THE RISING COST OF MEDICAL INSURANCE May 2003

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THE RISING COST OFMEDICAL INSURANCEMay 2003
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CURRENT TRENDS ON THE MEDICAL COVERAGE
COMPLIANCE LANDSCAPE
Recent medical marketplace trends indicate a
growing move by larger employers towards
experience rated medical plans.
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REASONS FOR THE DEVELOPINGSHIFT FROM COMMUNITY
RATED TOEXPERIENCE RATED MEDICAL PLANS

• Greater Plan Design Control
• Desire for Out-of-Network Benefits to be
  Available
• Perceived Greater Cost Control Potential

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WHY HAVE HMOS LOST SOME OF THEIR COST CONTROL
ABILITIES?

• HMOs still rank as the lowest cost per capita
  medical delivery model available. (Hewitt 2002
  study)
• However, recent HMO rate increases have
  escalated to a point where some groups have
  found lower costs in non-HMO plans.

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INCREASING PREMIUM TREND FACTORS

• Administration Waste
• Providers have become better negotiators
• Fewer competitors less concern for member
  growth
• HMOs enrollment now reflects entire risk base
• Population shift pyramid to column
• Move by better risks out of community pool
• Technology, Rx, and treatment enhancements

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IMPACT OF REDUCEDCOST CONTROL

• Fewer Competitors Member Growth More focus
  on reaching and maintaining desired margins
• HMO risk base now contains cross section of risk
• Population demographic shift significant

POPULATION SHIFT
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The impact of better risks leaving the community
pool is creating a similar phenomenon on a macro
scale, that individual employer indemnity plans
saw on a micro scale in the late 80s and into
the mid 90s.
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As Lower Claims groups leave the broader
community base, the community plan is left with
more groups having higher than average claims per
member. This in turn causes the premiums to
escalate at a faster pace.
This in turn sets up the next cycle of Lower
than Average Claims groups departing from the
broader community base and on it goes until only
the highest claim group remains.
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COMMUNITY VS. EXPERIENCE

• Many factors to consider
• Timing is Everything
• Too involved to address in this presentation

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PLAN FOR THE FUTURE Consumer Driven Healthcare

• The idea behind Consumer Driven Healthcare.
• Provide more control to the Consumer on how
  healthcare dollars are spent.
• Provide the Consumer with knowledge to make more
  informed decisions.

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What Percent of Medical Care Was Paid By Patients?

• In 1960?
• 50.
• In 1980?
• 24.
• Today?
• 15

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HEALTHCARE REIMBURSEMENT ARRANGEMENT HIGH
DEDUCTIBLE HEALTHCARE COVERAGE
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HRAs DEFINED
Basically,

• An HRA is an Employer-Funded Healthcare Expense
  Reimbursement Plan which may permit carryovers
  and spend-downs.

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HRAs DEFINED (cont)
Key Characteristics of an HRA

• Employer-funded only (no employee funds or flex
  credits)
• Can reimburse out-of-pocket medical expenses and
  certain insurance premiums (HIPAA alert!!!)
• May allow unused amounts to be carried over for
  use in future years.
• Can be established as a standalone plan, but most
  common use is expected to have the HRA offered in
  conjunction with high deductible health coverage
  (HDHC).

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REASONS TO ESTABLISH AN HRA

• Mounting Premium Increases Will Force Search For
  Alternatives
• ER switches to HDHC to reduce premium increases
• ER then establishes an HRA to reimburse employees
  for medical expenses for a portion of the
  deductible amount.
• Ultimately, the plan design is meant to reduce
  the total employer cost of providing medical
  benefits versus what the cost would have been had
  the employer retained the low deductible/co-pay
  plan and absorbed most of the premium increase.

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Reasons (cont)

• HRA carryover feature may make individuals more
  frugal purchasers of health care, especially
  when coupled with HDHC
• Making informed decisions becomes increasingly
  important.
• ViewMyBenefits website.

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ARENT THESE JUST SPECIAL HEALTH FSAS?
Not At All

• An HRA is 100 employer funded
• No salary reductions or flex credits are allowed
  in an HRA
• A Health FSA may be funded with
• Salary reductions and/or flex credits (sometimes
  with seed or matching employer contributions)
• Unlike a Health FSA, an HRA can
• Permit carryovers and spend-downs
• Have monthly accruals
• Reimburse expenses incurred in one year from a
  subsequent years HRA accruals if the employee
  was an HRA participant when the expenses were
  incurred

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HRA MATCHED UP WITH HDHC A MATCH MADE IN HVN

• HRA is tied to a Major Medical Health Plan
• Major Medical Plan has high deductibles
• High deductible amount is employers discretion
• Employees who participate in the HDHC receive a
  100 employer-paid HRA (No direct or indirect
  funding with pre-tax contributions)
• Watch carefully compliance issues if employees
  contribute to major medical plan with pre-tax
  contributions
• Reimbursements from HRA
• May be limited (e.g., to deductible, co-pays and
  other out-of-pocket medical expenses)
• May be broad (so long as within Code Section
  213(d) definition)
• Unused amounts can be carried over to following
  years

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WILL HRAS REALLY SLOW THE EVER INCREASING COST
OF MEDICAL COVERAGE?

• Relph Benefit Advisors designed plans using this
  concept in the late 80s and early 90s, with
  success.
• Our plans used FSAs to fund the high deductible.
• Effective, but more cumbersome than HRAs.

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HRA COUPLED WITH HDHCPLAN DESIGN EXAMPLE

• 1 Employees get high deductible health coverage
• (e.g., 2,000 deductible)
• 2 Employees get a 100 employer-paid HRA (e.g.,
  1,250)
• The HRA is used to satisfy the deductible,
  co-pays and etc.
• All or a portion of unused amounts in HRA can be
  carried over to following year
• 3 Employees get first-dollar coverage for
  certain preventive services
• Such as annual physical exams, etc.
• 4 Discounted network providers fees may apply

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HRA COUPLED WITH HDHC FUNDING
Employer funds HRA
Reimburses Medical Plan Qualified
- - - - - - - - Expenses Employee pre-tax
Employers Reimburse funds
HDHC expenses (Major
Medical) covered under major medical
plan
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HRA MUST BE FUNDED SOLELY BY EMPLOYER

• HRA amounts cannot be attributable to salary
  reduction or otherwise be provided under a
  Cafeteria Plan
• HRA may be offered in conjunction with Cafeteria
  Plan so long as it is not funded directly or
  indirectly with salary reduction
• Participation most likely limited to those who
  elect underlying HDHC where HDHC is funded via
  salary reduction
• IRS will examine numerous facts and design
  elements to determine whether prohibited funding
  has occurred

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NO DIRECT PRE-TAX FUNDING

• Employees cannot elect to pay for HRA with
  pre-tax contributions
• Salary reduction agreement/election form should
  indicate that pre-tax contributions are NOT for
  HRA

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NO INDIRECT PRE-TAX FUNDING

• There must be no correlation between salary
  reduction for major medical plan and HRA amount
• Dont Do the Following
• HRA and salary reduction amount for major medical
  cannot increase or decrease in tandem
• Option 1 HRA500/salary reduction 300
• Option 2 HRA700/salary reduction500
• Employees cannot use HRA funds to pay the premium
  for employer major medical coverage instead of
  paying the premium via salary reduction

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NO INDIRECT PRE-TAX FUNDING

• Permissible Practices
• Variations between individual/family coverage
• Single coverage/HRA of 1,000/salary reduction
  1,000
• Family coverage/HRA of 2,000/salary reduction
  3,500
• Inverse Correlation should be permissible
• HRA amount for multiple options decreases as
  salary reduction amount for multiple options
  increases or HRA amount increases as salary
  reduction decreases
• Option 1 HRA500/salary reduction300
• Option 2 HRS800/salary reduction200

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INDIVIDUAL ACCRUALS

• Each Participant accrues an amount per year or
  month
• A recordkeeper keeps track of each participants
  current account balance (crediting accruals and
  debiting the account when reimbursements are
  made)
• Similar to a vacation pay account, where the
  balance goes up and down during the year
• Amount and timing of the HRA accrual is a plan
  design feature set by the employer
• Monthly, quarterly or yearly accruals are okay

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CARRYOVERS

• Carryovers of an individual employees unused
  funds is the key feature that distinguishes HRAs
  from Health FSAs.
• Permissible limits on the carryover amounts
• Placing a cap on the carryover amount
• Limiting the carryover to a certain percentage of
  the unused amount

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OUT-OF-POCKET MEDICAL EXPENSES PERMISSIBLE HRA
DESIGNS

• Reimburse only medical expenses covered by the
  major medical plan that are not reimbursed due
  to the plans deductible, co-pay or other limits
• Common when an HRA is coupled with an HDHC
• Reimburse any out-of-pocket medical expenses,
  even ones not covered by the major medical plan
• Reimburse a narrow group of code section 213(d)
  expenses (e.g., only dental or vision expenses)
• Substantiation rules apply

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ERISA PLAN ASSET ISSUES

• No requirement to set aside funds in a separate
  account
• If funds are set aside in a separate account
  ERISAs trust requirement will most likely
  apply and an annual report with financial
  information will be required.

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HIPAA COMPLIANCE CONCERNS-PORTABILITY

• HRAs are health plans subject to HIPAA
  portability requirements (If employer annual
  contribution gt500)
• Special enrollment requirements
• Certificate of coverage
• Either give credit for prior coverage or have no
  preexisting condition exclusion (PCE) clause
• Contributions/eligibility/benefits cannot be
  based on health factors
• HRA carryover feature should not violate the
  health status nondiscrimination rules, as all
  employees participating in the HRA for the same
  number of years have the same aggregate benefits
  available to them

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HIPAA COMPLAIANCE CONERNS ADMINISTRATIVE
SIMPLIFICATION

• HRAs are health plans subject to HIPAA
  administrative simplification (AS) requirements
• Privacy
• Security
• Electronic Data Interchange (EDI)

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LEVEL OF COVERAGE/REIMBURSEMENT

• COBRA does apply
• Qualified beneficiaries may continue the level of
  coverage in effect immediately preceding the
  qualifying event
• IRS Notice 2002-45 The maximum reimbursement
  that was available immediately prior to the
  qualifying event must be made available.

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Relph.net

• Visit our Website for 1- A copy of this
  presentation. 2- A demonstration of our
  internet based benefit enrollment and
  service request system. 3- A demonstration
  of our ViewMyBenefits employee
  information website.