appealing and if Advantage plans exit

Exit? Drop or change plans and

contributions

Implementation



Implementation approachIMPLEMENTDECIDEIDENTIFY

Develop and execute implementation plan

Analyze options and make decisions

Know the law and the key questions, issues

and data Formulate multi-year plan for

implementation, change management and communication

Secure resources, suppliers, commitments and budgets

Implement tactics in 2010 to meet 2011 requirements

Incorporate health reform into 2011 – 2018 annual benefit planning process

Conduct financial, qualitative and other analyses

Conduct employee and retiree impact analysis

Evaluate options Design Financial management Delivery Change management Strategy

Make decisions

Understand law, effective dates and compliance requirements

Understand tactical and strategic issues

Collect data Find opportunities, costs and

risks in all plans Identify issues for different

segments of employees Identify issues for different

segments of pre-65 and post-65 retirees

Create an implementation plan and governance process


Implementation issues log

■■■Timing and messagesCommunication plan

■

■

■

Payroll

■Meet targetCost sharing

■

■

■

■

■

■

■

■

■

■

Benefits

■

■

■

Tax

■

■

■

■

■

■

Enroll-ment

■

■

■

■

■

■

■

Health Plans

Calculation methodW-2 disclosure

High income onlyHI tax increase

A problem?Waiting period change

Few affectedOTC change

No restructuringContributions

Etc., Etc., Etc.

Likely to happen?CLASS enrollment

Vendor searchStop-loss

Retained?Grandfathering status

Must comply

Risk issue

Verification process

Analysis and Comments

Insured plan renewals

Drop lifetime limits

Eligibility change to 26

Issues/tasks

S A M

P L

E


Understanding the employee perspective

Two-thirds believe health care reform would result in higher benefit costs

More than half believe it would reduce their available benefits and lower their quality of care

Forty percent say they would be uncomfortable purchasing their own insurance in reformed markets as an alternative to getting coverage through their employer

Source: Towers Watson 2010 Global Workforce Study – U.S..

My benefits

will cost less

My benefits

What impact do you think health reform will have on your costs?

will cost the same24%

My benefits

9%

will cost more67%


Communication and change activities

Near-term Develop an initial communication plan Consider an open dialog with employees and retirees

— Explain the impact of health reform on your organization’s benefits— Share approach to health care strategy evaluation — Reinforce your benefits philosophy and employee value

proposition— Set expectations about next steps and timing of decisions

Engage leaders and key influencers Communicate immediate program changes and reiterate key

messages


Communication and change activities

Long-term Gather input on what employees need and value Build a long-term communication and change roadmap

—Address the needs of key stakeholders: Executives, HR, managers, employees, retirees, labor unions, vendors/administrators, investors, etc.

Keep up the Culture of Health momentum


Implementing Health Care Reform:Managing opportunities, risks and costs

Key Questions for Plan Sponsors What is the impact of the new law? How will the organization be

affected? What new strategic opportunities

should be considered? How will costs and risks be

managed? What decisions need to be

made? How will implementation be

managed? How will employees be affected? How will retirees be affected?

Towers Watson support Legislative, regulatory and

compliance information Inventory of requirements and

effective dates Analytical methods, modeling tools

and decision-making guides Understanding of practices and

planning of other employers Strategy-setting for active and

retiree benefits, tied to Total Rewards and business objectives

Communication and change management strategies and plans

Comprehensive implementation plans, oversight and support

implementing health care reform — opportunities, costs and risks

News & Politics