Transcript Slide 1

Trends in HRAs, HSAs, & Consumer Driven
Healthcare
A Presentation to NAPEO
September 21, 2004
September 21, 2004
©2004Towers Perrin
Trends in HRAs, HSAs, & Consumer
Driven Healthcare
Michael A. Barbour - Towers Perrin
September 21, 2004
©2004Towers Perrin
Topics for Today
I.
Consumerism and Consumer Driven Health Plans
II.
CDHP Models & Vendors
III.
Effect on Participants
IV.
HDHPs and HSAs
V.
Early Results
VI.
What Consumerism and CDHPs Promise for PEOs
2
Consumerism and Consumer Driven Health
Plans
Introduction —
Benefits Lexicon

Basics
 CDHP = Consumer driven health plan or consumer directed health plan
 DC = Defined contribution
 HDHP = High deductible health plan (as recently defined by law)
 HP = Health plan

Some equations (perspectives)
 DC ≠ CDHP*
 Medical CDHP = HP (commonly with high deductible) + HRA + FSA
or
 Medical CDHP = HP + HRA + Rx** + FSA
or
 Medical CDHP = HDHP + HSA
*
“Defined contribution” focuses on determining employer financial support; CDHP may be a plan option
**
Prescription drugs may not be subject to the HRA (high deductible)
4
Setting the context
 The classic insurance model is designed to shift risk for expenses the insured:
 Can’t predict, or
 Can’t afford
Classic Insurance
Model
Risk Retention
Predictability
Cost
Insurance
Coverage
5
Typical medical plan designs do not reflect the insurance model
 Typical health insurance arrangements violate the insurance model by indemnifying
low cost, highly-predictable expenses
 Traditional models have been driven by the tax code and employer objectives to
encourage preventive care
 By suppressing participant expenses, traditional plans have driven demand
Classic Insurance
Model
Health Insurance
Model
Risk Retention
Insurance
Coverage
Predictability
Cost
Insurance
Coverage
Typical PPO
Coinsurance
Copays
Deductibles
Typical
HMO
Copays
6
HRA-based consumer-driven health plans reflect the insurance model
 HRA-based CDHPs reflect the classic insurance model while retaining preferential tax
treatment
 Well-designed CDHP models:
 Encourage a downward shift in demand for services
 Generate participant engagement and active consumerism
Insurance
Coverage
Insurance
Coverage
Predictability
Risk Retention
Coinsurance
CDHP
Model
Cost
Classic Insurance
Model
Deductible Gap
Risk
Retention
Health
Reimbursement
Arrangement
7
Coinsurance
Consumer-driven health plan prototype
Insurance
Coverage
• Notional Funding
• Balance accumulates
• Employer controls
growth
• Participant responsibility
• Allows Section 125 funding
• May precede HRA use
• Employer Funds Only
Deductible Gap
• IRC Section 213(d)
allowable expenses
• Earnings allowed on
accumulation
• Employer controls exit
rules
Health
Reimbursement
Arrangement
• Encourages prevention
Preventive Care
• Minimizes hoarding
8
Coinsurance
Consumer-driven health plan prototype
Insurance
Coverage
Deductible Gap
Health
Reimbursement
Arrangement
Preventive Care
9
Coinsurance
Consumer-driven health plan prototype
Insurance
Coverage
Deductible Gap
Health
Reimbursement
Arrangement
Preventive Care
10
Coinsurance
Emerging consumer-driven health plan design
Insurance
Coverage
Deductible Gap
Health
Reimbursement
Arrangement
Primary Deductible
Preventive Care
11
Considerations
Ad hoc implementation of CDHP options can lead to unanticipated financial
surprises but carefully analyzed approaches have the potential to change
member behavior and accountability
Financial Impact of Critical Design Factors
Factor
Outcome leading
to Cost Savings
Outcome Leading
to Cost Increase
Provider Discounts
At least as good as PPO
Immature Networks
Health Selection
Average
Healthiest migrate
Care Management
PPO or better
Rely solely on member
responsibility
Consumption Efficiency
5% to 7%
Graded with no improvements
in early years
Migration
From PPO, indemnity, and
inefficient HMOs
From efficient HMOs
Opt Outs
Not attracted in
Choose coverage and
motivated to stay
12
CDHP Market Overview — Models & Vendors
CDHP Variations
 Current models:
 Individual marketplace (discount plans)
 Carrier- or health system-based
 Point-of-enrollment (POE) models
 Medical spending account (MSA) models
— Pre-tax or post-tax MSA with catastrophic insurance plan
— Limited MSA with episodic-based reimbursement and full catastrophic
coverage
For this discussion, we will focus on POE and MSA models.
14
Leading Vendor Product Diagrams
MSA Products
HealthMarket
Lumenos/Definity/Aetna/CIGNA/UHC
Catastrophic
Out-of-Pocket
Maximum
Coinsurance
Choicelinx
OV Copayment
$10
$15
$20
100%/80%
90%/70%
80%/60%
Employee
“Deductible
Gap”
Employer
Member Responsibility
Medical Savings
Account
100%
Benefit
Point-of-Enrollment Products
Menu
Coinsurance
Legend
Deductible
MSA (R&P)
Insurance Coverage
Preventive Care
Vivius
Menu of Employee Choices
Deductible
$0
$200
$500
Out-of-Pocket Maximum
$1,000
$1,500
$2,000
Benefits
Providers
OV Copayment
$10
$15
Primary Care
Cardiologist
OB/GYN
Orthopedics
ENT
Lab
Mental Health
Hospital
ER
Deductible
$0
$250
Coinsurance
100%/80%
90%/70%
HealthMarket
15
Product Design and Cost Implications — Lumenos/Definity/
Aetna/CIGNA/UHC
 MSA used to pay qualified medical expenses that fund deductible, broken into 2
components
 Preventive benefit component -- “use it or lose it”
 All other expenses component -- unused balances roll over from year to year
 Deductible gap equals portion of deductible funded by member
 Coinsurance equals member share of expenses in excess of deductible up to annual
out-of-pocket maximum, which caps the member’s total expenditures
 CIGNA’s product would allow employers to apply copayments and/or coinsurance in
the MSA
Legend
$1,400
OOP Maximum ($1,000)
Coinsurance
(90%/70%)
“Deductible Gap”
($400)
Employee
Employer
$1,100
MSA
($800)
Preventive Benefits
($300)
Observations
 A majority of members may not have out-of-
pocket expenses during plan year
 Deductible gap would create selection issues
(if too wide or too narrow)
 MSA could be used for all federally qualified
benefits, including complementary medicine,
dental, lasik eye surgery, etc.
16
Product Design and Cost Implications — HealthMarket
 MSA used to pay for routine and preventive services
 MSA balances roll over from year to year
 Deductible and coinsurance applied to acute and chronic services
 Full coverage for catastrophic services
 Members will have access to online provider pricing to influence cost-effective
provider selection
OOP Maximum ($1,500)
Legend
Employee
Coinsurance
(90%/70%)
Employer
MSA (R&P)
($500)
Deductible
($250)
Catastrophic (100%)
Observations
 Limited MSA would reduce risk of abuse
 MSA includes preventive care, which could
cause unintended rationing of appropriate
care
 Product could be offered without MSA
 Product to evolve to include Episodes of
Care profiling and reimbursement strategy
for acute and chronic care
17
Point-of-Enrollment Products — Choicelinx
 Company selects benefit options from which
Menu of Employee Choices
OV Copayment
$10
$15
$20
employees can choose personalized benefit
plan
Deductible
$0
$200
$500
Coinsurance
100%/80%
90%/70%
80%/60%
 Company defines contribution toward
coverage
Out-of-Pocket Maximum
$1,000
$1,500
$2,000
 Benefit options are priced to assist
employee in designing plan that meets
his/her budget
Observations
 Cost shifting is primary source of savings, but will also influence utilization
 Benefit option proliferation is administratively complex
Cost-sharing
Categories
Benefit
Options
Rate
Tiers
Total Benefit
Options
4
4
3
768
4
3
3
243
4
2
3
48
18
Point-of-Enrollment Products — Vivius
 Company contributes fixed amount toward cost of health care coverage
 Employee builds personalized benefit plan and provider panel (comprising 18
physicians, 4 facilities) based on pre-priced options
 Wrap-around insurance benefit is available to cover out-of-area care and services
the personalized panel does not provide (subject to deductible and coinsurance)
Observations:
Menu of Employee Choices
Benefits
Providers
OV Copayment
$10
$15
Primary Care
Cardiologist
OB/GYN
Orthopedics
ENT
Lab
Mental Health
Hospital
ER
Deductible
$0
$250
Coinsurance
100%/80%
90%/70%
 Combination of cost-shifting through benefit
design and more cost-efficient provider
selection will drive savings
 Selection of personalized provider panel can
be overwhelming
 Vivius provides tools to simplify elections,
but holds employee accountable if higher
cost providers and benefits are selected
19
Point-of-Enrollment Products — UHC Overture and Rhapsody
Overture:
 Company defines contribution toward coverage and selects package of three benefit plans (19
packages available, a sample is shown below)
 Employee selects benefit plan based on price and plan design
Benefit
Percentage
MEDICAL IN-NETWORK BENEFIT LEVEL
MEDICAL OON BENEFIT LEVEL
PHARMACY BENEFIT COVERAGE
Office
Urgent Emergency
Out of
Out of
Visit
Care
Room
Inpatient
Pocket
Benefit
Pocket
Rx
Rx Generic Rx P-Brand Rx NP-Brand
Copay
Copay
Copay Deductible Copayment Maximum Percentage Deductible Maximum Deductible
Copay
Copay
Copay
90%
N/A
$50
$150
$1,000
$0
$4,500
70%
$2,000
$9,000
$100
$10
$30
$50
90%
$15
$50
$100
$500
$0
$2,500
70%
$1,500
$5,000
$0
$8
$25
$45
100%
$15
$35
$100
$250
$0
NA
80%
$500
$2,500
$0
$6
$20
$35
Rhapsody:
 Similar to traditional PPO plans in design and administration
 Copayments are based on fees set by providers (IP, OP, and office visit)
 Members select providers based on perceived value (due to variable copayment
Observations:
 Cost-shifting through contributions and benefit design will drive savings
 Utilization of more efficient providers should drive long-term savings
 Copayments are not adjusted based on quality measures
 Centers of Excellence for complex care supercede copayment differentials
20
Enrollment Trends
 Definity Health
 14% of initial eligibles (3% to 6% for recent employers)
 30% of new hires
 Lumenos
 17% of Novartis retirees
 5% to 8% of other employers’ active employees
 HealthMarket
 6% to 7% for larger employers
 Small group products are offered on replacement basis
 Choicelinx
 2% at Morgan Stanley (off-cycle enrollment)
 Aetna Healthfund
 Less than 1% of its own employees
21
CDHPs – Effect on Participants
Out-of-Pocket Expense Comparison
Percentage of Claim Cost Paid by Employer*
1 0 0 .0 %
9 5 .0 %
9 0 .0 %
1 0 0 /8 0
8 5 .0 %
9 0 /7 0
8 0 .0 %
Lu m en o s
Heal t h M ark et
7 5 .0 %
7 0 .0 %
6 5 .0 %
6 0 .0 %
5 5 .0 %
5 0 .0 %
$0 t o $250
$251 t o
$500
$501 t o
$1,000
$1,001 t o
$1,500
$1,501 or
great er
Claim Cost
 Lumenos plan provides rich benefit for low utilizers and shifts cost to higher utilizing employees.
 HealthMarket has a limited MSA and shifts cost to employees through higher deductible.
*Based on actual data; does not include added employer cost for expanded definition of eligible services
23
Sample Member — New to the Workforce
Covered Charges
Services
Performed
Allowed
Charges
Office Visit
New patient
exam, urinalysis
$42
$42
$15
$15
$0
$0
Office Visit
Well woman
exam
$144
$144
$0
$0
$0
$0
Office Visit
Common cold
$53
$53
$15
$15
$0
$0
$239
$239
$30
$30
$0
$0
Totals
Routine &
Preventive
Member Cost-Sharing*
100/80
90/70
HMI
Aetna,
Lumenos,
Definity
* Utilized following benefit plans:
100/80 100%/80% coinsurance (PPO) with $15 office visit copayment and no deductible.
90/70  90%/70% coinsurance (PPO) with $15 office visit copayment and no deductible.
HMI  $500 MSA for routine and preventive care; $250 deductible and 90%/70% PPO for acute and chronic care.
Aetna/Lumenos/Definity  $1,100 MSA, which includes: $300 use-it-or-lose-it preventive benefit; and $1,500 deductible,
90%/70% PPO for claims in excess of MSA.
24
Sample Member — Pregnant Employee (through delivery)
Covered Charges
Services
Performed
Initial Visit
Allowed
Charges
Routine &
Preventive
Member Cost-Sharing*
100/80
90/70
HMI
Aetna,
Lumenos,
Definity
$0
Pregnancy test,
pelvic exam,
other lab work
Pelvic exam
$339
$339
$15
$15
$0
$157
$157
$0
$0
$0
$0
$198
$198
$0
$0
$194
$0
4th Visit
Blood test and
other lab work
Lab work
$16
$16
$0
$0
$16
$0
5th Visit
Pelvic exam
$146
$146
$0
$0
$51
$0
Visits 6-9
Lab work
$60
$60
$0
$0
$6
$0
Delivery
Vaginal delivery
$3,797
-------
$0
$380
$380
$721
Follow-up
Office visit
$48
-------
$15
$15
$5
$5
$4,761
$916
$30
$410
$652
$726
2nd Visit
3rd Visit
Totals
* Utilized following benefit plans:
100/80 100%/80% coinsurance (PPO) with $15 office visit copayment and no deductible.
90/70  90%/70% coinsurance (PPO) with $15 office visit copayment and no deductible.
HMI  $500 MSA for routine and preventive care; $250 deductible and 90%/70% PPO for acute and chronic care.
Aetna/Lumenos/Definity  $1,100 MSA, which includes: $300 use-it-or-lose-it preventive benefit; and $1,500 deductible,
90%/70% PPO for claims in excess of MSA.
25
Sample Family — Typical Vendor Example
Covered Charges
Services/
Diagnoses
Allowed
Charges
Routine &
Preventive
Member Cost-Sharing*
100/80
90/70
HMI
Aetna,
Lumenos,
Definity
Husband
Annual physical
$210
$210
$0
$0
$0
$0
Wife
ER visit
$267
$0
$50
$50
$267
$0
Child # 1
Eye exam, cold
$100
$100
$15
$15
$0
$0
Child # 2
Office visit
$55
$55
$15
$15
$0
$0
$632
$365
$70
$70
$267
$0
Totals
 MSA roll over of $1,568 ($2,200 MSA less $632 Billed Charges = $1,568 roll over)
* Utilized following benefit plans:
100/80 100%/80% coinsurance (PPO) with $15 office visit copayment and no deductible.
90/70  90%/70% coinsurance (PPO) with $15 office visit copayment and no deductible.
HMI  $1,000 MSA for routine and preventive care; $500 deductible and 90%/70% PPO for acute and chronic care.
Aetna/Lumenos/Definity  $2,200 MSA, which includes: $600 use-it-or-lose-it preventive benefit; and $3,000 deductible,
90%/70% PPO for claims in excess of MSA.
26
Sample Family — High Cost Family Member
Member Cost-Sharing*
Covered Charges
Services/
Diagnoses
Allowed
Charges
Routine &
Preventive
100/80
90/70
HMI
Aetna,
Lumenos,
Definity
$89
$89
$15
$15
$0
$0
Cold, hand
injury
$100
$100
$30
$30
$0
$0
Child # 1
Office visits
$128
$128
$30
$30
$0
$0
Child # 2
Metabolic
disorder
$3,714
$59
$15
$366
$366
$903
$4,031
$376
$90
$441
$366
$903
Husband
Skin abrasion
Wife
Totals
 No MSA rollover
* Utilized following benefit plans:
100/80 100%/80% coinsurance (PPO) with $15 office visit copayment and no deductible.
90/70  90%/70% coinsurance (PPO) with $15 office visit copayment and no deductible.
HMI  $1,000 MSA for routine and preventive care; $500 deductible and 90%/70% PPO for acute and chronic care.
Aetna/Lumenos/Definity  $2,200 MSA, which includes: $600 use-it-or-lose-it preventive benefit; and $3,000 deductible,
90%/70% PPO for claims in excess of MSA.
27
High Deductible Health Plans (HDHP) and
Health Savings Accounts (HSA)
Forms of Account-Based Approaches to Address Financial and Health
Care Needs

Retirement income accounts
 401(k) plan
 Cash balance plan (hybrid pension plan)
 Individual retirement account (IRA)

Health care accounts
 Flexible spending account (FSA) (or HCFSA)
 Health reimbursement arrangement (HRA)
 Health savings account (HSA)

Others
 Retiree health reimbursement arrangement (RHRA) (terminology is not set)
 Retiree medical savings account (RMSA) (terminology is not set)

Are there more on the way?
29
Health Savings Account (HSA) — A Closer Look

Congress has created a tax-favored savings vehicle for current and future medical
expenses
 Employer and employee contributions permissible
 Tax-free contributions (within limits) and earnings
 Tax-free distributions for qualified medical expenses

Added to the Internal Revenue Code (IRC §223) as an unrelated provision of the
new Medicare prescription drug law

IRS Notice 2004-2 provides initial regulatory guidance on HSAs; more Treasury
guidance to follow in March and in summer 2004

Available beginning January 1, 2004, to eligible individuals covered by a qualifying
high deductible health plan (HDHP) (including employees and retirees of any size
employer)

HSAs share some characteristics of existing health account vehicles – HRAs and
FSAs – but with important differences
30
HSA Basics

HSA is a tax-exempt trust or custodial account established by an eligible
individual, with or without an employer’s involvement

HSA is created to pay “qualified medical expenses” of an “eligible individual” and
his or her eligible dependents

Trustee must be a bank, insurance company or other person acceptable to
Secretary of Treasury (under rules for IRA nonbank trustees)

Contributions must be made in cash, may not exceed certain annual limits and
may not be invested in life insurance

An individual’s HSA balance is nonforfeitable and may be rolled over to another
HSA (i.e., HSAs have built-in postemployment portability)
31
High Deductible Health Plan (HDHP)

HDHP coverage is a prerequisite to make or receive HSA contributions, but the
same institution need not provide HSA and HDHP

HDHP must have an annual deductible of at least $1,000* for single coverage and
$2,000* for family coverage

Combination of deductible and other out-of-pocket requirements (excluding HDHP
premium) may not exceed $5,000* for single coverage or $10,000* for family
coverage

Network plans – separate deductibles and higher out-of-pocket expense limits for
out-of-network expenses permitted and do not affect HDHP status

HDHP may waive deductible for preventive care

Employer’s insured or self-insured health plan may be HDHP
* Indexed to CPI
32
Advantages of HDHP with HSA or HRA
HSA HRA

Fosters consumerism



Provides another plan option



Introduces a different way to share
cost



Increases employee accountability



Encourages provider competition



Allows portability of funds

Comments
Lessons from Rand Corporation
Health Insurance Experiment must be
considered
HSA funds are owned by the
individual and, therefore, portable
33
Advantages of HDHP with HSA or HRA
HSA HRA
Comments

Provides funds for current and
future needs (including nonmedical
related expenses)


Allows for employee choice of
contribution amount


Allows for use of debit card with
limited need to determine nature of
expenses

HRA requires claim substantiation for
debit card use

Transfer to surviving spouse
without tax consequences

Employer sets rules relating to HRA

Possibility to self-direct investments 
HRA amounts may be carried over
for use with covered medical
expenses; subject to plan provisions
HRAs are generally offered with no
potential for investment growth
(interest); ERISA-status of HRA
raises fiduciary issues
34
Advantages of HDHP with HSA or HRA
HSA HRA
Comments


Employer need not sponsor the
account option

Allows for use of health care FSA

HSA will likely be able to allow for use
of vision and dental FSA

No need to fund unused portion of
account

HRA accounting and reporting issues
must be considered

Introduces new employee tools to
aid health care choices


35
Disadvantages of HDHP with HSA or HRA
HSA HRA
Comments

Takes time to educate employees
and dependents



Providers may not be prepared for
requests about cost



Does not address high-dollar
claimants



Administrative complexity


HSA will generally be less complex
than HRA

Annual contribution amount is
limited


Limited employee ownership of
account dollars

HRA amounts are subject to forfeiture
including employer termination of
plan
36
Disadvantages of HDHP with HSA or HRA
HSA HRA

Cost may increase due to adverse
selection

Cost may increase due to account
accumulation




Comments

Pricing approach can address
selection issues

Less likely to occur with HSA
because it is the participant’s own
money
Need to fund account (for employer 
contribution)
Access to account deposits may be 
limited to actual account balance
HRA plan provisions determine
account availability

HRA may also have restrictions
Requires restricting use of health
care FSA
37
Disadvantages of HDHP with HSA or HRA
HSA HRA

Immature vendors


Fosters use of same vendor for
medical and prescription drug
coverage


Potential for first-dollar coverage


May need to use higher individual
deductibles for family coverage


Creates winners and losers

Comments

HDHP must apply to medical and
prescription drugs

Concern is minimal for HSA because
it is the participant’s own money
Plan design flexibility is greater with
HRA

38
Early Results
Early results
 Participants like options
 Most appreciate shared decision making
 Majority of participants actively use the plan support tools
— About 50% website usage; 7 visits/member/year
— Internet access not connected to satisfaction
— Self-service appears to reduce transaction costs
 Nurse line usage is about double the managed care average
 40 – 44 calls/1,000 members vs. 20 – 22)
 When CDHP offered as an option, it tends to attract:
 A slightly older-than-average, slightly healthier-than-average participant
 Family participants over single participants
 An even distribution of male and female participants
 8-18% of initial eligibles; 25-30% of new hires
40
Early results
Prescription Drug Utilization
Comparison
1 .0 0
Definity Health
0 .7 5
0 .5 0
0.56
0.62
0 .2 5
0 .0 0
2001
Y TD
2002
Industry High
Benchmark
Industry Low
Benchmark
Data from Definity Health care management system as of July 31, 2002.
41
Early results
Hospital Utilization
(per 1,000)
225
208
75
50
58
25
136
134
48
39
0
150
75
Days
Admissions
100
0
Moderately
Managed
Well Managed Definity Health
Admissions
Days
Data from Definity Health care management system as of June 30, 2002.
42
Claims Statistics — Definity Health
YTD Cumulative PCA* Claims Paid
Per Employee for 2001
$1,600
$1,200
$902
$977
$769
$800
$671
$422
$400
$105
$221
$11
$0
Jan
Feb
Mar
Apr May
M ont h
Jun
Jul
Aug
Maximum Annual PCA is $1,500
*Personal Care Account
Claims data incurred January 1 through August 31, paid through August 31, 2001.
43
Utilization of Expanded Services
PCA/MSA claim cost for expanded scope (items not included in
traditional health coverage)
 Definity Health
 All employers:
4.2% (range 2.8% to 28.0%)
 Most common services:
— Vision
— Dental
— All other (complementary medicine)
39%
25%
36%
 Aetna projects 5% increase in total cost if coverage is expanded
44
Near-Term Benefits and Costs — MSA Plans
Average MSA surpluses based on medical claim data analyzed by
Towers Perrin
A v er ag e M SA Su r p lu s A m o n g M em b er s
w it h Fu lly Fu n d ed D ed u c t ib les*
$3,500
$2,966
$3,000
$2,324
$2,500
$2,000
$1,667
$1,500
$1,000
$1,006
$341
$500
1
2
3
4
5
Year (f ollow ing f ir st y ear )
*Assumes 8% annual medical trend.
 The average size of this fund balance will grow over time
 Approximately 65% to 70% of the population will carry over balances that
will fully fund the deductible
45
Interest in CDHPs is growing rapidly
50%
44%
Have adopted
40%
Are considering
30%
19%
20%
13%
10%
5%
1%
7%
1%
0%
0%
2003
2002
As a total
replacement offering
2003
2002
As an option alongside
traditional health plan options
Respondents were permitted to select both “Have adopted” and “Are considering” , if appropriate
Source: Towers Perrin 2003 Health Care Cost Survey
46
There are a number of CDHP success/acceptance factors
 Leadership engagement/visibility
 Commitment to behavior/change management
 Demographics
 Relatively low turnover (<20%)
—enables account accumulation
—longer-term employment view
 Literate population
—comprehension of basic financial concepts
 A workforce that is
—sensitive to health care issues
—accustomed to shared benefits decision-making
 Reasonably good Web access (60%+)
 Economic neutrality or preference in plan design and pricing, relative to
competitive offerings
47
Implementing Consumer-Driven Health Care
 Determine whether the product fits into your company’s health care/rewards
strategy
 Set goals
 Cost savings
 Choice
 Consumerism
 Design plan to fit those goals
 Proceed with caution
 Set reasonable expectations
 Introduce consumer elements gradually
 Model cost scenarios to establish plan design
 Target risk profile to influence selection
 Carefully plan your communications strategy
 Obtain management commitment before proceeding with product
48
What Consumerism and CDHPs Promise
for PEOs
Consumer-Driven Healthcare
PEO Considerations
Mark C. Perlberg
President & Chief Executive Officer
Oasis Group
September 21, 2004
©2004Towers Perrin
Agenda

Overview

Relevance

Highlights of a few key provisions

Appeal (pro’s, con’s and possible “hybrids”)

PEO Action Plan

Conclusion
51
Overview

Much of the Consumer-Driven Healthcare (“CDHC”) debate applies to everyone,
including PEO’s.

However, there are specific aspects that should be of particular interest to PEO’s.

Thought not a “silver bullet,” this healthcare evolution has true potential to help us.

There is much to understand and guidance is evolving rapidly.

As always, preparation and execution will be critical.

Per a Mercer, April 2004 study, 81% of employers with more than 20 thousand
employees are somewhat or very likely to offer a consumer-driven option by 2006.
52
Relevance

Medical rates are increasing (18 percent trend in 2003) and are expected to
continue increasing.

Medical rate increases create particular problems for PEO’s…the “trust” factor.

Pharmacy remains a powerful lobby. Other cost drivers remain.

PEO medical options often somewhat limited.

CDHC is in its infancy (by most accounts less than 1.5 percent penetration).

HSA law less than a year old.

Typically, adoption of new medical “paradigms” is slow.
53
Relevance (cont.)

However, cost factors could fuel an explosion.

Virtually all experts predict this to be a (if not the) next major medical services
model.

According to a study by MCOC (Managed Care On-line) over 50 percent of
employers believe this will be the norm in 3 to 5 years.

Providing medical benefits is an important part of what PEO’s provide.

Bottom line: this is highly relevant.
54
Highlights of a few key provisions

401k vs. pension concept. Build a “nest egg.” No forfeiture. This is not a product.

Employer responsibility to determine HSA eligibility and contribution limits.

HSA comparability requirements and “complications” with employee matches.

Tax benefits (PEO).

HRA employer-funded. HSA both employer and employee contributions permitted.

It’s a Trust.
55
Pro’s

An appealing concept: take control of your destiny!

Access to medical services: according to a November 2001 American Journal of
Public Health study, when patients must pay more of the cost, they reduce their
use of medical care.

The internet age theoretically empowers consumers to take more control.
56
Pro’s (cont.)

More employers can now offer medical (e.g., a small employer who couldn’t, might
now provide an HSA with a very high deductible).

Non-forfeiture is huge. Investment earnings potential.

401k type approach is now both more understood and utilized in retirement
planning.

Points for “innovation.”

Could be ideal for white collar sales.
57
Con’s

Employee costs could rise, creating low morale and turnover.

Adverse selection: early experiences do not substantiate, but real concern.

FSA has severe limitations with an HSA.

Employer contributions to HSA immediately vested. If you fund the year
January 2 and the employee leaves January 3, the money belongs to the
employee.

Complexity

Training curve for salespeople/sales expertise.
58
Pro’s / Con’s?

On-line tools, communication, telephonic support (e.g. Nurse lines)

Insurance carriers, banks and other potential trustees. They’ll cost money,
but are expected to drive utilization.

HSA’s a monthly, not annual, election. Great flexibility but mid-year changes
are tricky and big problems if not handled properly.

HSA claim substantiation not required, but you may need receipts.

Cost: the big question.
59
Cost
The Big PEO Question

Nobody knows yet

Execution (remember adverse selection?) will be critical.

Many expect this to have more impact controlling future increases than
decreasing current costs.

It could cost employees more for sure

Program design (e.g. how big is the deductible?) will of course play a role.

Trustee/ administrative costs.

How much will use of medical services actually decrease?
60
Action Plan

Understand and monitor.

Consult your current (or possibly future) strategic partners.

Conduct a technology/systems review and develop an action plan.

Explore options in your markets.

Prepare to jump in sooner rather than later. Don’t be desperate, but being
proactive is better than reactive.

Survey clients and WSE’s as appropriate.

Act!
61
Conclusion

Consumer-driven healthcare is an important, emerging trend.

The extent of cost advantage is still an open question.

PEO’s must understand and be prepared to offer CDHC options.

Doing so may require infrastructure improvement.

On balance, this can and should be utilized to build competitive advantage.
62