financial impact of health care reform

+

Financial Impact of Affordable Healthcare Act Presented by Philip Corsano January 14th 2013

Gnostam Consulting Copyright 2013

+US Supreme Court Ruling 28 June 2012

n  Individual Mandate: ~ Constitutional;

n  Entire Affordable Care Act, [ACA] ~ Stands;

n  Medicaid Expansion: ~ State Option;


+Main Findings

n  Mind the Gap*! n  Both large and medium sized employers >50 employees are likely to

want to manage the gap in actuarial value of the employer sponsored plans;

n  United Healthcare in November 2012 expects a continued decline in fully insured commercial customers in 2013;

n  More businesses will cover healthcare costs themselves, while hiring insurer to manage benefits;

n  Supplemental benefits as a class will grow in importance because employers see this as an cost effective (after employer taxes) way to minimize their overall healthcare risk;

n  Employees are mainly interested in supplemental insurance because of the depletion of their savings that a major medical issue like cancer can have on their liquidity and net worth.


* Gap in Actuarial Value

+Summary of Impact on Businesses

n  Main Impact of ACA is deliberate shifting of premium costs between, Employers ~ Employees ~ Insurers ~ Public Sector;

n  On average, [which does not mean much] premiums will apparently go up by 3% to 5% according to Willis, the Re-Insurance broker;

n  Coverage minimum may be lowered to 60% to 70% of actuarial value * by companies, which will mean a greater opportunity to offer “self insured” payroll deduction plans funded by reducing employee salaries, [saving “employer taxes”];

n  Insurers will be required to spend a certain % of premiums on medical care and quality improvement activities:

n  80% for individual & small group Health Insurance;

n  85% for large e group health insurance market.

Gnostam Consulting Copyright 2013 * actuarial value = % medical expenses paid by insurer

+What happens in 2013 n  On Jan. 1st 2013, $2,500 annual limit will be imposed on health FSA

deferrals; currently there is no such limit (effective January 1, 2013);

n  Employers must provide notice to employees of the upcoming existence of state insurance exchanges, which are to be established by all the states in 2014. Notice must be in the form specified in upcoming DOL guidance (effective March 1, 2013 or such later date as set forth in future DOL guidance)

n  Medicare surtax: Individuals earning > $200K and couples earning > $250K will pay a 3.8% Medicare contribution tax, a 0.9% increase for salary and self employment;

n  The deduction for the portion of health care expenses that are reimbursed to the employer through the Medicare Part D subsidy program is eliminated (effective January 1, 2013).

n  December 14th 2012 was deadline for States to declare intention of whether would establish and Health Insurance Exchange. See current situation of States who have expressed intention of establishing exchanges overleaf.


+Historical Significance of Personal Life and Health Insurance n  1741-1744, two Scottish Minister’s Wallace & Webster set up Scottish

Ministers Fund in Edinburgh;

n  Actuarial calculations ~ statistics based on avg. # Ministers for period 1722-1741, a 4% interest rate;

n  Largest Welfare State in World, in terms of National Insurance is Japan, or Aflac’s biggest market. People want supplemental insurance because of two huge trends:

n  Demography of Developed Countries, [see next slide]; n  Re-investment risk, fixed income market in US 1.7% for 10 years, can you even

think of 4% any longer, with 30 year TIPS show a zero yield, 2.95%- 2.917%*, 30 year inflation will be 0.03% per annum, when today we have over 1.8-2.0 **%?

* On the run 30 year Treasuries/On the run 30 year Indexed Liked CUSIP 912810QY7. See RINF for an ETF that tracks the TIP spread.

** Current 2012 estimates from BLS


+Effective Insurance is needed more than ever

n  In 2008 we saw impact of no intellectual property protection in financial markets:

n  Cannot patent innovation in Finance; n  Economies of scale drive profits in financial institutions;

n  Business model was to create non transparent derivatives like CDO’s – CDS in dark pools of unsupervised capital, offshore;

n  Huge impact on profitability of banks, who were arbitraging edge in information flows against clients, and regulatory capital environment;

n  Solution in exchange mark to market transparency kills old bank business model;

n  So only free lunch in finance is to arbitrage the last legitimate option, personal “tax advantaged investing”, or more simply

n  PERSONAL ~ PORTABLE INSURANCE n  Risk sharing between employer and employee, given the expense of

health and life insurance will not diminish in current economic environment.


+ACA Healthcare Reform Terms and Definitions

n  Employer Sponsored Insurance [“ESI”]: Represents insurance coverage offered by an employer to its employees;

n  Health Insurance Exchange, [“Exchange”] – an exchange is an insurance marketplace where individuals or certain small business employees can purchase insurance as a part of a large risk pool. Each state must establish its own exchange or a federal exchange option will be provided. Four plan levels will be offered;

n  Full Time Employee: Working an average 30+ hours/week annually;

n  Waived: A full time employee who elects not to obtain health insurance through employer. Future coverage decisions made by these employees will impact the employer’s tital healthcare costs;


+ACA Healthcare Reform Terms and Definitions, [Continued]

n  Exchange Subsidy: Individuals who meet the income and healthcare insurance affordability criteria will be eligible for premium and cost sharing, [e.g. deductibles, co-payments] subsidies in the Exchange;

n  “Affordable Insurance” Employee premium cost < 9.5% of Household income;

n  “Household Income” [HHI] Employees adjusted gross income, [AGI] as reported on annual tax return. Baseline simulation in case study uses TAXABLE WAGES as a proxy for AGI, excluding spousal income. HHI will be assessed in relation to FPL to determine ELIGIBILITY FOR EXCHANGE SUBISIDIES;

n  “Federal Poverty Level” [FPL] is a government established income threshold used to determine eligibility for assistance through various Federal programs.


+ACA Healthcare Reform Terms and Definitions, [Continued]

n  Penalty: Assessed on individuals who fail to obtain adequate health insurance in 2014 or beyond. Also assessed on employers who have employees who access subsidies and purchase insurance through exchange 2014 onwards;

n  Employer Penalty for no or inadequate insurance: $2,000 x all FTE, minus first 30 employees, if no ESI is provided, or actuarial value is < 60%;

n  Employer Penalty for Unaffordable Employee Insurance: $3,000 x number of employees receiving exchange subsidies due to low income/unaffordable premiums.


+States Establishing Exchanges


+The US Problem, pass the hot potato


+ACA OVERVIEW:

n  HEALTH REFORM EXPANDS COVERAGE BY: n  Expanding Medicaid availability;

n  Developing a new marketplace for purchasing insurance, “Exchange”;

n  Mandating Individuals enroll in health insurance;

n  Impose penalties on large employers who do not offer health coverage/unaffordable health coverage for employees;

n  Subsidize low and middle income individuals in the Exchange;


+2014 Individual Mandate – ACA n  Individual Mandate to obtain health coverage: Beginning 2014, most

individuals must obtain minimum-level of health insurance coverage or pay penalty;

n  Minimum essential coverage includes: n  Medicare, Medicaid, TRICARE n  Insurance purchased through an Exchange, on the individual market; n  Employer-sponsored coverage that is affordable & provides minimum value; n  Grandfathered plans, [group plans in effect on 3/23/2010]

n  Penalties for failure to obtain coverage: n  In 2014: > $95 or 1% of income; n  In 2015: > $325 or 2.0% of income; n  In 2016: > $695 or 2.5% of income; n  Penalty is capped at 3 x per person amount/family; n  Assessed penalty for dependents ½ Individual Rate.

HARDSHIP EXEMPTION Premium Cost for “Lowest

Plan >8% of Household Income


+2014: Government Assistance to help some individuals obtain coverage

n  Medicaid Expansion: Expands eligibility to individuals and families up to 133% of Federal Poverty Level, [FPL]

n  If cost effective, states can opt to subsidize employer sponsored premiums for this group.

n  Premium and cost share assistance: n  Individuals and families with “household income” of 100 -400% of

FPL may be eligible for sliding scale assistance in form of:

n  Tax credits to help pay premiums; and

n  Out of pocket reductions to help with cost sharing, [co-payments and co-insurance]. [Big AFLAC opportunity]

133% of FPL: Individual $14,856 Family of 4 $30,656

400% of FPL Individual: $44,680 Family of 4: $92,200


+Penalties for Individual non Compliance with ACA

n  Penalties are administered by IRS from Jan. 1st 2014:

n  Individuals: Not covered, [except for 3 months hiatus] penalty is $95 per adult, $47.5 per child up to a total of $285 or 1% of family income in 2014; n  2015 Individual penalty $325/adult, $162.5/child, family maximum

of $975 2% of family income;

n  2015 Individual penalty $695/adult, $347.50/child, family maximum of $2,085 or 2.5% of family income.


+Penalties for Employer non compliance with ACA

n  Plans with >50 workers, that impose a >30 day waiting period on coverage eligibility, $600/full time employee;

n  Tax on large employers [.50 employees] who do not offer health coverage, or coverage that costs more than 9.8% of employee modified gross income, [MGI]:

n  $2000/employee when no coverage offered;

n  Penalty when coverage offered is more than 9.8 percent of MGI is $3,000 per employee receiving subsidies or $750 per employee, whichever is less


+Adjusted Gross Income [AGI] Deductions

n  The current 7.5 percent of AGI floor on income-tax deductions for health care expenses is raised to 10 percent of AGI (effective January 1, 2013; however, new floor is waived during 2013, 2014, 2015, and 2016 for individuals who turn age 65 before the close of those years)


+Group Health Plan requirements

n  Group health plans must comply with "administrative simplification" rules (to be published) for electronic exchange health information and electronic fund transfers and file a certification with the federal government that the plans are in compliance. In addition, the employer must ensure that service providers also comply with the transaction and certification requirements. The penalty for non-compliance is $1.00 per covered life per day of non-compliance up to a maximum of $20.00 per covered life per year, but a double penalty applies in the case of any employer misrepresentation. This applies to grandfathered plans. Systems must be effective starting January 1, 2013, and employers must certify compliance by December 31, 2013


+Modeling Financial Impact on Businesses n  Key inputs that need to be modeled for NEW HEALTH CARE PLANS:

n  If in State where there is an exchange, [entire West Coast plus Nevada], these are the types of exchanges that need to be offered by insurers:

n  Bronze: 60% actuarial value;

n  Silver: 70% of actuarial value;

n  Gold: 80% of actuarial value;

n  Platinum: 90% of actuarial value/

n  Catastrophic plans: only for <30 year olds, must cover, “minimum essential benefits” and minimum of 3 primary healthcare visits/p.a.

n  NB all “exchange metal” plans must cover essential health benefits, limit cost sharing, [but can include supplementary plans like AFLAC] and must have a specified ACTUARIAL VALUE.


+INSURER MEDICAL LOSS RATIO’s [or MLR] n  The ACA requires insurance companies in 2012 to spend a certain % of

premium $ on medical care and “quality” improvements: n  80% for individual and small group health insurance markets; n  85% for large group health insurance market.

n  Insurance Companies that do not satisfy MLR standards in 2011 must provide “rebates” to customers. This does NOT apply to self funded or limited dental/vision policies.

n  Rebate in form of: n  Premium credit; n  Lump sum payment; n  Refund to credit/debit card; n  Pre-paid debit card.

n  If employees pay premiums on a pre-tax basis, MLR rebate is taxable. If not is not subject to Federal and employment taxes.


+ Subsidies to Employers in State vs. Federal Subsidy Eligibility under ACA n  QUESTION:

n  If a State has a Federal Exchange and not a State Exchange, [does not apply to WA,OR,CA, NV], then are its citizens still eligible for premium tax credits/cost sharing assistance in ACA?

n  If yes, large employer penalties may be incurred; n  If no, then employers are NOT in jeopardy of penalties being

assessed if they do not offer coverage or if their employer plan is not affordable.

n  CONTEXT: THERE ARE SUBSIDIES PROVIDED BY FEDERAL GOVERNMENT FOR EMPLOYERS WHO PROVIDE HEALTCARE PLANS FOR THEIR EMPLOYEES. THESE ARE DISCUSSED LATER ON.


+2014: Employer Penalties

n  Beginning in 2014, employers with 50+ FTE’s must pay a shared responsibility penalty if any employee receives “Exchange Subsidies”

n  Different penalties whether or not employer offers affordable “minimum value” to employees;

n  “Minimum essential coverage * ” = Bronze Plan 60% of actuarial value;

n  “Affordable” = Employee annual premium cost <9.5% of household income.

THE ACA Law does NOT require Employers to Offer health Insurance

FTE = FT employees + FT equivalents FT employee works on avg. >30 hours/week FT equivalents = Hours worked in a month by all PT employees / 120

* Minimum essential coverage see IRS notice 2012-31 www.irs.gov/pub/irs-drop/n-12-31.pdf


+Employer “shared responsibility” penalty

n  NO or INADEQUATE Insurance Penalty: n  $2,000 x each FTE, after first 30 workers;

n  UNAFFORDABLE EMPLOYER COVERAGE Penalty:

n  At least $3,000 x number of full-time employees who receive exchange subsidies;

n  Maximum penalty = $2,000 x each full time employee [except for first 30 FTE] penalty;

n  No penalty for Medicaid eligible employees.

Penalty only assessed if FTE receives Exchange subsidies Employees are not eligible for Exchange subsidies if their employer coverage is deemed affordable. “Affordable” means the employee contribution under the employer plans is <9.5% of their household income


+Other Employer Requirements

n  Government Reporting Obligations [2014]: n  Names of FTE on health plan n  Employer contribution levels to employee coverage n  Plan waiting and length periods n  Whether employer-sponsored plan meets “minimum essential

coverage” requirements

n  Large Employers to auto-enroll: Employers with 200 + FTE’s will be required to auto enroll employees into their employer-sponsored health plan:

n  Employees can opt out; n  Won’t be effective until the US Dept. of labor issues rules.

Expected Q2-Q3 2013.


+KEY PROVISIONS OF PROPOSED RULES [12 Aug 2012]

n  Employees MUST file a Tax Return: All individuals receiving “advanced premium assistance tax credit” must file tax return.

n  Affordability for Employee: n  Employee Premium Cost/W2 wages for the employer < 9.5%,

coverage deemed affordable, even if have family and take family coverage. No employer penalty;

n  Employer’s not subject to penalty if employee receives tax credit, but later employer sponsored insurance is determined affordable;

n  Affordability for related individuals: For premium tax credits eligibility = cost of self only coverage related to household income;

n  For the individual mandate penalty = family coverage premiums in proportion to household income.


+ CASE STUDY: ACA Affordability

n  HEALTHCARE REFORM DRIVERS

Gnostam Consulting © Copyright 2013, prepared from public information deemed to be accurate.

Full Time Employees: 1,922 (1,319 insured/603 waived) Total Staff: 2,725 (106 PT insured/697 PT No ESI) 2014 PPACA FTE’s 2,361

1379

191

59

41

87

165

0.00% to 6.5%

6.5% to 8.0%

8.0% to 9.5%

9.5% to 11.0%

11.0% to 15.0%

Greater than 15%

0.00% to 6.5%

6.5% to 8.0%

8.0% to 9.5%

9.5% to 11.0%

11.0% to

15.0%

Greater than 15%

# Employees 1379 191 59 41 87 165

Health Insurance Affordability for Employees

Subsidy Eligible

Subsidy Eligible Subsidy Eligible

Exchange Subsidy Eligibility =Affordability +

133-400% of FPL

In 2014, employer pays penalty when an FT employee is eligible for an Exchange

Subsidy.

427

467

822

69

137

22.2%

24.3%

42.8%

3.6%

7.1%

0 100 200 300 400 500 600 700 800 900

Over 400%

266% to 400%

133% to 266%

100% to 133%

Less than 100%

Number of Employees

Household Income [HHI] % > FPL

Employee # Pct Total

Subsidy Eligible

Status Quo

Medicaid Eligible

+2014 Post Reform Coverage


Medicaid Eligible

11% Subsidy Eligible

3%

ESI Coverage 86%

Post Reform ESI FTE mix

Medicaid Eligible

Subsidy Eligible

ESI Coverage

Assuming a Baseline premium cost/employee of $5,826 in 2013, [or the equivalent of a “Silver” ESI] - of the 1,922 FTE insured, a total of 1,657 will be insured by current ESI, or 86.2%, with 3% eligible for “Exchange” subsidies.

+Health Reform/Employee Cost Dashboard n  Assumptions:

n  100% of waived converted;

n  Single “Silver” Exchange Premium ~ Current Bronze Avg. $5,826 in 2013, rising to $5,940 for Silver, with 9% premium growth in 2014;

n  60% or premium EMPLOYER FUNDED, on wages from $30,000 to $340,000)

n  “Opportunity” for AFLAC to provide for “Gap” supplementary insurance for all 1,922 employees….


+Change in Avg Premium/Employee < 134% of FPL

n  206 employees in this category, or 11% of total;

n  101 FTE or 8% of total

n  105 waived or converted.


+Change in Avg. Premium/Employee 134% to 266% of FPL

n  821 employees in this category;

n  558 FTE [42%]

n  263 waived or converted


2014 Pre Ref Post 2014 Post Reform 2014 Funded 134%-‐266% Avg Prem Cost/Employee Today ESI Reform ESI No ESI AlternaEve Employer Share $4,000.00 $6,000.00 $5,000.00 $2,000.00 $2,000.00 Employee Share $1,000.00 $2,000.00 $1,000.00 $2,000.00 $2,000.00 Government Subsidy $1,000.00 $6,000.00 $6,000.00 Total $5,000.00 $8,000.00 $7,000.00 $10,000.00 $10,000.00

+Change in Avg. premium/Employee 267% to 400% of FPL

n  467 of total employees in this category, or 24%;

n  338 FTE, [26%];

n  129 waived or converted employees.


+Change in Avg Premium/Employee > 400% + FPL

n  427 of employees in this category or 22%;

n  322 FTE or 24%;

n  105 waived or converted.


2014 Pre Ref Post 2014 Post Reform 2014 Funded > 400 + FPL Today ESI Reform ESI No ESI AlternaEve Employer Share $4,000.00 $6,000.00 $6,000.00 $2,000.00 $7,000.00 Employee Share $2,000.00 $3,000.00 $2,000.00 $8,000.00 $3,000.00 Government Subsidy Total $6,000.00 $9,000.00 $8,000.00 $10,000.00 $10,000.00

financial impact of health care reform

Health & Medicine

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