Health care reform:
Implications for US employers
Accounting and Auditing Conference
Wichita
19 May 2011
Discussion overview
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Survey results
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Financial implications and strategic considerations
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Case studies
19 May 2011
Health care reform: Implications for US employers
Page 1
Ernst & Young LLP survey results
19 May 2011
Health care reform: Implications for US employers
Page 2
What are we hearing from Boards regarding
health care reform?
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Have we prepared a detailed financial business model
regarding all of the provisions of the new law, including
benefit design implications and compensation changes?
How do we make sure all mandatory changes are
implemented, including 2011 payroll and reporting changes?
Do we have a team focused on the implementation of the
compliance requirements, including payroll, information
reporting, worker classification and non-discrimination
requirements?
Does the company have a multidisciplinary team in place to
address health care reform, including legal, tax, human
resources, finance, payroll and internal audit?
19 May 2011
Health care reform: Implications for US employers
Page 3
EY company readiness survey
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EY conducted a health care reform client readiness
survey between 11 August and 14 September 2010
More than 380 respondents at C-suite level
Companies represent a broad range of business sectors
and vary in size to more than 250,000 employees
19 May 2011
Health care reform: Implications for US employers
Page 4
Survey themes
Health care reform
is a business issue.
Implementation is
critically important
to a high
percentage of
C-suite level
respondents.
19 May 2011
Cost and
compliance are key
concerns for
respondents.
Many have not
undertaken a
financial impact
analysis.
Health care reform: Implications for US employers
The law is very
complex. The more
respondents
learned about the
law, the more their
confidence waned.
Page 5
Survey result: employers weigh implications
of dropping coverage
Are you considering no
longer offering health care
benefits to your employees?
19 May 2011
Key considerations
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Employee reaction and
relations
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Competitive practices
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Tax penalties
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Loss of employer
deduction
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Community reaction
Health care reform: Implications for US employers
Page 6
Survey result: other options employers are
considering
► 76%
Cost sharing
Benefit
changes
of respondents said they are at least
somewhat likely to increase the employeepaid portion of health care coverage
► Retiree
drug coverage is the benefit
respondents said they were most likely to
eliminate
► Reducing
Business
model
19 May 2011
business process inefficiencies is
the most commonly cited area to offset
costs, followed by reducing supply chain
costs and updating IT reporting systems
Health care reform: Implications for US employers
Page 7
Financial implications and
strategic considerations
19 May 2011
Health care reform: Implications for US employers
Page 8
Health care reform timeline
Repealed
Medicare provider cuts*
Economic substance
Part D “Donut Hole”
Retiree reinsurance
Tanning tax (7/1)
2010
2011
Corp. info. rep.
W2 health reporting
2012
Minimum benefits *
OTC drug exclusion
Fees on Pharma *
Medicare Adv. Cuts*
W2 health reporting
2013
2014
. . .
Medicare payroll tax
Investment income tax
Retiree drug subsidy tax*
FSA limits
Medical device tax*
Outcomes research fee*
162(m) limits in insurers
* Impacts health plan costs
19 May 2011
State ins. exchanges
Individual mandate*
Employer mandates*
Free choice vouchers*
Health insurer fees*
Health care reform: Implications for US employers
2018
2019
Excise tax on high
cost plans*
Constitutional Challenge
Page 9
Expectations by industry
Additional aggregate annual trend
Additional aggregate trend as a result of health care reform
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year
Baseline
Manufacturing
Finance, Banking
19 May 2011
Health care reform: Implications for US employers
Professional Services
Retail, Hospitality, Health Care
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Modeling observations
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Employee demographic information is a key factor in
assessing risk areas under the employer and employee
mandate provisions.
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The inflationary issues inherent in health care reform can
be significant and are often overlooked.
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The high-cost plan excise tax will likely be a significant
issue for an employer to address.
19 May 2011
Health care reform: Implications for US employers
Page 11
Key risk factors for cost implications
Employee
categorization
Parameter
Low paid
Those whose household income falls below 400% of the Federal poverty
level can lead to affordability issues with a $3,000 employer tax penalty
for employees who take coverage in the Exchanges and receive a
Federal premium subsidy.
Opted-out
Employees, especially those without a working spouse, currently opting
out of coverage will likely create opt-out returnees due to the individual
mandate.
Temporary or
seasonal
If just one 30-plus hours per week employee isn’t offered coverage in
any given month, there is a $2,000 (1/12th on a monthly basis) employer
tax penalty for every 30-plus hours employee [minus 30].
30-plus hours per
week ineligibles
If this category of employees cannot be reduced to less than 30 hours
per week, they will have to be offered coverage in order to avoid the
same “no coverage” $2,000 employer tax penalty application.
Union
Usually offered substantial health care benefits to which the high-cost
plan excise tax is more likely to apply.
19 May 2011
Health care reform: Implications for US employers
Page 12
Employer strategies under consideration
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“Old” strategies may have new applications:
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“Pay” or “Play”
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Increase employee cost sharing
“Unit” pricing
Wage-based health plan contribution schemes
Cost management strategies
“Play”
Exit in 2014
Contingent exit strategy
Managing excise tax
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60% actuarial plan
Dropping FSA
19 May 2011
Health care reform: Implications for US employers
Page 13
“Pay or Play” options
Aggregate cost of "pay" and
compensation increase (billions)
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Year
19 May 2011
Net Cost (Play) After Tax
2014 Exit - Pre Tax
2018 Exit - Pre Tax
2018 Exit - Post Tax
Health care reform: Implications for US employers
2014 Exit - Post Tax
Page 14
Managing the high-cost plan excise tax
No FSA contribution
50,000
80%
3 Years
45,000
Gross cost
40,000
35,000
6 Years
30,000
60%
25,000
20,000
15,000
Excise tax limit
10,000
5,000
-
Year
Single 60% Actuarial Value
19 May 2011
Single 80% Actuarial Value
Health care reform: Implications for US employers
Single Excise Tax Threshold
Page 15
Summary
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Health care reform creates a dynamic environment with
many moving parts.
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Health care reform changes the landscape with respect to
cost, compliance, operational, and overall governance
risks.
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Employers need to be prepared with a long-term strategy
(or contingent strategies) based on external market
reactions or “triggers” over the next several years.
19 May 2011
Health care reform: Implications for US employers
Page 16
Events to watch
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Legislative changes on targeted provisions
Cost changes in private plans
November 2012 Presidential elections
Employer design changes leading into 2014
Constitutionality of the individual mandate
Credibility and viability of state insurance exchanges
Employers exiting health care sponsorship
19 May 2011
Health care reform: Implications for US employers
Page 17
Case Studies
19 May 2011
Health care reform: Implications for US employers
Page 18
Case Study 1 – Salary Based Contributions:
Overview
Employee demographics
Industry
Professional services
Active employee count
250,000
Employees below 400% of federal poverty level
75,000
Employees above 400% of federal poverty level
175,000
Average age
39
Plan Statistics
Plan participants
210,000
Employees declining coverage
40,000
Gross cost per capita
$10,750
Employer subsidy
19 May 2011
Health care reform: Implications for US employers
77%
Page 19
Case Study 1 – Salary Based Contributions :
Observations
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Moving to salary based employee contributions effectively
mitigated risk against employer mandate taxes
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Only 23 employees below 400% of federal poverty level with
employee contributions over 8% of income
Moving to salary based employee contributions increased
risk to individual mandate
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It is expected that over 20,000 currently opted out
employees move back into employer sponsored coverage
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Increasing number of coverage tiers to mitigate against
dependents to age 26 increased risk to excise tax
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Consider unintended consequences of strategy
19 May 2011
Health care reform: Implications for US employers
Page 20
Case Study 2 – Low Wage Workforce:
Overview
Employee demographics
Industry
Retail/Hospitality
Active employee count
100
Full time salaried employees (offered coverage)
10
Full time hourly employees (no coverage)
40
Part time hourly employees (no coverage)
50
Average wages
<$20,000
Plan Statistics
Plan participants
4
Employees declining coverage
6
Full time employee not offered coverage
40
Employer subsidy
19 May 2011
Health care reform: Implications for US employers
50%
Page 21
Case Study 2 – Low Wage Workforce :
Observations
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Low salaries plus high employee contributions create
significant risk to employer mandate
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In 2014, this group would have to offer coverage to all full
time employees or pay penalty on all employees
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If this group opened up coverage to all full time
employees, it is expected that employer mandate
penalties would reach cap of $40,000
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Penalty to eliminate coverage would be $40,000 annually
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This is an extreme case
19 May 2011
Health care reform: Implications for US employers
Page 22
Case Study 3 – Long Term Strategy:
Overview
Employee demographics
Industry
Manufacturing
Active employee count
270
Employees below 400% of federal poverty level
152
Employees above 400% of federal poverty level
118
Average age
47
Plan Statistics
Plan participants
228
Employees declining coverage
42
Employer subsidy
19 May 2011
Health care reform: Implications for US employers
79%
Page 23
Case Study 3 – Long Term Strategy :
Grandfather status
Estimated savings value of maintaining grandfather status:
Plan Year
Savings
Percent Savings
2011
$17,182
0.5%
2012
$18,513
0.5%
2013
$19,902
0.5%
2014
$21,345
0.5%
2015
$22,839
0.5%
2016
$24,381
0.5%
2017
$25,965
0.5%
2018
$27,588
0.5%
2019
$29,244
0.5%
19 May 2011
Health care reform: Implications for US employers
Page 24
Case Study 3 – Long Term Strategy :
Grandfather status
Sample projected PPO plan changes that can be made and still maintain grandfather status*:
Individual InPlan Year Network Deductible
2011
$356
Individual Out of
Pocket Maximum
In network
Coinsurance
In network PCP
Copay
$4,750
90%
$25.00
2012
$368
$4,906
90%
$25.00
2013
$380
$5,067
90%
$25.34
2014
$393
$5,235
90%
$26.17
2015
$406
$5,408
90%
$27.04
2016
$419
$5,589
90%
$27.94
2017
$433
$5,776
90%
$28.88
2018
$448
$5,970
90%
$29.85
2019
$463
$6,171
90%
$30.86
*Maximum allowable changes are dependent on Medical CPI. Based on historical Medical CPI as
published by the Bureau of Labor Statistics, we have assumed Medical CPI to be 3.75% for the next 10
years.
19 May 2011
Health care reform: Implications for US employers
Page 25
Case Study 3 – Long Term Strategy :
Observations
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Client may wish to manage plans down towards a 60% actuarial value
over the next several years
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Currently, EPO estimated to be at 86.4% actuarial value and PPO
estimated to be at 78.9% actuarial value
This can be achieved by adding a high deductible option and phasing out
EPO over time (Costs are more difficult to manage with EPO)
This will reduce risk to individual mandate by giving opted out employees
a less costly plan to move into and also reduce excise tax risk in 2018
A sample 9-year approach is shown on the next page
19 May 2011
Health care reform: Implications for US employers
Page 26
Case Study 3 – Long Term Strategy :
Observations
Years
Plan changes
Result
2011
- Increase PPO deductible to $500/$1,000
- Reduce EPO employer contribution
percentage to 77.1% (same as PPO)
Manages health care trend and
reduces incentive for employees
to move to EPO
2012 to
2013
- Reduce EPO employer contribution
percentage to 75%
- Increase PPO deductible to $600/$1,200
(consistent with trend)
Manages health care trend and
incentivizes employees to move
to PPO
2014
- Make EPO a “buy up” from PPO
(employer contributions same for each
plan)
- Add High Deductible PPO with 60%
actuarial value and very low employee
contributions
- Increase PPO deductibles to $750/$1,500
Moves employees out of EPO
into high deductible plan and
increases consumerism. Also,
provides low cost plan for
currently opted out individuals to
enroll in.
2014 to
2018
- Eliminate EPO plan
- Increase deductibles with trend
- Transition from FSA to HSA
Fully transitions to manageable
PPO plans with lower actuarial
values and prevents FSA from
triggering excise tax
19 May 2011
Health care reform: Implications for US employers
Page 27
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