Rich Bailey FSA, MAAA, FCA
Richmond, VA
Is it Time for Employers to Move
Away From the Traditional Ways of
Providing Employee Benefits?
November 3, 2004
Mercer Human Resource Consulting
Agenda
The Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics
1
Mercer Human Resource Consulting
Agenda
The Environment
– Medical Trends
– Legislation
– Marketplace Changes
– Population Demographics
– Employer Outlook
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics
2
Mercer Human Resource Consulting
Double-Digit Increase for Second Year in a Row
Per employee costs in excess of $5,600 per year
% +%
+%
+%
+%
+%
Source: 2002 Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans
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Mercer Human Resource Consulting
Annual CPI Trend
. health care costs rise, despite continuing economic recession
è The gap between CPI-U and medical care component is increasing
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Comparison of Overall Growth
Cumulative medical care CPI 89% greater than overall CPI since
1967
Data based on January 1 CPI values
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Employers’ Cost Increases Out-Pace Other Indicators
Largest increase since 1990 (all employers)
Includes medical, dental and pharmacy
Source: 2002 Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans
Results for Employers with 500 or more lives
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Employers
CPI-Medical
CPI-All Items
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Aggregate Health Care Spending (1980 – 2010)
Government portion of payments increasing; total projected to be
over $2 trillion by 2009
Source: CMS
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Medical Trends
Pop Quiz
How many years will it take gross medical costs to double, assuming no
specific employer interventions or national health care?
– 10 or more
– 9
– 8
– 7
– 6
– 5 or fewer
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Mercer Human Resource Consulting
Medical Trends
Responses from a group of 25 actuaries who had time to get their
calculators
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Legislation
Medicare Prescription Drugs
– If made into law, will have major impact on retiree benefits and strategies
– Initial confusion aside, should have positive impact on retiree plans
– Expect cost shifting to negatively impact active plans
EEOC Proposed changes in ADEA regulations
– Cline vs. General Dynamics
Wells Fargo case
– Appears to allow pre-funding (and tax-deductibility) of entire retiree liability
an ILP approach
won’t be exactly same number as FAS liability
funding in years 2+ would be limited to service cost
– IRS weighing its options
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Mercer Human Resource Consulting
Proposals to Increase Coverage Among Early Retirees
Few government programs except for financially indigent
COBRA extensions and/or Medicare buy-ins
Prohibitions on post-retirement benefit reductions
Expanded pre-funding for retiree medical
Still few viable products for pre-65 in individual market that
overcome access and affordability issues.
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ADEA Issues
Impact on retiree medical coverage
Age Discrimination in Employment Act (ADEA) prohibits discrimination against
persons age 40 or older in terms and conditions of employment
Age-based distinctions in employee benefit plans are permissible only if:
– A specific statutory exception applies, or
– Equal benefit/equal cost test is satisfied
Plan must provide equal benefits for older and younger workers, or
Plan must incur equal costs for older and younger workers
Third and Sixth Circuit Courts reach different conclusions
EEOC reviewing ADEA regulations
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Mercer Human Resource Consulting
Marketplace Changes
Consolidation of Major Health Care Carriers
Employer options are greatly reduced, carriers have more clout
United Healthcare
HealthSource
Provident
CIGNA
Equicor
Metrahealth
US Healthcare
Aetna
TakeCare
FHP
PacifiCare
HealthSource
CIGNA
Aetna US Healthcare
NYLCare
Prudential HealthCare
FHP
PacifiCare
Provident
Transamerica
Equitable
HCA
Metropolitan
Partners
Aetna
GSDHP
Lincoln National HPs
TakeCare
PacifiCare
Health Plan of America
WellPoint/Blue Cross of
California
Hancock
Mass Mutual
Travelers United Healthcare
Aetna
PacifiCare Health
Systems
WellPoint/Blue
Cross of California
CIGNA
BCBS of Georgia
Multiple BCBS Plans
Fewer
Major BCBS
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Mercer Human Resource Consulting
Marketplace Changes
PBM consolidation continues; three major national PBMs remain
CPI
API
CPN
RxNet
Value Rx
Diagnostek
Perform
HCS
HPI
Diagnostek
Value Rx
RxNet
Columbia
Value Rx
Express Scripts
Express
Scripts
NPA
DPS
Express
Scripts
PAID
MEDCO
Advanced Paradigm
Advance
Medco
Integrated
Prescription
Solutions (IPS)
PCS
Foundation
Merck-Medco Merck-Medco
ProadvantageSystemed
Paradigm
Merck-Medco
Medco
Advance
PCS
Major
Insurers
Major
Insurers
MPS
PCS
Clinical
Pharmacy
Advantage
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Population Trends
Aging baby boomers will increase the elderly and near elderly
populations
Data Source: . Census Bureau State Population Projections
Baby Boomers Year of Birth 1946 to 1964
Source: . Census Bureau as of January 2000
. Population, 2000 Projected Population
M
ill
io
ns
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Negative Tidal Wave of Available Talent
Pool of “prime workers” will be decreasing
Source: DRI, World at Work Journal, fourth quarter 2001
Percent Change in Population by Age Group, 2000-10
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79
The “Echo boom”
ages 15-29
Shrinking Pool of
“Prime workers”
ages 30-44
Aging “Baby boomers”
ages 45-69
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Impact of Demographics on Health Care Cost
Cost increases with age
20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+
Age
R
el
at
iv
e
C
os
t b
y
A
ge
Male Female
Average employer cost =
Relative Costs By Age and Gender
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Mercer Human Resource Consulting
Health Deterioration
A cause and a consequence
We eat too much -- % of adults overweight
Population with diabetes increased over 50% in last decade
*Overweight is roughly 10 to 30 pounds over an ideal weight. Obesity is roughly 30 pounds over an ideal weight
Source: National Health and Nutrition Examination Survey
%
%
%
%
%
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Issues Facing Businesses
The perfect storm
Low ambient inflation; high medical inflation
Advances in medical technology likely to lead to higher costs, difficult
decisions
Legislative uncertainty
Consolidating medical delivery and financing system
An aging workforce
Increased longevity
Slowing economy
Disappearing over-funded pension plans
Few, if any, obvious and easy alternatives to managing health care costs
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Mercer Human Resource Consulting
Employer Outlook
Environmental outlook spurring employer action
– Employers acutely aware of trends
Heightened interest in cost saving strategies (active and retiree)
Greater emphasis on longer term cost projections and on the “bottom line”
Projection results have induced “fight or flight” responses
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Retiree Medical Coverage
Employers continue to drop retiree medical coverage
Percentage of Employers
Offering Coverage to Future Retirees
Based on employers of 500 or more lives responding to the
2001 Mercer/Foster Higgins Survey of Employer-Sponsored Health Plans
When coverage is offered, retiree premiums and out-of-pocket costs often
increase
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Agenda
The Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics
22
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The Catch-22
Reducing employer cost typically implies increasing employee/retiree cost
Eventually runs against employer’s sensibilities regarding fairness,
paternalism (if present), and the concept of benefits generally
Example (FAS 106): “Lower my liabilities significantly but don’t do anything
harsh to our retirees…they won’t accept it”
– To the extent that retirees represent the bulk of the liability, this is a very difficult
proposition
– Opportunities exist to change eligibility, design , etc. for future retirees
If we don’t take cost out of the system, either the employer or the
employees/retirees will pay the increases
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Mercer Human Resource Consulting
Agenda
The Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics
24
Mercer Human Resource Consulting
Paths Away from Traditional Delivery: Two Camps
Employers that become more involved in
– Changing employee behavior
– Changing provider behavior
– Changing providers that they work with
– Changing the laws
Employers that reduce their involvement by
– Increasing employee responsibility
– Limiting employer cost
– Limiting employer risk
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Mercer Human Resource Consulting
Employers Becoming More Involved
Collective Purchasing
High Performance Networks
Direct Contracting
Consumer Accountability
Leap Frog
Lobbying
Disease Management/Preventive Care
What these approaches share is an eye toward reducing cost from the
employer’s system, and in some cases, the entire health care system.
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Mercer Human Resource Consulting
Collective Purchasing
Use employer and plan manager clout to negotiate favorable
payment arrangements
Background
– Traditional network negotiations are volume driven
Approaches to achieve lower costs include
– Aggregated purchasing to improve negotiating strength
Coalitions
Formal alliances
Informal alliances
– Directing care to most cost-effective source of quality care
– Reviewing effectiveness, efficiency and “fit” of current vendor relationships;
changing as appropriate
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What is a HPN?
High Performance Network: A health plan performance
improvement method that steers care to providers that meet specific
efficiency and quality criteria
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Rationale for HPNs
New management approaches are needed in this era of cost acceleration
Patients and physicians are the key drivers of health care costs
– But they have limited or no incentive to care about costs
The heart of the High Performance Network concept is to change the provider
selection behavior of patients and/or physicians
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Mercer Human Resource Consulting
High Performance Networks
Network models
Limited Network
– A subset of an existing provider network comprised of high performing providers
Tiered Network
– Employee copay/coinsurance differentials to encourage use of high performing
providers
Physician Partnering
– An arrangement with (typically) primary care physicians to enhance efficiency
Consumer Driven
– Deployment of performance information to consumers to improve provider selection
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Direct Contracting
Large employers with significant market presence
May be able to achieve significant savings by contracting directly with health
care providers
May need group of regional employers to achieve critical mass
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Promote Consumer Accountability
Help patients be better consumers of health care
Background
– If half of cost is due to lifestyle and half of chronic patients do not follow treatment
plan, what can we do?
Get members’ attention – make them aware of consequences
Approaches to encourage consumer involvement include
– Coordinated health promotion, disease prevention and educational programs
– Tying employee cost increase to trend
– “Defined contribution” health plans
– Consumer directed health care
– Re-introduction of coinsurance
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Efforts to Improve Quality of Care in Hospitals
Leapfrog initiative
The Leapfrog Group: Background
– Formed in response to Institute of Medicine study of errors in health care
– Goal: Major gains in patient safety, customer service and health care affordability
– Sponsored by Business Roundtable
– Employers in Leapfrog Group use purchasing power to encourage health care
providers to adopt patient safety standards
Leapfrog standards include:
– Computerized systems in hospitals to improve the accuracy of physicians’
prescriptions and minimize medication errors
– Staffing of intensive care units by physicians trained in critical care medicine
– Referral of patients requiring certain complex procedures to hospitals offering the
best results
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Lobbying
Some employers making presence felt on Capitol Hill
Many have been active for years and are recognized as important voices
Some large associations have similar goals and represent large voting
populations
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Preventive Care and Disease Management Across the
Health Care Continuum
Programs should be tailored to the needs
– Prevention
– Screenings
– Health Risk
Assessment
– Targeted Risk
Reduction Programs
– Risk Modeling
– Nurse Advice Line
– Web Tools
– Consumer Directed
Health Plan
– Disease
Management
– Incentive Design
– Self Management
Training
– Case Management
– Decision Support
– Predictive Modeling
Well
No Disease
At Risk
Obesity
High Cholesterol
Acute Illness/
Discretionary Care
Doctor Visits
Emergency Visits
Chronic Illness
Diabetes
Coronary Heart Disease
Catastrophic
Head Injury
Cancer
85% members = 15% cost
15% members = 85% cost
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Employers Becoming More Involved
Summary
Typically the larger employers
“Fighting” to change the way health care delivered to own employees
– Goal is to produce better outcomes……
– And lower cost
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Employers Becoming Less Involved (Camp 2)
Employers desire to “know their cost”
Dollar-based plans (often account-based)
Reimbursement plans
Access Only plans
“Capped Plans”…typically retiree medical
What these approaches share is an eye toward reducing employer cost at the
expense of employees/retirees
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Account-Based Approaches
Defines employer’s commitment as a defined dollar contribution instead of a
defined medical benefit
Commitment can be monthly, annual, aggregate
Commitment can be based on retiree-only or recognize dependents
Amounts available for health care only; employer contributions are tax-free to
the retiree and deductible for employer under Sections 105, 106 and 162 of
IRC
Can be funded or unfunded
For Medicare-eligible, Medicare+Choice, Medigap and traditional Medicare
available; HIPAA may eventually make this a viable option for pre-Medicare
retirees
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Account-Based Approaches
Examples
Monthly/annual promise
– Retirees receive monthly (or annual) credits of a specified dollar amount (.,
$100/monthly; $5/month/year of service for 20 years of service)
– Fixed or increases annually; “flat” or tied to service; amount not used can be carried
over or not
Aggregate (“lump sum”) promise
– Employer promise is one-time credit (., $30,000; $1,000 per year of service for
30 years of service); accounts earn interest (., at T-bill rate) or not; no employer
pre-funding required
– Payment options
“Draw-down” on funds (retiree uses funds to pay portion of retiree medical cost;
ends when fund exhausted), or “lump sum” is converted to an annuity (multiple
options)
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Reimbursement Plans
Employer often requires submission of receipts for health care expenditures
– Premiums
– Out-of-Pocket costs
Typically defined with a maximum reimbursable limit (. $75/month)
Most common is reimbursement (or pre-payment) of Medicare Part B
premium for Medicare eligible retirees
– Current cost $ per month with moderate year-to-year trends
– Employer motivated to ensure Part B in effect for Medicare-eligible retirees
– Part D reimbursement may become popular
Employer achieving
– Escape from plan sponsorship (for whichever segment of his population the plan
applies to)
– Fixed costs; increases subject to employer discretion
Not a tax-advantaged approach
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Access Only Plans
Employer “sponsors” company health plans (stays “in the business”)
By doing so, retains group underwriting, pricing and risk profile
Employer contemplates no subsidy
Full cost and annual increases absorbed by employees/retirees
Fully insured plans
– Works best
– Costs known in advance
– Premiums fixed in advance
Self-insured plans
– Requires more management
– Costs not known in advance
– But premiums must be fixed in advance
– Caution regarding active/retiree subsidy
– May impact other accounting (FAS 106)
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Capped Plans
“Employer cost will be capped at 2 times the 1993 cost”
Implication is that employer share becomes a fixed dollar commitment at
some point in the future
Typical action taken in early to mid 1990s for retiree programs in response to
FAS 106; liabilities approximately ½ of uncapped plans
Many caveats
– Usually applied only to those retiring post-announcement
– Evaluate separately for pre-Medicare eligible vs. Medicare eligible, or in aggregate
– Evaluate per retiree or in aggregate
– Definitions of “premiums” and “costs”
cross subsidy of actives/retirees can cloud calculations
Need clear definition of how costs and contributions are calculated before cap
is hit
Enrollees will understand concept, but likely won’t be prepared for eventual
increases
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Employers Becoming Less Involved
Summary
Focusing on approaches that allow a fixed employer commitment
Risk transferred to employees/retirees
In some versions (caps), no immediate impact felt by participants
– Communication is critical
Employers concerned about participant response
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The Two Camps Summarized
Fight or Flight
The largest employers seem willing to try to change the world
Mid sized and smaller employers seem to want to “get out” of the
responsibility
Neither reflects the traditional way of providing benefits
Focus on employers reducing involvement, using a generic defined
dollar (defined contribution) approach
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Agenda
The Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics
45
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Where can we apply “Defined Contribution”
approaches most easily?
Active employees/early retirees
– Employers will still need to “sponsor” a plan
– Can set employee contributions to meet desired cost share and allow employees to
buy back into a self-insured plan
– Easiest calculation if underlying plan is fully insured
Medicare Eligible Retirees
– Employers may actually be able to get all the way out
– Even if company sponsors no Medicare eligible retiree plan, options available in
market for retirees to choose from
– Some with little or no underwriting (removes access problem) but eligibility/timing
important
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Mercer Human Resource Consulting
DC Health Plans in the Spectrum of Employer
Contributions
% of Cost
Employer pays X%
(., 80%) of cost of
health plans; employee pays
the remainder.
% for Benchmark; DC for Others
Employer pays X% of cost
of one specified Plan A
(“preferred” or “employer” plan).
The amount of employer
contribution for Plan A becomes the
defined dollar contribution for
Plans B, C, …; the employee pays
the balance in cost.
Pure DC
Employer pays $Z per
employee. Employee must pay
balance for whatever plan is
picked. The employer
contribution
is not tied directly to the
cost of any plan.
Employer Contribution LevelEmployer Contribution Level
DC Health Plans
% of
Cost
No
Contribution
(wages only)
% for
Benchmark
Plans; DC
for Others
Pure
DC
Full
Cost
High Low
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Medicare+Choice
Health plan takes risk, receives “capitated” payment
Medicare “Part C” (Medicare Advantage?)
Health plan offered by private insurance companies, usually on an HMO-like
basis
Benefits broader than Original Medicare
– Reduced out of pocket expenses for deductibles and copayments
– May offer prescription drug coverage
Medicare pays a set amount of money to private insurer
May be additional premium cost over Part B premium (fully insured to
employer)
Available only in certain areas
Recent private insurer profitability poor and insurers have curtailed availability
and increased costs to retiree
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Mercer Human Resource Consulting
Medicare+Choice HMO Enrollment
Enrollment declined for first time in 2000
Source: Medicare Managed Care Contract (MMCC) Plans - Monthly Summary Reports -
from CMS Website (
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Mercer Human Resource Consulting
2002 Medicare+Choice HMO Availability
Even after pullbacks, slightly more than three-quarters of Medicare
Eligibles still live in counties which offer at least one M+C plan in
2002
PFFS Plan Locations
Cover Approximately 35% of Medicare Eligibles
Over 58% of Medicare Eligibles
Live in M+C HMO Areas
Source: CMS Medicare Plan Compare Data &
Sterling Life Insurance Company
Coverage Data as of 3/31/023
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Mercer Human Resource Consulting
Medigap Overview
Plans supplement “original Medicare” benefits
Sold to individuals age 65+ (and certain other Medicare Eligibles under 65)
Medigap carriers must accept all applicants for the first six months of eligibility
The basic benefits included in every Medigap plan are
– Part A coinsurance (for admissions of more than 60 days)
– Coverage for 365 additional hospital days after Medicare benefits exhausted
– Part B coinsurance
– The first three pints of blood each year
Product types
– Standard products
A through J sold from 1992 to present
Only H, I and J cover prescription drug
– Medicare Select
Provides Medigap benefits with network discount and lower prices
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Medigap Policies Overview
AARP and BCBS plans offer majority of products
Only individual insurance plans permitted by law that can be issued to
Medicare Eligible individuals
Carriers cannot customize plans and must offer “standardized” plans
Regulated by state insurance authorities within federal government guidelines
Major providers include AARP, Blues plans, some insurers
– AARP in all states with Plan A through J
– Blues in all states but limited offering, particularly of plans H, I and J
Most plans underwrite where allowed
– Exception is AARP, with minimal underwriting requirements (only ESRD) except on
plans H, I and J
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Medigap Policies
Policy features
Item Plan A Plan B Plan C Plan D Plan E Plan F Plan G Plan H Plan I Plan J
Basic Benefits*
Skilled Nursing
Coinsurance
Part A Deductible
Part B Deductible
Part B Excess
Foreign Travel
Emergency
At Home Recovery
Drugs**
Preventive Care
Approximate Monthly
Premium Range
$55-$150 $90-$190 $100-$210 $90-$200 $100-$200 $110-$210 $100-$230 $150-$230 $160-$250 $200-$290
*Basic Benefits = Part A coinsurance plus 365 extra days of hospital care plus Part B coinsurance plus three pints of blood/year
**$250 deductible, 50% coinsurance to contract limit
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Medicare Select
Same standardized plan designs (A through J) as other Med Supp policies
– AARP offers it on Plan C only
Works like a Preferred Provider Organization (PPO)
– Full supplemental benefits available if network providers used
– Reduction or loss of supplemental benefits if non-network providers used
– Always retain full Medicare benefits
Most common provider networks are hospitals only
– Hospital can waive Part A deductible via safe harbor from anti-kickback statutes
– Limited ability to affect Part B cost
– Negotiations with other vendors possible
Lower cost than Medigap: typically 20% discount
– AARP example: Ohio Plan C: $122; Ohio Medicare Select-C: $94
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Agenda
The Environment
The Catch-22
Paths Away from Traditional Delivery: Two Camps
Opportunities Along Path 2
The Answer
Additional Topics
55
Mercer Human Resource Consulting
The Answer
Yes, it may be time for employers to consider new approaches
But which direction are your clients heading?
Standing still is likely not an option
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