©2004Towers Perrin

September 21, 2004

September 21, 2004

A Presentation to NAPEO

Trends in HRAs, HSAs, & Consumer Driven Healthcare

©2004Towers Perrin

Trends in HRAs, HSAs, & Consumer Driven Healthcare

September 21, 2004

Michael A. Barbour - Towers Perrin

3

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

Consumerism and Consumer Driven Health Plans

5

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)

6

Setting the context

The classic insurance model is designed to shift risk for expenses the insured: Can’t predict, or Can’t afford

Insurance Coverage

Risk Retention

Classic Insurance

Model

Cost

Pre

dic

tab

ility

7

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

Insurance Coverage

Risk Retention

Health Insurance

Model

Typical PPO Coinsurance

CopaysDeductibles

Typical HMO

Copays

Classic Insurance

Model

Insurance Coverage

Cost

Pre

dic

tab

ility

8

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

Risk Retention

CDHP Model

Classic Insurance

Model

Risk Retention

Insurance Coverage

Health Reimbursement

Arrangement

Cost

Pre

dic

tab

ility

Deductible Gap

Coin

su

ran

ce

9

Consumer-driven health plan prototype

Insurance Coverage

Health Reimbursement Arrangement

Preventive Care

• Employer Funds Only

• Notional Funding

• Balance accumulates

• Employer controls growth

• IRC Section 213(d) allowable expenses

• Earnings allowed on accumulation

• Employer controls exit rules

• Encourages prevention

• Minimizes hoarding

• Participant responsibility

• Allows Section 125 funding

• May precede HRA use

Coin

su

ran

ce

Deductible Gap

10

Consumer-driven health plan prototype

Insurance Coverage

Health Reimbursement Arrangement

Preventive Care

Ed

ucat i

on

& D

ecis

ion

Su

pp

ort

Deductible Gap

Coin

su

ran

ce

11

Consumer-driven health plan prototype

Insurance Coverage

Health Reimbursement Arrangement

Preventive Care

Netw

ork

s &

Care

Man

ag

em

en

tEd

ucat i

on

& D

ecis

ion

Su

pp

ort

Deductible Gap

Coin

su

ran

ce

12

Emerging consumer-driven health plan design

Insurance Coverage

Health Reimbursement Arrangement

Preventive Care

Netw

ork

s &

Care

Man

ag

em

en

tEd

ucat i

on

& D

ecis

ion

Su

pp

ort

Deductible Gap

Coin

su

ran

ce

Primary Deductible

13

Considerations

Financial Impact of Critical Design Factors

FactorOutcome leadingto Cost Savings

Outcome Leadingto Cost Increase

Provider Discounts At least as good as PPO Immature Networks

Health Selection Average Healthiest migrate

Care Management PPO or betterRely solely on member

responsibility

Consumption Efficiency 5% to 7%Graded with no improvements

in early years

MigrationFrom PPO, indemnity, and

inefficient HMOs From efficient HMOs

Opt Outs Not attracted in Choose coverage andmotivated to stay

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

CDHP Market Overview — Models & Vendors

15

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.

For this discussion, we will focus on POE and MSA models.

16

Leading Vendor Product Diagrams

Insurance Coverage

Member Responsibility

Medical Savings Account

“Deductible Gap”

Preventive Care100%

Benefit

Lumenos/Definity/Aetna/CIGNA/UHC

MSA (R&P) Deductible

Coinsurance

Cata

stro

phic

Choicelinx Menu

OV Copayment

Coinsurance

Deductible

Out-of-Pocket Maximum

$10$15$20

$0$200$500

$1,000$1,500$2,000

100%/80%90%/70%80%/60%

HealthMarket

Menu of Employee Choices

Providers

Primary CareCardiologistOB/GYNOrthopedicsENTLabMental HealthHospitalER

OV Copayment

Deductible

Coinsurance

Benefits

$10$15

$0$250

100%/80%90%/70%

Vivius

HealthMarket

Legend

Employee

Employer

MSA Products

Point-of-Enrollment Products

Out-of-PocketMaximum

17

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

$1,100

Coinsurance(90%/70%)

“Deductible Gap”($400)

MSA($800)

Preventive Benefits($300)

$1,400

OOP Maximum ($1,000)

Legend

Employee

Employer

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.

18

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

Legend

Employee

Employer

Coinsurance (90%/70%)

OOP Maximum ($1,500)

Cata

stro

phic

(1

00

%)

MSA (R&P)($500)

Deductible($250)

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

19

Point-of-Enrollment Products — Choicelinx

Company selects benefit options from which employees can choose personalized benefit plan

Company defines contribution toward coverage

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

Menu of Employee Choices

OV Copayment

Coinsurance

Deductible

Out-of-Pocket Maximum

$10$15$20

$0$200$500

$1,000$1,500$2,000

100%/80%90%/70%80%/60%

Cost-sharingCategories

BenefitOptions

RateTiers

Total BenefitOptions

4

4

4

4

3

2

3

3

3

768

243

48

20

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)

Menu of Employee Choices

Providers

Primary CareCardiologistOB/GYNOrthopedicsENTLabMental HealthHospitalER

OV Copayment

Deductible

Coinsurance

Benefits

$10$15

$0$250

100%/80%90%/70%

Observations: 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

21

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

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 copaymentObservations: 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

Office Urgent Emergency Out of Out ofBenefit Visit Care Room Inpatient Pocket Benefit Pocket Rx Rx Generic Rx P-Brand Rx NP-Brand

Percentage 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

PHARMACY BENEFIT COVERAGEMEDICAL IN-NETWORK BENEFIT LEVEL MEDICAL OON BENEFIT LEVEL

22

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

CDHPs – Effect on Participants

24

Out-of-Pocket Expense Comparison

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

$0 to $250 $251 to$500

$501 to$1,000

$1,001 to$1,500

$1,501 orgreater

100/80

90/70

Lumenos

HealthMarket

*Based on actual data; does not include added employer cost for expanded definition of eligible services

Percentage of Claim Cost Paid by Employer*

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.

25

Sample Member — New to the Workforce

Covered Charges Member Cost-Sharing*

ServicesPerformed

AllowedCharges

Routine &Preventive

100/80 90/70 HMI Aetna,Lumenos,Definity

Office Visit New patientexam, urinalysis

$42 $42 $15 $15 $0 $0

Office Visit Well womanexam

$144 $144 $0 $0 $0 $0

Office Visit Common cold $53 $53 $15 $15 $0 $0

Totals $239 $239 $30 $30 $0 $0

*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.

26

Sample Member — Pregnant Employee (through delivery)

Covered Charges Member Cost-Sharing*

ServicesPerformed

AllowedCharges

Routine &Preventive

100/80 90/70 HMI Aetna,Lumenos,Definity

Initial Visit Pregnancy test,pelvic exam,other lab work

$339 $339 $15 $15 $0 $0

2nd Visit Pelvic exam $157 $157 $0 $0 $0 $0

3rd Visit Blood test andother lab work

$198 $198 $0 $0 $194 $0

4th Visit 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

Totals $4,761 $916 $30 $410 $652 $726

*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.

27

Sample Family — Typical Vendor Example

Covered Charges Member Cost-Sharing*

Services/Diagnoses

AllowedCharges

Routine &Preventive

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

Totals $632 $365 $70 $70 $267 $0

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.

28

Sample Family — High Cost Family Member

Covered Charges Member Cost-Sharing*

Services/Diagnoses

AllowedCharges

Routine &Preventive

100/80 90/70 HMI Aetna,Lumenos,Definity

Husband Skin abrasion $89 $89 $15 $15 $0 $0

Wife Cold, handinjury

$100 $100 $30 $30 $0 $0

Child #1 Office visits $128 $128 $30 $30 $0 $0

Child #2 Metabolicdisorder

$3,714 $59 $15 $366 $366 $903

Totals $4,031 $376 $90 $441 $366 $903

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.

High Deductible Health Plans (HDHP) and Health Savings Accounts (HSA)

30

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?

31

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

32

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)

33

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

34

Advantages of HDHP with HSA or HRA

HSA

HRA

Comments

Fosters consumerism

Lessons from Rand Corporation Health Insurance Experiment must be considered

Provides another plan option

Introduces a different way to share cost

Increases employee accountability

Encourages provider competition

Allows portability of funds HSA funds are owned by the individual and, therefore, portable

35

Advantages of HDHP with HSA or HRA

HSA

HRA

Comments

Provides funds for current and

future needs (including nonmedical related expenses)

HRA amounts may be carried over for use with covered medical expenses; subject to plan provisions

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 HRAs are generally offered with no potential for investment growth (interest); ERISA-status of HRA raises fiduciary issues

36

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

37

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

38

Disadvantages of HDHP with HSA or HRA

HSA

HRA

Comments

Cost may increase due to adverse

selection

Pricing approach can address selection issues

Cost may increase due to account accumulation

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

Requires restricting use of health care FSA

HRA may also have restrictions

39

Disadvantages of HDHP with HSA or HRA

HSA

HRA

Comments

Immature vendors

Fosters use of same vendor for medical and prescription drug coverage

HDHP must apply to medical and prescription drugs

Potential for first-dollar coverage

Concern is minimal for HSA because it is the participant’s own money

May need to use higher individual deductibles for family coverage

Plan design flexibility is greater with HRA

Creates winners and losers

Early Results

41

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

Early results

42

Early results

Data from Definity Health care management system as of July 31, 2002.

Prescription Drug Utilization Comparison

0.56 0.62

0.00

0.25

0.50

0.75

1.00

2001 YTD2002

Definity Health

Industry HighBenchmark

Industry LowBenchmark

43

Early results

Hospital Utilization (per 1,000)

5848

39

208

134 136

0

25

50

75

100

ModeratelyManaged

Well Managed Definity Health

Adm

issi

ons

0

75

150

225

Days

Admissions Days

Data from Definity Health care management system as of June 30, 2002.

44

Claims Statistics — Definity Health

$11$105

$221

$422

$671$769

$902$977

$0

$400

$800

$1,200

$1,600

J an Feb Mar Apr May J un J ul AugMonth

YTD Cumulative PCA* Claims Paid Per Employee for 2001

YTD

PC

A C

laim

s P

er

EE

*Personal Care Account Claims data incurred January 1 through August 31, paid through August 31, 2001.

Maximum Annual PCA is $1,500

45

Utilization of Expanded Services

All employers: 4.2% (range 2.8% to 28.0%) Most common services:

—Vision 39%—Dental 25%—All other (complementary medicine) 36%

PCA/MSA claim cost for expanded scope (items not included in traditional health coverage)

Aetna projects 5% increase in total cost if coverage is expanded

Definity Health

46

Near-Term Benefits and Costs — MSA Plans

$341

$1,006

$1,667

$2,324

$2,966

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1 2 3 4 5

A verage MSA Surplus A mong Members with Fully Funded Deductibles*

Year (following first year)

*Assumes 8% annual medical trend.

Average MSA surpluses based on medical claim data analyzed by Towers Perrin

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

47

Interest in CDHPs is growing rapidly

1% 0%

7%

1%

19%

5%

44%

13%

0%

10%

20%

30%

40%

50%

2003 2002 2003 2002

As a total replacement offering

As an option alongsidetraditional health plan

options

Source: Towers Perrin 2003 Health Care Cost Survey

Respondents were permitted to select both “Have adopted” and “Are considering” , if appropriate

Have adopted

Are considering

48

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

49

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

What Consumerism and CDHPs Promise for PEOs

©2004Towers Perrin

Consumer-Driven HealthcarePEO Considerations

Mark C. Perlberg

President & Chief Executive Officer

Oasis Group

September 21, 2004

52

Agenda

Overview

Relevance

Highlights of a few key provisions

Appeal (pro’s, con’s and possible “hybrids”)

PEO Action Plan

Conclusion

53

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.

54

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.

55

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.

56

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.

57

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.

58

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.

59

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.

60

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.

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CostThe 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?

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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!

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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.