Converting from Employer Health Insurance to Defined Contribution Health Benefits

"The implementation of 2010 Healthcare Reform has created a $3,000/employee/yr arbitrage opportunity for U.S. Employers who convert in 2012 vs waiting for 2014."

Agenda

1.  The History of Employer Health Insurance

2.  The Future of Employer Health Insurance

3.  Healthcare Costs – The Greatest Issue Facing Americans

4.  The Cost of Health Care vs Health Insurance (employer windfall)

5.  Employer Arbitrage Opportunity- Switch Now from Group to Individual

6.  2014 and Beyond

7.  Summary

History of U.S. Employer Health Insurance - The Beginning

Creation of “Modern” U.S. Health Care Occurred Post-WWII

•  Limited employer involvement •  Catastrophic health insurance •  Local Blue Cross / Blue Shield •  Individual / family driven

•  Wage & Price Controls (1941-1947)

•  Employer-sponsored health care exempted from income taxes

World War II

Pre-WWII Post-WWII

HUGE cost advantage to

employer system

History of U.S. Employer Health Insurance, WW2 - 2002

Tax Advantages - Group vs Individual Coverage

Group policies enjoyed enormous tax advantages over individual:

•  Employers allowed to pay for group insurance “off the books” •  Employees allowed to pay (via salary reduction) for group

insurance "off the books"

History of U.S. Employer Health Insurance, 2002 - Today

Federal Government Gives Tax Parity to Individual Policies

2002 - HRAs Health Reimbursement Arrangements for employer tax-free contributions

2009 - PRAs Premium Reimbursement Arrangements for employee tax-free contributions

Defined Contribution Health Benefits

Pre-ACA Legislation 1965-1996

Medicare (1965) - 48 million covered today •  Removed the elderly and very sick from private

insurance Medicaid (1965) - 52 million covered today

•  Removed the very poor from private insurance ERISA (1974) - Primarily retirement/pension reform but covered all employee benefits

•  Defined Benefits vs Defined Contribution Plans COBRA (1986) – exempts employers <19 employees

•  Allowed employees 18-36 month coverage between “jobs”

HIPAA (1996) •  Portabilty to next employer (63 days), Mandated

state coverage of uninsurables post- 2006

Affordable Care Act (ACA) Legislation 2010-2014

Mandated Benefits for All Policies – creating “generic” national health insurance

Mandated Purchase for all Americans (the “Mandate”) --$750 is not much of a Mandate Mandated Guaranteed Issue for All Individual Policies --Children became GI in 2010 --Some Adults become GI 2011-2014 (Federal Risk Pool) --All become GI in 2014

Major Expansion of Medicaid Eligibility (economically challenged by many States)

Future of U.S. Employer Health Insurance - 2014?

Healthcare Reform Favors Defined Contribution

•  Medical Underwriting •  No Federal Subsidies for

Individual Policies •  Employer-Driven

•  No Medical Underwriting •  Federal Subsidies for

Individual Policies •  Individual/Family-Driven

2014 Reform

Pre-2014 Post-2014

HUGE cost advantage to

individual system

Defined Contribution Health Benefits (1999-2014)

1970s - Defined Benefit vs Defined Contribution (IRA, 401k)

1999 - Extend Health (formerly Extend Benefits), retirees

2002 - IRS endorses HRAs for Individual policy premiums 2006 - HIPAA mandate for uninsurables starts

2007 - Zane Benefits (front page Wall St. Journal 7/30/07)

2009 - IRS endorses PRA Plans for Individual Policies 2014 - Individual Policies become Guaranteed Issue

The Problem Today with Employer Health Insurance

Employers offer insurance for recruiting & retention b/c:

1.  It is tax deductible to the business

2.  Employees get the benefit 100% tax-free

3.  Individual health insurance is not guaranteed-issue in most states (i.e. Moral Obligation)

BUT, Health Insurance Costs are not the

REAL Problem

HEALTH INSURANCE COSTS TOO MUCH !

Real Problem #1 with U.S. Health Insurance

Real Problem #1 is NOT The Cost of Health Insurance... It's the $3 Trillion Cost of U.S. Healthcare ! •  Employer health insurance drove

up the the cost of healthcare •  U.S. Healthcare now 3x other

developed nations •  50% ("five zero") of Medical

Procedures Do More Harm than Good

Real Problem #2 with U.S. Health Insurance

It's Obesity We are not gathered here today to solve Obesity--We are here today to identify a $3,000+/Employee Economic Opportunity for U.S. Employers.

Real Problem #2 is Why U.S. Healthcare Cost 300% (3X) the Healthcare Cost of Other Developed Nations

How U.S. Citizens Get Health Care Today

Cost of U.S. Health Care Today •  314 million Americans •  $3 trillion ($3,000 billion) cost of health care •  $9,500* per year per American Cost of U.S. Health Care

*The entire China GDP per capita is $8,500 per year. We (U.S.) spend more per person on healthcare than the Chinese spend on EVERYTHING COMBINED

Let’s look closer at these 314 million Americans and their health care spending by major groups

How 314 Million Americans Get Health Insurance

200 Million - Private Sector ~160 million are on Employer Group plans ~40 million are on Individual plans

114 Million - Public Sector ~50 million are on Medicare (aged) ~50 million are on Medicaid (poor) ~14 million are on VA, uninsured, etc.

Total Cost of Total U.S. Healthcare $3 trillion / 314 million Americans = $9,500/American/year*

*$792/American/month for the "average" American but no American is "average"

Working Americans Are 3x Healthier than Non-Working

64% of the Working Americans Consume 36% of Total Healthcare - 3:1 ratio (or 36% combined Medicare/Medicaid population consume 64% of healthcare) 200 Million working Americans on Private Health Insurance

~160 Million on Group Employer Plans ~40 Million on Individual Plans*

*Majority not yet reimbursed by employers Cost of Healthcare for 200 Million Working Americans

160 million x $6,000/person/yr ($500/month) = $960 billion 40 million x $3,000/person/yr ($250/month) = $120 billion 200 million total = $5400/person/yr ($450/month) = $1080 billion [vs $16,842/person/yr ($1400/month) = $1.92 trillion for non-working]

Working Americans (incl. dependents) are 3X as healthy and cost 1/3 as much as the non-employed (i.e. Medicare and Medicaid) population We (employer benefits industry) have created our own self-selected group for health insurance that excludes higher-cost Americans

2012-2014 Arbitrage Opportunity for 200 Million Working

1. Switch insurable employees to individual health plans 2. Switch uninsurable employees to government guaranteed coverage 3. Use Defined Contribution software to maintain tax advantages 40 Million Americans w/ Individual Plans Should be 200 Million Cost of Health Insurance for 200 Million Working Americans

~160 million x $6,000/person ($500/month) = $960 billion ~40 million x $3,000/person ($250/month) = $120 billion ~200 million total = $5400/person ($450/month) = $1080 billion

40 million mostly in 45 states allowing medical underwriting 1. Assume health insurance a civil right 2. Group windfall -- self-selected healthier people (40% discount--$6000 vs $10000 3. Individual bigger windfall - insurance company selected healthier people (70% discount--$3,000 vs $10000)

2012-2014 Arbitrage Opportunity for 160 Million Group

Review: Move the 160 million employees (+ dependents) from Group Employer Plans costing $500/month/person to Individual Plans costing $250/month/person Only has to last 1 year (through 2013) before all U.S. plans become Guaranteed Issue (e.g. Short-term coverage can work) Guaranteed Issue is already here for millions of Americans TODAY due to 2010 Healthcare Reform 2010-2013 Implementation, e.g.

1.  CHIP - Children under 18 2.  PCIP - Adults w/o Health Insurance for 6 months 3.  State Risk Pools - Greatly improved 4.  Other State-by-State Programs, specifically children

NOW to 2014

If you're in a group plan, you're in a pool paying $6,000 / person Switch employees to individual plans, to be in pool paying $3,000 / person Why now? Because existing pieces of ACA make individual transition easier for employees and address employer Recruiting and Retention issues:

•  Employee Costs (Retention... most group plans no longer pay for dependents, employees saves full 50% or more)

•  G-Issue Child-Only (Retention...) •  HIPAA Plans (Retention... ) •  PCIP (Recruiting...Better than Group Health Plan Waiting period,

cheaper and portable, goldman sachs coverage) •  2014 is right around the corner.

Arbitrage Opportunity → get in now to capture 50% savings

2014 and Beyond

IN 2014, one of three things must happen with Health Care Reform (ACA)

1.  Occam's Razor - ACA gets implemented (most likely) - Market will shift rapidly to Individual health insurance, huge opp to maintain tax deduction for Recruiting and Retention, huge benefit to majority of employees via tax subsidies.

2.  Nothing Happens - Why? Bill Repealed by Republican Win. Arbitrage opportunity in individual market continues indefinitely... (50% savings)

3.  Limbo Happens - Implementation Delayed due to Lack of Funding for Subsidies (i.e. Affordable Care Act October 2011)

Summary of 2014 Affordable Care Act for Employers/Employees Mandated Benefits for All Policies

•  No lifetime maximums on benefits •  Preventive Care with no co-pays or deductibles •  Federal Minimum (effectively maximum) benefits

Employee w/ Family of 4 (see kff.org)

Summary of 2014 Affordable Care Act for Employers/Employees

Employers < 50 FTEs – No Penalty Assume “health insurance” back in 2010 cost $6,000/year/person

•  White House wanted $10,000 Employer Penalty

•  Senate wanted $750 Employer Penalty •  House wanted $2,000 Employer Penalty

Employers > 50 FTEs – Penalty if Not Offering “Qualified, Affordable” #1

•  ($3,000/employee receiving exchange subsidy. $2,000 max. on all employees)

Summary

•  The Core Problem is that Employer Health Insurance Costs Too Much •  Real problem is that Health Care costs too much •  Employer Health Insurance Exists Today Because of 60 years of Cost-

Advantages for Employer Market (i.e. tax deductibility) •  In 2002 and 2009, Defined Contribution (HRA & PRA) plans leveled the

tax "playing field" for individual plans •  In 2014, ACA creates Major Cost-Advantages for Individual Health

Insurance (i.e. tax subsidies) •  Death of Employer Group Health Insurance - 2014 and Beyond

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Thank You!

The Future of Health Benefits is Now. What are You Waiting for?

DISCLAIMER The information provided herein by Zane Benefits is general in nature and should not be relied on for commercial decisions without conducting independent review and analysis and discussing alternatives with legal, accounting, and insurance advisors. Furthermore, health insurance regulations differ in each state; information provided does not apply to any specific U.S. state except where noted. See a licensed agent for detailed information on your state. www.ZaneBenefits.com

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