medicare reform presentation to pebb february 24, 2004

Medicare ReformPresentation to PEBB

February 24, 2004

Mercer Human Resource Consulting 2

Medicare Reform LegislationHighlights of new legislation

Most significant change to Medicare since its inception

New prescription drug benefit (Part D) effective January 1, 2006

Subsidy for employers and multiemployer plans providing prescription drugs to retirees eligible for Medicare

Changes to structure of Medicare

Health Savings Accounts – HSA’s Final details of the law will require clarification from government and

consideration of how carriers and other vendors will respond Implementation is scheduled from 2004 to 2010 or even later


Medicare Prescription Drug CoverageOverview

Medicare does not currently cover outpatient prescription drugs

New Part D provides partial prescription drugs coverage effective January 1, 2006

Voluntary program for Medicare eligibles

Standard Rx benefit (or actuarial equivalent)

Benefit offered by private plans Government payments to private plans Beneficiaries pay premium

Subsidies for low-income individuals


Part D Prescription Drug BenefitStandard Rx benefit has “doughnut hole” to meet cost goal

Initial coverage: Deductible of $250, enrollee coinsurance of 25% up to $2,250

“Doughnut hole”: No coverage until enrollee reaches out-of-pocket limit of $3,600

Amounts paid by third parties (e.g., employers, individual coverage, etc.) do not count towards out-of-pocket limit

Catastrophic coverage: Above the out-of-pocket limit, enrollee coinsurance is the greater of 5% or a fixed copay ($2 generic or $5 brand, indexed)

Amounts are indexed

100% RetireeCoinsurance(no Medicarecoverage in

doughnut hole)($2,850)

5% Retiree Coinsurance(min. $2/$5 copay)

$5,100

$2,250

$250

95% Medicare Benefit

(CatastrophicCoverage)

75% Medicare Benefit (Initial

Coverage)

$3,600 out-of-pocketreached ($250+$500+$2,850 = $3,600)

25% Retiree Coinsurance($500)

$250 Deductible

Medicare Retiree


Part D Prescription Drug BenefitGovernment pays about three-quarters of cost

Member pays roughly one-quarter of Medicare Part D premium (estimated $35 PMPM in 2006)

Amounts indexed

Subsidies for low income seniors

Premiums may be increased for “late” enrollees

Premiums may be deducted from Social Security benefits

Medicare Part D benefits are primary

Employer plan secondary if retiree enrolls in Part D


Subsidy for Retiree Health PlansPlan sponsors can maintain plan, receive subsidy

Federal government offers subsidy to employers and other sponsors of qualified retiree health plans

Qualified plan must provide benefits with “actuarial value” greater than or equal to Part D benefits

Sponsor gets 28% subsidy for covered drug costs from $250 to $5,000 (indexed) per eligible participant

Subsidy only for participants that do not enroll in either Part D or Medicare Advantage drug coverage

Subsidy is not taxed to plan sponsor

Recordkeeping and documentation requirements, but no details yet

FASB now will allow immediate recognition of change in accounting for retiree medical benefits under FAS106 (GASB likely will be similar)


Options for Plan SponsorsPrescription drug coverage for Medicare-eligible retirees

Plan designed by sponsor

Receive government subsidy if at least “actuarially equivalent” to Part D

“Wrap around” plan / integration with Medicare

Medicare is primary, plan sponsor secondary

With or without subsidy of Part D premium

Medicare Advantage plan (formerly Medicare+Choice)

With or without sponsor subsidy of Medicare Advantage premium

Drop coverage, with or without Part D premium subsidy


Accounting and Financial IssuesSteps to estimate financial impact

Determine how much cost and obligation is associated with Medicare-eligible Rx

Select options to consider

Model the effect on per capita claims costs of the options under consideration

Use actuarial projections to estimate effect on future cash costs and benefit obligations

Apply current and potential accounting rules to estimate effect on FAS 106 expense


Reflections . . .While quick action possibly needed for accounting . . . more time likely warranted for design details

Some decisions may be needed quickly Decision to receive subsidy, wrap or terminate can drive financial

reporting

For details of 2006 plan design, don’t rush to judgment Look at emerging PDP designs

New ideas, information and designs will emerge Some opportunities may be better than what is known now

New Medicare Advantage plans may create additional options

Communicate with retirees Explain the changes to Medicare and how they will impact plan

participants Help plan participants understand changes, if any, to their current

program made as a result of the changes to Medicare Move carefully because interpretations of the law (and perhaps the

law itself) may shift over time


Other Medicare Related ProvisionsMedicare Advantage plan, discount card, structural change

Medicare+Choice becomes Medicare Advantage

New law allows 10 to 50 “regional” plans, plus a national plan

Medicare Advantage plans can receive somewhat higher payments from Medicare than previously for Medicare+Choice, at least initially

Discount prescription drug card effective spring 2004 until 2006

Part B deductible will be increased to $110 in 2005, then indexed

Medicare Part B premiums will be tied to income

Competition between traditional Medicare and private plans in 2010


Options for Plan SponsorsMedicare Advantage plan

If health plans offer national plan or regional plans at reasonable cost, Medicare Advantage could be a viable alternative for some plan sponsors

Plans maintain “managed care”

Benefits could potentially fill prescription drug “doughnut hole”

But past history is problematic: Growth in enrollment, followed by tight controls on reimbursement by Medicare, then reductions in enrollment


Health Savings Accounts – HSAsWhat Are They?

Now available (since 1/1/2004); part of Medicare reform law HSA: A savings / spending account held in trust, like an IRA or 401(k) Flexibility of design:

Employer may sponsor; may choose to contribute or not, OR

A person can open an individual HSA account, like an IRA Triple tax-favored, if conditions are met:

Pre-tax (or deductible) contributions; by individual and/or employer

Tax-free build up of investment earnings

Tax-free distributions for medical expenses at any age 100% vested: Spend it or grow it from year to year; no “use it or lose it”


HSAsEssential Linkage to High-Deductible Health Plan

To contribute: Must be in a “high-deductible health plan” Definition of “high-deductible health plan” (HDHP)

A health plan that covers the HSA account holder

Sponsored by employer or spouse’s employer; or private coverage

High deductibles: Not LESS than $1,000 for individual Not LESS than $2,000 for family

Out-of-pocket limits: not MORE than $5,000 / $10,000

Preventive care can be first-dollar, as much as 100% covered

Deductibles needn’t apply to dental, vision, LTD, AD&D, etc.

But prescription drug coverage cannot be carved out

Need not be in an HDHP when spending the HSA account balance


HSAsSpending the HSA Balance

Can spend in same year … later year … or in retirement Tax-Free: HSA distributions are never taxed if spent on:

“Medical expenses” Broad definition: Code §213(d), like HRA reimbursement account Needn’t be covered health plan cost: e.g. elective care; otc items

Not for paying premiums, except the following are allowed: Post-65 Medicare and retiree plan premiums (but not Medigap) Premiums for COBRA, or while on unemployment compensation Long-term care insurance premiums

Taxable: For distributions for any other purpose:

Ordinary income tax applies, and

10% penalty tax applies, if prior to age 65


HSAsAnnual Contributions

Annual limit on combined employer and employee contributions: Lesser of: HDHP annual deductible, or

$2,600 (single) $5,150 (family) – indexed yearly

Plus “catch-up contributions” If 55 or older Up to an additional $500 per year $500 increases to $1,000 by 2009 (in $100 yearly steps)

Contributions must stop when Medicare coverage begins No contributions for a “dependent” on another person’s tax return Rollover into HSA: only from “Archer MSA” or another HSA

Not from flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs) or IRAs


HSAsPlan Sponsor Options

Offer an HSA-compliant HDHP Employees have option of setting up HSA on their own No cost to employer for HSA

Offer an HDHP and sponsor an HSA for eligible employees Employees can contribute through employer or set up their own HSA Administrative cost for employer unless employees pay cost

Offer an HDHP, sponsor an HSA, and make contributions to it Employer pays HSA cost plus administrative cost (unless paid by

employees) Funding HSAs by employer is not a long-term liability but has a cash

cost

Mercer’s National Survey of Employer-Sponsored Health PlansPresentation to PEBB

February 24, 2004


About the survey

Established in 1986, national probability sample used since 1993 Largest annual survey on the topic Results are projectable to all US employers with 10 or more employees Nearly 3,000 employers participated in 2003 Today’s presentation is based on employers with 500+ employees


Total health benefit cost for 2003 rises more slowly than expectedAll employers

6.9%

18.6%

16.7% 17.1%

12.1%

10.1%

8.0%

2.1% 2.5%

0.2%

6.1%7.3%

8.1%

11.2%

14.7%

10.1%

-1.1%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


$3,930 $3,820$4,037

$4,320$4,604

$5,162

$6,348

$5,758

1996 1997 1998 1999 2000 2001 2002 2003 2004

-2.8%+ 5.7%

+ 7.0%+ 6.6%

*Average increase projected for 2004

+ 12.1%

+12.5%*

Total health benefit cost for active employees up 10.2%Large employers

+10.2%

+11.5%


Benefit reductions the key to slower cost growth

In summer/fall of 2002, Mercer survey respondents predicted an average

increase of 13.5 % for 2003

The 10.2% actual increase reflects subsequent benefit reductions, and

may reflect a mid-year slowdown in medical trend (MCPI)

No cause to celebrate: health benefit cost is still rising 4 times the rate of

general inflation


Factors that affect average cost per employeeLarge Employers by Region

$5,783

$6,602 $6,616 $6,717$6,348

South Midwest West Northeast Total


WA State and Gov’t – type of plan offered Percent of employers offering plan

20%

93%

20%

57%

40%

71%

40%

71%

27%

78%

18%

46%

TraditionalIndemnity

PPO POS HMO

Washington State State Gov't All Gov't


WA State and Gov’t – employee enrollment Percent of covered employees enrolled

2%

43%

17%

38%

16%

39%

14%

31%

12%

39%

13%

36%

TraditionalIndemnity

PPO POS HMO

Washington State State Gov't All Gov't


$4,301

$5,049$4,751

$5,336$5,583$5,056

$5,880$5,328

$5,563

$6,368

Total TraditionalIndemnity

PPO POS HMO

2002 2003+14.1%

+4.3% +12.1%

+16.5%

+17.6%

Washington State – average cost per active employee


14.4%

16.1%16.9%

17.8%18.3%16.9%

13.8%

1998 1999 2000 2001 2002 2003 WA 2003

Prescription drug benefit cost increases continue to outpace overall cost increase Cost increase in primary medical plan


$6,956$7,948

$3,003$2,702

Pre-Medicare-eligibleretirees

Medicare-eligible retirees

2002 2003

Average health benefit cost per retireeBased on 2003 respondents providing both 2002 and 2003 cost

+14.3%

+11.2%


Significant plan design componentsWashington State vs. National

PPOs WA Nat’l

Require in-network deductible (% of employers) 85% 70%

Median deductible $238 $250

% of employers who increased deductible 25%

Median office visit cost-sharing $15 $15

Out-of-pocket in-network maximum (median amount) $1,500 $1,500

HMOs

Physician office copayment (average) $14 $14

Require copay of $20 or more (% of employers) 20%

Require hospital deductible

Emergency room copay (median)

71%

$75

43%

$50


How employers are addressing cost in 2004 – and beyond

49% (50% WA) of large employers expect to increase employee premium percentage in 2004

45% (60% WA) expect to increase employee cost-sharing in 2004 16% expect to change carriers in 2004, 12% expect to drop carrier 38% (39% WA) are engaging in consumerist strategies 58% offer one or more disease management programs, up substantially

over 2002 Health management activities up substantially over 2002 11% of large employers using “networks within networks”, another 17%

considering


The future

Focus will be on managing consumer behavior and demand

Consumerist strategies

Higher-cost populations Forces that converged to drive up cost will not abate any time soon

Demographics

Lack of competition

Technology


Health Care Authority Budget Comparison

FY 05 State Agency CY 05 Average

Funding Rate Employee Contribution

Initial budget (Spring 2003) $592.30 $110.58

Governor Supplemental $581.52 $97.54

(February Update)

Senate Chair Supplemental $578.84 $105.89

House Chair Supplemental $600.85 $65.00


Open Enrollment Plan Changes

Members Enrolled Change

Health PlanDecember

2003January

2004 Number Percent

Community Health Plan 2,125 8,156 6,031 284%

Group Health 89,280 91,921 2,641 3%

Options 11,904 13,391 1,487 12%

Kaiser 7,015 7,265 250 4%

No Plan 396 376 -20 -5%

PacifiCare 30,245 26,147 -4,098 -14%

Premera Foundation 41,543 0 -41,543 -100%

RegenceCare 18,924 20,916 1,992 11%

Uniform Medical 98,599 131,235 32,636 33%

Neighborhood 0 1,662 1,662 N/A

Medicare Supp. E 2,647 2,703 56 2%

Medicare Supp. J 6,081 6,041 -40 -1%

Total Members 308,759 309,813 1,054 0.3%


Key dates for 2005 procurement

April 8: Purchasing document released May 13: Proposals due June 22: Board votes and contracts

awarded


Informational bids

$15 and $20 office visit copayment $100 emergency room and

ambulance copayment

medicare reform presentation to pebb february 24, 2004

Documents

medicare coverage

medicare changes

quarter of medicare

d slide

retiree coinsurance

medicare reform presentation

d effective

d premium