© 2013 Towers Watson. All rights reserved. Health Care Reform May 16, 2013 What Florida’s Local...

© 2013 Towers Watson. All rights reserved.

Health Care Reform

May 16, 2013

What Florida’s Local Governments Need To Know

towerswatson.com © 2012 Towers Watson. All rights reserved.

© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson Client Use Only.

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Towers Watson is not a law firm and therefore cannot provide legal advice. Please seek qualified legal counsel before finalizing a course of action based on this material.

A transformational moment

Health Care Reform is creating an added catalyst for change in employers’ health care offerings

Employers are considering significant changes in health care strategy to address the anticipated cost of the legislation

It’s really a convergence of several issues: Rising health costs Aging work force with increasing health risks Increasing frustration with provider

reimbursement system

Health care is becoming a total business issue that will ultimately affect:

Financial planning for public and private organizations

Competitive position of products and services

Defining the employee value proposition

Workforce strategies

Benefits and compensation

Administration and payroll



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Despite recent events in Washington, uncertainty remains

How will Supreme Court rule?

Who wins Presidential election?

Will funding be available?

Will public Exchanges be ready?

Who controls Congress in 2013?

What regulatory guidance is coming?

DECIDED DECIDED DECIDED


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© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson Client Use Only.Towers Watson is not a law firm and therefore cannot provide legal advice. Please seek qualified legal counsel before finalizing a course of action based on this material.

Stakeholders all have their own interests

I want to be paid more for the care I

deliver

I want to remain in the lead position of

controlling rate increases and I don’t want to be accountable for

outcomes or service

I want a payer mix that includes

private sector so I can shift costs; I like integrated health systems except for the

expectation for risk sharing

I want access to good doctors and hospitals,

including my own Employers must offer affordable benefits that are not too high or

low

I need a healthy and productive workforce

and affordable solutions

Participants

Hospitals

Employers

Government

Health Plan

Physicians

I want to get out of the health care business if

things don’t change

I want a health plan that doesn’t

cost so much and is easy to

use


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Building blocks of Health Care Reform

Key Element Impact

Individual mandate Potential for additional enrollment in employer plans

Marketplace reformEmployee communication needs and potential future employer benefit design changes

Health Insurance ExchangesPublic Exchanges that will provide individual coverage for retirees and certain employees

Premium and cost-sharing subsidies

Potential for employees to receive subsidies in Exchanges

Employer mandatesAdditional administration requirements; potential change in eligibility for some employees

Expanded public plans Potential for some employees to enroll in Medicaid

Revenue raisers Additional payroll taxes and fees; long-term incentive to reduce plan costs to avoid excise tax

Penalties Delayed / Reporting Relaxed


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2014 individual mandates

All U.S. citizens and legal residents are required to enroll in basic health coverage or pay a penalty (limited exemptions)

Tax penalties for noncompliance equal to the greater of an indexed flat dollar amount or percent of income 2014: $95 or 1% of income

2015: $325 or 2% of income

2016: $695 of 2.5% of income

Family cap: 3x the flat-dollar penalty

Comments

Tax penalties are not expected to significantly influence behavior

INDIVIDUAL MANDATE


2014 examples of individual tax penalties

Examples of individual mandate tax penalties: Assume $10,250 single/$20,500 family tax filing threshold in 2014 (for those under

age 65) Assume $11,000 single/$22,000 family tax filing threshold in 2017 (for those under

age 65)

Family SizeHousehold

Income 2014 Penalty Calculation2014

PenaltyEst. 2017 Penalty

Individual $25,000Maximum of:

$95 Flat Dollar OR 1% of ($25,000 – $10,250)$148 $695

Married Couple $40,000Maximum of:

($95 x 2) OR 1% of ($40,000 – $20,500) $195 $1,390

Family of 3 (1 child <18)

$40,000Maximum of:

($95 x 2.5) OR 1% of ($40,000 – $20,500) $238 $1,738

Family of 5 $40,000Maximum of:

($95 x 3) OR 1% of ($40,000 – $20,500) $285 $2,085

Family of 5 $150,000Maximum of:

($95 x 3) OR 1% of ($150,000 – $20,500) $1,295 $3,200


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INDIVIDUAL MANDATE


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Health Care Reform: Provisions already in place

2011

Dependents covered to age 26

No lifetime maximums and restricted annual maximums

No pre-existing condition exclusions for age 18 and under

No reimbursement for over-the-counter drugs from account-based plans (FSAs, HRAs or HSAs)

Penalty for ineligible HSA withdrawals increased to 20%

Medicare Part D “donut hole” begins to close; 50% discount on brand drugs; target cost-sharing is 25% by 2020

2012

Women’s preventive services – effective for plan years beginning ≥ 8/1/2012

Summary of Benefits and Coverage (SBC) – first Open Enrollment ≥ 9/23/2012

W-2 Reporting for 2012 Calendar Year of Aggregate Value of Employees’ Health Coverage

2013

FSA maximum lowered to $2,500

Medicare payroll tax increased for high earners

MARKETPLACE REFORM

Recent guidance requires changes to SBC templates for 2014 -- Adds disclosure regarding Minimum Essential Coverage and whether the plan meets Minimum Value requirements


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DOL Releases Guidance on the Required Notice to Employees on Exchange Operations

By October 1, 2013, employers must provide their employees information on how the Exchanges will operate Includes a description of the services provided by the Exchange (also known as

the Marketplace) and the manner in which the employee may contact the Exchange to request assistance

Shares with employees that if their employer plan does not satisfy Minimum Value requirements, the employee may be eligible for federal subsidies

Confirms that if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefit plan offered by the employer and that all or a portion of such contribution may be excludable from income for federal income tax purposes

Notice must be in writing and can be delivered via first class mail or electronically

MARKETPLACE REFORM

The model language is available on the DOL's website: dol.gov/ebsa/healthreform


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Provisions beginning in 2014Waiting period

Plan may apply an eligibility waiting period of up to 90 days Coverage under the group health plan

must begin no later than the 91st day of employment

Employees in waiting period should not be counted for purposes of determining the employer’s tax assessment regarding play-or-pay mandate

MARKETPLACE REFORM

Comments

Common waiting periods:

— Immediate eligibility

— 1st of month following date of hire

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PPACA provides that a group health plan (which includes insured andself-insured plans of large employers) may not require out-of-pocket (OOP) payments that exceed the out-of-pocket limits for HSA-compliant HDHPs (e.g., for 2014 $6,350 for an individual, $12,700 for a family)

Under HDHPs, OOP limits must be ‘comprehensive’ (i.e., all OOP costs, including medical and Rx, must count toward OOP limit and all expenses, which again include medical and Rx, must be covered at 100% once OOP limit is met (rules apply to in-network services) This differs from prevalent practice for non-HDHPs under which: (a) Rx benefits are

carved out from medical and do not apply to medical OOP limit, and: (b) copays for services such as Rx and office visits continue to apply after medical OOP limit reached

Recent federal guidance confirms that OOP limits must be comprehensive starting in 2014; one year delay is allowed for plans that carve Rx out to separate administrator

MARKETPLACE REFORM

Provisions beginning in 2014Maximum out-of-pocket limits

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Significant implications for non-HDHP plans: Plan value becomes richer, thus impacting plan cost, unless changes to OOP limit or

other design features are adopted to offset this increased cost

Rx and medical vendors need to share claim data for combined accumulation toward comprehensive OOP limits

MARKETPLACE REFORM

Provisions beginning in 2014Maximum out-of-pocket limits (continued)


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Employers with more than 200 full-time employees that offer health coverage are required to automatically enroll employees in health coverage

Employees must be given notice and opportunity to opt-out or enroll in another option

Employers can subject employees to waiting period

U.S. Department of Labor to issue guidance

13MARKETPLACE REFORM

Automatic enrollment (delayed until 1/1/2015…or later

Comments

Administrative burden:

— Continuous turnover can create challenges

— Process and procedures will have to be evaluated and adjusted

Significant employee communication considerations


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Health insurance exchange defined

HEALTH INSURANCE EXCHANGES

Private Exchanges Fall into two general categories:

An arrangement where participating employers would offer their employees and/or retirees a pre-defined selection of health plans that have been designed and selected by a third party

Medicare exchanges supporting transition from group to individual coverage

Public Exchanges As enacted under Health Care

Reform, public exchanges will offer plans with standardized relative values to individuals and small groups, with federal subsidies based on income to offset premium cost

May be operated at state or federal level

Scheduled to become operational in 2014 for all eligible individuals under age 65 (will not apply for individuals eligible for Medicare)


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Public health insurance exchanges

Comprehensive "one-stop shopping" market for commercial health insurance that brings together buyers (employers, individuals) and sellers (insured health plans) by providing Plans that meet specified standards in terms of design and underwriting, and Centralized services to support plan assessment, comparison, enrollment and

administration

For all eligible individuals under age 65 (will not apply for individuals eligible for Medicare) U.S. citizens and legal residents Reside in state in which exchange operates Not incarcerated

May be operated at state or federal level Employer eligibility to participate in Exchange

Small employers (≤100 employees; States could lower to ≤50 employees) - DELAYED Exchanges may allow large employers (200+ employees) same options in 2017+



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Family Income Less Than 400% of Poverty

Family Income Greater Than 400% of Poverty

Family Income Less Than 133% of

Poverty

Family may purchase unsubsidized coverage in

Exchange

If employer coverage is available

Family may choose the employer plan or

unsubsidized coverage in Exchange

2014 FPL

Single Individual

Family of 4

100% $11,850 $24,454

133% $15,796 $32,597

400% $47,401 $97,815

Family may also participate in Exchange

Family is eligible for Medicaid

Family may choose the employer plan or Medicaid

If employer coverage is available

Family is eligible for subsidy in Exchange

If employer coverage is available, but either inadequate (<60% benefit) or unaffordable

(premiums >9.5%)

Family may choose the employer plan or subsidized coverage in Exchange

If employer coverage is available and adequate and premiums are affordable

Family may choose the employer plan or unsubsidized coverage in Exchange

Estimated for 2014


How will an individual likely get coverage in 2014?


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Platinum (90% Value)

Gold

(80% Value)

Silver

(70% Value)

Bronze

(60% Value)

Guarantee issue

No medical underwriting

No pre-existing condition limits

Rating rules (highest age bracket can be no more than 3 times lowest age bracket)

Plan Offerings

Essential health benefits

Preventive care at 100%

No lifetime or annual limits

Maximum Out-of-Pocket limits

Key Requirements

As enacted under Health Care Reform, public exchanges will offer planswith standardized relative values to individuals and small groups, with

federal subsidies based on income to offset premium cost


What kind of exchange coverage will be available?



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Roles in exchange development and operation

States can choose: How many exchanges there will be:

— More than one in state?— Separate for individual and small group?— Participation in a regional exchange?— No state-sponsored exchange (federal

exchange)— State-federal partnership?

Whether it’s a governmental or not-for-profit entity

Exchange governance Regulatory role with insurers Determine product offering requirements within

HHS guidelines in the exchange Interaction between products and rates in the

exchange vs. those sold outside of the exchange

Health and HumanServices (HHS) must:

Issue rules regarding implementation and operations of exchange

Issue rules around broad qualified health plan requirements

Issue standards for “Navigators” Develop IT systems to help exchanges:

— Rate qualified health plans— Evaluate member satisfaction — Make eligibility determinations for

federal programs and subsidies— Provide standardized information

Develop streamlined application for income based plans and subsidies

Provide funding until 2015




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Play or Pay Decision Possible exchange participantsExchange Interactions with

employer

Play coverage is always affordable

Medicaid eligible employees COBRA participants Non-FTEs Early retirees

Administrative (verifying access to affordable coverage, etc.)

No employer penalties

Play coverage is unaffordable

Employees with unaffordable coverage

Medicaid eligible employees COBRA participants Non-FTEs Early retirees

Major administrative (verifying access, appeals re: status of affordable coverage, etc.)

Employer penalties for those who enroll in exchange when unaffordable, or broader if coverage unavailable

Pay All categories of active, inactive and retired employees

Considerable administrative effort in verifying no access to employer plan, etc.

Employer penalties for all active full-time employees


Employer interaction with exchangesFrequency and intensity will vary based on play-or-pay strategy

Penalties Delayed / Reporting Relaxed


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Key Exchange functions

Key Functions:

Determine eligibility For Exchange participation

For insurance affordability programs (Medicaid, CHIP, premium tax credits, Basic Health Plan)

Notify individuals and employers about determinations; provide appeals process

Certify, rate and communicate qualified health plans

Maintain Web site and call center with toll-free number

Notify IRS and enrollees of Exchange coverage


Concerns

Interactions and administrative requirements related to eligibility determinations

Potential for adverse selection— Overall member experience in

exchanges and perceptions on quality and value of coverage

Uncertainty surrounding exchange development, readiness for 2014 and future viability

Coverage expansions likely to strain primary care capacity due to additional demand of the newly covered

Relaxed


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State Exchanges by Model and Certification Status

WA*

OR*

CA*

NV*

ID*

UT*

AZ

MT

TX

NM*

AK

HI*

CO*

WY

NE

OK

KS

ND

SDMI

WIMN*

IA*

MO

AR*

LA

INIL*OH

KY*

TN

MS** AL

FL

GA

SC

NC

VAWV*

MD*

DE*

PA

ME

NH*

VT*

RI*NY*

CT*NJ

MA*

Source: Towers Watson, as of April 17, 2013

DC*

State exchange Partnership exchange Federally-facilitated exchange Unknown* Conditional certification by HHS** State-based exchange blueprint rejected by HHS


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HHS Bulletin: Verification of Access toEmployer-sponsored Coverage

HHS Bulletin: Verification of Access to Employer-Sponsored Coverage

Requests input on interim (2014 and 2015 plan years) and long-term (2016+ plan years) strategies for the purpose of verifying an employee’s eligibility for federal subsidies to purchase Exchange-based coverage

Proposed interim strategy:

— Provide a standardized way for employees and employers to voluntarily collect and communicate employer-sponsored coverage information needed to complete an Exchange application

— Allow Exchanges to verify employer-sponsored coverage through use of limited pre-enrollment verification based on data sources available to an Exchange and a post-enrollment verification screening process where data sources are not available during the eligibility determination process



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HHS Bulletin: Verification of Access to Employer-sponsored Coverage

Proposed long-term strategy:

— HHS is looking for ways to foster the identification and/or development of data sources that would facilitate real-time verification of access to employer-sponsored coverage information during the enrollment process

— HHS seeks comment from employers and other stakeholders on data sources so as to minimize the need for employers to respond to requests from employees or Exchanges for information

— Interest in leveraging any data accumulated through other reporting requirements; agencies considering a number of existing reporting mechanisms to identify opportunities for streamlining, with the goal of minimizing the burden on employers

The preamble of the August 2011 proposed Exchange regulations requested comment on two proposed interim strategies: (1) a sample template that could be used voluntarily by employers and employees to assist applicants in filling out the Exchange application; and (2) a database that employers could voluntarily populate with relevant information and that Exchanges could access



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Employer mandate – 2014

Generally, beginning in 2014, applicable large employers must either:

Offer coverage to 95% of full-time employees (and their child dependents) that is affordable and meets minimum value

Pay tax penalties for those employees who receive tax credits/subsidies for Exchange coverage

OR

Comments

Many State and Local Government employees are likely to qualify for federal subsidies

Estimated 2014 FPL levels

Family Size 1x FPL 4x FPL

Individual $11,850 $47,401

Family of four $24,454 $97,815

EMPLOYER MANDATES

Delayed


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Definitions: Full-time employee (FTE)

Full-time is defined as working an average of 30 hours or more per week each month

Regulations provide that 130 hours of service in a calendar month will be treated as the monthly equivalent of 30 hours/week

EMPLOYER MANDATES

Comments

Will require monitoring to ensure that part-time employees do not inadvertently becomefull-time — even temporarily, which could generate penalties

If an employer cannot determine whether an employee will work a consistent, full-time schedule, coverage can be delayed during measurement period Measurement period must be at least 3 months and cannot exceed 12 months If during measurement period employee is determined to be full-time, coverage must

be offered going forward for a period of time at least equivalent to the measurement period, but not less than 6 months



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No Employer Plan Employer OffersMinimum Value Coverage

$2,0001 x all full-time employees (FTEs) Triggered if any employee receives

subsidized coverage through Exchange

Penalties nondeductible by employer

Employee contributions for self-only coverage exceed 9.5% of household income and employee household income at or below 400% of federal poverty level (FPL)

Pay lesser of: $3,0001 for each subsidized FTE that

receives Exchange-based premium subsidy, or

$2,0001 x all FTEs in controlled group

1 Indexed to national average increases in health care premiums

EMPLOYER MANDATES

Overview of employer penaltiesDelayed


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Premium and cost sharing subsidies – 2014

Federal premium subsidies available for low-/middle-income individuals with household income at or below 400% of the federal poverty level (FPL) Available only for Exchange-based

coverage; unavailable to those offered affordable minimum coverage by employer

Sliding scale: Individual to pay2% - 9.5% of income toward premiums

Cost-sharing subsidies also available

Comments Employees earning below 133% of

FPL may be able to enroll in Medicaid for no monthly premium

Next tranches of employees may actually be better off in Exchange plans, depending on required contribution levels

Family income

as % of FPL

Max premium cost as a % of family income

Actuarial Value

< 133% 2.0% 94%

133% - 150% 3.0% - 4.0% 94%

150% - 200% 4.0% - 6.3% 87%

200% - 250% 6.3% - 8.05% 73%

250% - 300% 8.05% - 9.5% 70%

300% - 400% 9.5% 70%

PREMIUM / COST SHARING SUBSIDIES


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Yes

No employees eligible for federal premium subsidies

to purchase Exchange coverage

No $3,000 employer “play”

penalty per employee obtaining subsidies

No

Is family income ≤ 4x Federal Poverty Level?

Yes

Employee may qualify for federal premium subsidies for Exchange coverage (if

declines employer plan)

Employer pays $3,000 "play" penalty per employee

No

Employee does not qualify for federal premium subsidies to purchase Exchange coverage (unlikely to decline employer

plan)

Employer not subject to $3,000 “play” penalty per employee

Affordability and the 9.5% ruleIs employer coverage “affordable”?

1) Lowest single contribution ≤ 9.5% of family income, and

2) plan pays at least 60% of plan eligible expenses (based solely on plan design)

PREMIUM / COST SHARING SUBSIDIES

Employees with access to family coverage that costs more than 9.5% of family income will NOT qualify for federal subsidies if single contribution is set at or below 9.5% of family income

Delayed


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A difficult decision regarding Medicaid expansion

Federal government can offer states 90% of the cost of expanding Medicaid to millions of new individuals

States may agree to expand coverage in exchange for those new federal funds

If a state accepts the Medicaid expansion funds, it must obey the new rules and expand coverage

However, a state must be able to decline participation in the expansion without losing all of its Medicaid funds States have the option to continue a current Medicaid plan – as is – without losing the

50% federal share of the costs for original Medicaid

Federal tax credits for Exchange-based premiums do not extend to individuals under 100% of FPL A potential gap in access to premium tax credits for those not meeting states’ current

Medicaid eligibility guidelines, but under 100% of FPL

EXPANDED PUBLIC PLANS


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Medicaid expansion: Where states stand

Source: The Advisory Board, April 1, 2013. The District of Columbia plans to participate in Medicaid expansion and will operate its own exchange.http://www.advisory.com/Daily-Briefing/2012/11/09/MedicaidMap#lightbox/1/

WA

OR

CA

NV

ID

UT

AZ

MT

TX

NM

AK

HI

CO

WY

NE

OK

KS

ND

SD

MI

WIMN

IA

MO

AR

LA

INILOH

KY

TN

MS AL

FL

GA

SC

NC

VAWV

MD

DE

PA

ME

NH

VT

RINY

CTNJ

MA

Participating (25) Leaning Toward Participating (2) Undecided/No Comment (6) Leaning Toward Not Participating (3) Will Not Participate (14)

25 Governors Support Medicaid Expansion

?

EXPANDED PUBLIC PLANS

http://www.advisory.com/Daily-Briefing/2012/11/09/MedicaidMap


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Transitional reinsurance fee

WHY? Meant to stabilize premiums for coverage in the individual market during the first

three years public exchanges are operational (2014-2016) Reinsurance payments provided to individual market issuers that cover individuals with

high medical costs

WHO PAYS? “Contributing entities,” (i.e., health insurance issuers and self-insured group health

plans), are required to make reinsurance contributions for “major medical coverage”

HOW MUCH? For the 2014 benefit year, the national per capita contribution rate will be $5.25

per covered life per month (or $63 per covered life per year) Expected to decline to ≈$42 per covered life in 2015 and ≈$26 per covered life in 2016

REVENUE RAISERS


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Transitional reinsurance fee

WHEN? Contributing entities will be required to make the first reinsurance contributions

payment in December 2014 or January 2015

WHAT ELSE? Plan expense: The Department of Labor indicated that the reinsurance

contributions constitute a permissible plan expense under ERISA; this means that plan assets may be utilized to pay the reinsurance contributions

REVENUE RAISERS


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Patient-Centered Outcomes Research Institute (PCORI)

WHY? Established by PPACA to research comparative effectiveness of treatments for health

issues; evidence-based information may affect plan design and consumer behavior

WHO PAYS? Sponsoring employer – single employer self-insured health plans

Multi-employer fund – multi-employer health plans

Insurer – insured health plans (including HMOs)

HOW MUCH? $1 per year/covered life (employee, spouse, dependent) in the first year; $2 per

year/covered life in the second year, and indexed for the remaining five years

WHEN? Self-insured plan years and insured policy years ending on or after 10/1/12 and before

10/1/19 No later than July 31 of the year following the last day of the plan year or policy year (i.e., 7/31/13

for calendar year plans)

REVENUE RAISERS


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40% non-deductible excise tax on high-cost group health benefits* Plans whose cost exceeds $10,200 for

single coverage, $27,500 for family coverage annually

Indexed CPI-U+1% in 2019, CPI beginning in 2020

Adjustments for age, gender, high-risk populations, early retirees and cost growth greater than benchmark

Aggregate premium for employer-sponsored health benefits* NOT applicable to separate fully-insured

vision and dental plans, and dread disease and fixed-dollar indemnity policies

*Group health benefits includes: medical (e.g., PPO, HDHP), health FSA, HRA, employer and employee pre-tax HSA contributions, EAP, on-site primary care medical clinics (and self-insured dental and vision plans)

Comments Without significant design or

contribution changes, many employer plans will hit the excise tax limit in 2018

Many employers will be reviewing their medical benefits strategy in order to manage costs below the excise tax threshold

Employers will look for proactive health plan management strategies that reflect: business, workforce and reward strategies; engagement strategies and ways to improve the workforce health and productivity

REVENUE RAISERS

Excise tax on “Cadillac” plansEffective 2018


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Discussion


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Thank you

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