QUESTION OF ESSENTIAL HEALTH BENEFITS

JANUARY 17, 2012

2MERCER

Agenda

• Health Care Reform Timeline

• Essential Health Benefits– 2010 Requirements – Restricted Annual Limits – phased amounts until

2014– 2014 Requirements

•W-2 Reporting: Update

•Top Priority 2012-2013 activities

MERCER

• Dependent coverage to 26 (grandfathered plans may limit to children without access to other employer coverage, other than parent’s coverage)1

• No lifetime dollar limits1

• Restricted annual dollar limits, phased amounts until 20141

• No pre-existing condition limitations for enrollees up to age 191

• No rescissions1

• Additional standards for new or “non-grandfathered” health plans, including mandatory preventive care in network with no cost-sharing and non-discrimination provisions for insured plans3

• No health FSA/HRA/HSA reimbursement for non-prescribed drugs

• Increased penalties for non-qualified HSA distributions

• Income-based Medicare Part D premiums

• Pharmaceutical importers and manufacturers’ fees start

• Medicare, Medicare Advantage benefit and payment reforms to begin

• Insurers subject to medical loss ratio rules

• Change in tax treatment for over-age dependent coverage

• Accounting impact of change in Medicare retiree drug subsidy tax treatment

• Early retiree medical reinsurance

• Medicare prescription drug “donut hole” beneficiary rebate

• Break time/private room for nursing moms

• Employers to distribute uniform summary of benefits and coverage (SBC) to participants3

• Employers to provide 60-day advance notice of material modifications for mid-year changes3

• Form W-2 reporting for health coverage (track in 2012 for W-2 form provided in early 2013)4

• Comparative effectiveness group health plan fees begin

• Coverage for additional women's’ preventive care services begins (plan years on or after August 1, 2012)

• $2,500 health FSA contribution cap (indexed)

• Employers notify employees about exchanges

• Medical device manufacturers’ fees start

• Higher Medicare payroll tax on wages exceeding $200,000/ individual; $250,000/couples

• Change in Medicare retiree drug subsidy tax treatment takes effect

• Exchanges initial open enrollment period to begin

• Auto enrollment likely to begin in 2014

• Health insurance exchanges

• Individual coverage mandate

• Financial assistance for exchange coverage of lower-income individuals

• Medicaid expansion

• HIPAA wellness limit

• Employer shared responsibility

• Additional reporting and disclosure

• Dependent coverage to age 26 for any covered employee’s child2

• No annual dollar limits2

• No pre-existing condition limits2

• No waiting period over 90 days2

• Additional new standards for new or “non-grandfathered” health plans, including limited cost-sharing and deductibles

• Health insurance industry fees begin

• 40% excise tax on “high cost” or Cadillac coverage

1. Applies to all plans, including “grandfathered” plans, effective for plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans).

2. Applies to all plans, including grandfathered plans, effective for plan years beginning on or after Jan. 1, 2014.

3. Delayed until regulations issued/date TBD

4. A temporary exemption applies to employers filing fewer than 250 Forms W-2.

Key elements of health reform for employers

2011 2012 20132010 20182014

4MERCER

What are Essential Health Benefits?

•Essential Health Benefits (EHBs) are part of the health care reform law’s initiatives to broaden affordable access to adequate health coverage

•Under the law, EHBs must be equal to the scope of benefits provided under a “typical employer plan” and include at least 10 categories of items and services

5MERCER

Essential Health Benefit Categories

• Ambulatory patient services

• Emergency services

• Hospitalization

• Maternity and newborn care

• Mental health and substance abuse disorder benefits, including behavioral health treatment

• Prescription drugs

• Rehabilitative and habilitative services and devices

• Laboratory services

• Preventive and wellness services and chronic disease management

• Pediatric services, including oral and vision care

6MERCER

Restricted Dollar Limits on EHBs

• With limited exceptions, most insured and self-insured employer group health plans – whether grandfathered or not – must comply with restrictions on imposing lifetime and annual dollar limits on EHBs, effective for plan years beginning on or after Sept. 23, 2010 • Employers plan cannot impose any lifetime dollar limit on covered EHBs• Before Jan. 1, 2014, annual dollar limits on covered EHBs may not be less than the amounts shown in the table below

•For plans with plan years beginning between Sept. 23, 2012, and Dec. 31, 2013, the $2 million minimum annual limit will apply for two plan years. No plan may impose an annual dollar limit on EHBs for plan years that begin on or after Jan. 1, 2014

For plan years beginning on or after… Minimum annual limit is…

Sept. 23, 2010, but before Sept. 23, 2011 $750,000

Sept. 23, 2011, but before Sept. 23, 2012 $1,250,000

Sept. 23, 2012, but before Jan. 1, 2014 $2,000,000

7MERCER

Summary - 2014

• Starting in 2014, nongrandfathered individual and small-group insured products offered outside of exchanges and qualified health plans (QHPs) offered on exchanges will have to cover EHBs

• Although employer plans with more than 100 employees aren’t required to cover all EHBs, those plans still must comply with the health care reform law’s restrictions on applying lifetime and annual dollar limits to EHBs

8MERCER

Which Plans Must Cover EHBs?

•Starting in 2014, all nongrandfathered individual insurance policies, nongrandfathered fully insured small-group products, and QHPs offered on exchanges will have to cover EHBs

– Future HHS guidance will address how state Medicaid programs must implement EHBs

– Self-insured group health plans, fully insured plans offered to large employers (generally, those with more than 100 employees), and grandfathered small-group and individual policies do not have to cover all EHBs However, even if a plan is not required to cover all EHBs, other

health care reform rules apply to any EHBs that are included in the plan’s coverage

9MERCER

Which Plans Must Cover EHBs?

Type of planMust cover EHBs starting in 2014

Not required to cover EHBs

Self-insured employer plans, regardless of grandfathered status or employer size X

Fully insured large-group plans, regardless of grandfathered status X

Fully insured grandfathered group plans of any size X

Fully insured grandfathered individual policies X

Exchange-based QHPs offered to individuals and qualified small employers (and starting in 2017, to large groups in states opting to expand eligibility) X

Fully insured nongrandfathered policies offered to the small-group market outside of exchanges X

Fully insured nongrandfathered individual policies offered outside of exchanges X

Medicaid benchmark or benchmark-equivalent coverage X

State basic health plan X

10MERCER

Which Plans Must Cover EHBs? – Lingering Questions

•Recent HHS bulletin doesn’t define EHBs for purposes of the dollar-limit restrictions

•Lacking this guidance, employers trying to comply with the dollar-limit restrictions have found that it isn’t always clear whether a particular service or item is an EHB

•Opinions differ on whether hearing aids or bariatric surgery are EHBs subject to lifetime or annual dollar-limit restrictions

•Regulators have simply said that until final regulations are issued, employers should make a good-faith effort to comply with a reasonable and consistent interpretation of EHBs

11MERCER

Approach to Defining EHBs

•HHS did not come up with a single method of defining EHBs or follow the recommendations of a recent Institute of Medicine report prepared at the agency’s request

•Instead, HHS adopts the approach used to define the scope of the Children’s Health Insurance Program (CHIP) and certain Medicaid populations

•This approach would give each state a choice of “benchmark” plans to define covered EHBs for that state

•The selected benchmark plan would reflect the scope of services offered and any limits imposed by a “typical employer plan” in the state

•The HHS proposal would pave the way for a patchwork of EHB packages for individual and small-group insured policies and QHPs in different states

•For multistate employers, this approach would complicate design and administration of plans to comply with restricted dollar limits

12MERCER

Benchmark Plans

To set EHB standards in 2014 and 2015, states could choose a benchmark plan from any of the following sources, selecting among the three plans with the largest enrollment within each category:

• Small-group insured plans in the state

• State employee health benefit plans

• National offerings under the Federal Employees Health Benefits Program (FEHBP)

• Insured commercial HMOs operating in the state (other than Medicaid HMOs)

13MERCER

What’s Missing

The bulletin leaves unsettled many questions. Two of the most notable unresolved issues for employer-sponsored plans are: •How to determine EHBs for purposes of lifetime and annual dollar-limit restrictions?

•What cost-sharing or actuarial-valuation approaches are acceptable?

14MERCER

Employer Next Steps

•Until regulators issue more guidance, employers should consider whether using one of the suggested benchmarks would be a reasonable way to define EHBs when applying any lifetime or annual dollar limits in group health plans

•This inquiry may be more complicated for self-insured employers operating in several states, where flexibility to choose a benchmark from plans operating in a particular state or the FEHBP’s national offerings may be optimal

•Employers may want to consult with legal counsel and consider giving comments to HHS by the Jan. 31 deadline

15MERCER

2012 and 2013: Upcoming Mandates and ResponsibilitiesEmployee

CommunicationsAdditional

CostPayroll

CoordinationVendorSupport

2012 Requirement

W-2 Reporting • Reporting for 2012 takes place in January 2013; “Aggregate cost” using methods described in IRS guidance; Actives only

Group Health Plan Fee • Annual fee of $1 ($2 in second year and indexed thereafter), assessed per participant until 2019; Funds federal program on comparative effectiveness research. Waiting on guidance on process and timing for payment. ?

Uniform Summary of Benefits and Coverage

(DELAYED)

• In addition to SPD and other currently required disclosures; Four pages, 12-point font summary provided at initial and annual enrollment; Includes information about covered benefits, exclusions, cost-sharing and continuation coverage. Vendors will prepare for insured plans; self insured plans are the employer responsibility.

2013 Requirement

$2,500 Health FSA Cap • CPI adjusted after 2013

Health Insurance Exchange Notice

• Inform employees about health insurance exchanges and eligibility rules in March 2013

New Taxes For High-income Households

• Additional employee-only 0.9% Medicare tax on wages exceeding:

– $250,000/married filing jointly, $125,000/married filing separately, or $200,000 in any other case

• New 3.8% tax on investment income for taxpayers with incomes exceeding levels described above. Compensation planning issue

Women’s preventive services

Additional Preventive Services for women must be covered by non-grandfathered plans; estimated cost impact is 0.3-0.5% increase in claims cost.

Automatic Enrollment for 2014 plan year

Advance preparation needed in 2013 for 2014 open enrollment to comply with the automatic enrollment requirement. Waiting on guidance.

16MERCER

IRS expands, clarifies guidance on Form W-2 reporting of health care coverage

•A new IRS notice explains how an employer should report the aggregate cost of an employee’s health coverage, starting with the 2012 Form W-2 due in early 2013

•Clarified exemptions. The notice clarifies that the reporting requirement does not apply to certain types of coverage, including the following:

– Dental and vision plans meeting the conditions of an “excepted benefit” for certain HIPAA purposes

– Coverage in an employee assistance program, wellness program or on-site medical clinic if COBRA enrollees aren’t charged a premium for that coverage

– Health flexible spending arrangements funded solely by salary reduction contributions

– Certain independent, non-coordinated hospital or fixed indemnity insurance offered on an after-tax basis to employees

17MERCER

IRS expands, clarifies guidance on Form W-2 reporting of health care coverage

•Other noteworthy changes. New and revised information in the notice includes these details:

– Coverage cost may be based on the employer’s available information as of Dec. 31. Therefore, subsequent notifications or elections (e.g., divorce) needn’t be considered

– Alternative methods may be used to calculate the reportable amount if coverage extends over a payroll period that includes a Dec. 31, provided the method is used for all employees

– Coverage reporting relief for employers filing fewer than 250 Forms W-2 is based on the prior calendar year and is determined without taking into account the use of certain agents

•Immediate application. Because the 2012 Forms W-2 due in early 2013 must report on health coverage provided this year, employers should begin using this notice to identify coverages subject to reporting, determine their costs, track coverage by employee and capture other needed data

18MERCER

Women’s Preventive Services

• For plan years beginning on or after 8/1/2012, non-grandfathered and individual health plans must cover the following:– Well-woman visit at least annually – Contraceptive drugs and methods as prescribed– Lactation support with each birth– HPV and DNA testing for cervical cancer every 3 years– HIV testing and counseling annually– Domestic violence screening and counseling annually– Sexually transmitted disease counseling annually– Screening for gestational diabetes between 24 and 28 weeks of

gestation

MERCER

Group health plan fee:

•Annual 2012 fee of $1 per average number of covered lives

Notices about exchanges:

•Prepare 2013 employee notices for distribution in 2013 (draft notice not yet available)

$2,500 FSA contribution cap:

•Communicate during open enrollment

Timeline1 for top priority 2012 - 2013 activities

1. Timeline assumes a January 1 plan year. Timing for plans with other renewal dates need to be adjusted accordingly

Conduct ongoing strategy discussions, refine future plans

Form W-2 reporting:

•Begin tracking aggregate health plan cost

Uniform summary of benefits and coverage:

•Watch for regulations and the compliance date

Medicare payroll tax:

•Prepare for payroll system modifications to tax 2013 wages exceeding $200,000/individual; $250,000/couples

2012 Q2 2012 Q3 2012 Q42012 Q1 2013

Women’s preventive services:

•Prepare to cover with no cost sharing for non-grandfathered plans

• Employers notify employees about exchanges

• Medical device manufacturers’ fees start

• Change in Medicare retiree drug subsidy tax treatment takes effect

• Exchanges initial open enrollment period to begin in the fall

• Auto-enrollment of full-time employees (applicability date TBD)

• $2,500 health FSA contribution cap (communicate during open enrollment in 2012)

• Higher Medicare payroll tax on wages exceeding $200,000/ individual; $250,000/couples (modify payroll systems in 2012)

• Form W-2 reporting for health coverage (track in 2012 for W-2 form provided in early 2013)

• No cost sharing for women’s preventive services in nongrandfathered plans

Services provided by Mercer Health & Benefits LLC.

California Insurance License 0E75483