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