Employer Coverage in the Era of Exchanges Presented by: Caroline Pearson

September 9-12

Bellagio Resort Las Vegas, Nevada

9/4/2013 1

Employer-Sponsored Insurance: Mandate

Impact and Employer Response

Presented by Caroline Pearson

September 2013

avalerehealth.net 2

Agenda

3

● Affordable Care Act (ACA) Provisions Impacting Employers

● Employer Mandate and Decision to Delay

● Monitoring Employer Behavior to Mitigate Impact of the Mandate

● Outlook for Other Employer Trends

● Conclusions

9/4/2013

ACA Provisions Impacting Employers

4

Employers Offer Coverage For Three Main Reasons

The ACA make significant changes only to the second of these reasons – insurance market

reforms and exchanges could potentially create a viable alternative to ESI

1. Employers offer health benefits as part of overall compensation package to recruit and retain employees

2. Employers offer health benefits because there has been no viable alternative for employees to obtain comprehensive coverage on their own

3. Employers offer health benefits to boost worker productivity

Why Employers Offer ESI

ESI = Employer-sponsored insurance

5 9/4/2013

Small Employers Are Less Likely to Offer Health Benefits and the Offer Rate Has Fallen in Recent Years

47%

72%

87%

95% 98%

59%

76%

92% 95%

99%

48%

71%

85%

93%

99%

50%

73%

87%

94% 98%

45%

68%

85% 91%

99%

3 - 9 Workers 10 - 24 Workers 25 - 49 Workers 50 - 199 Workers 200+ Workers

2009 2010 2011 2012 2013

Percentage of Firms Offering Health Benefits

Source: Kaiser Family Foundation/HRET, Employer Health Benefits 2012 Survey

6 9/4/2013

Employer Coverage Likely to Remain Stable Through 2016

7

49 40 35 26

50 55 57

58

8 12 22 16 13 12 11

144 144 145 146

5 5 5 5

50 52 53 55

2013 2014 2015 2016

EXPECTED SOURCES OF COVERAGE (IN MILLIONS)

Medicare

Other Public Programs

Employer

Non-Group

Exchanges

Medicaid and CHIP

Uninsured

Source: Avalere Enrollment Model, May 2013, Scenario 3, which assumes 26 states opt out of the Medicaid expansion.

9/4/2013

Several ACA Provisions May Affect Employers’ Decisions to Offer Health Insurance

Provision Description ESI

Impact

Employer

Mandate

Employers with >50 workers will face penalties if they do not

offer affordable coverage

Individual

Mandate

Requires individuals to purchase insurance coverage or pay a

penalty

Exchanges States must establish an exchange for the individual and small

group markets by 2014 or rely on federal-fallback

Subsidies/

Medicaid

Expansion

Provides sliding-scale tax credits to individuals from133 to

400% of FPL; Extends Medicaid coverage to those up to 133%

of FPL

FPL = Federal Poverty Level

8 9/4/2013

The ACA Will Increase Costs for Some Employers

9

Employer

Costs

Factors Driving Employer Costs Higher

• Generosity requirements for companies with

mini-med plans

• Higher uptake rates among employees

• Coverage requirement for part-time

employees working more than 30

hours/week

9/4/2013

Estimates of ACA’s Impact on ESI Vary Widely Though Modelers Are Generally Consistent With Each Other

-30%

-21.5%

-3.8% -3.1% -2.5% -1.6%

2.7% 2.7%

McKinsey Booz Holtz-Eakin CBO1

RAND

Lewin

Urban

Benefit consultants and other experts largely agree

with the models that predict only small net changes

in coverage

Impact on early retirees not included in microsimulation model

estimates

Other policy analysts and

politicians, such as

Capretta and Bredesen

agree with McKinsey and

Holtz-Eakin

Estimates reflect different ACA phase-in periods

from 2010 to 2016

Gruber2

Source: See Appendix 1CBO and Joint Committee on Taxacion (JCT) estimate a decline of 3 – 5 M people with ESI (graphic above uses 4 million for display

purposes). CBO and JCT modeled 4 scenarios and results ranged from -20 M to + 3 million people with ESI. 2For percent change calculation, Avalere assumed that Gruber used the current/projected CBO ESI baseline for his estimates

10 9/4/2013

ESI Lives Stable in Short-Term; Certain Firms Could Drop

FIRMS WITH LOW WAGE WORKERS OR HIGH COSTS RELATED TO EARLY RETIREES ARE

THE MOST LIKELY TO DROP COVERAGE

11

Likely to Drop Unlikely to Drop

Firms with Low

Wage Workers

Firms with High

Early Retiree Costs

Small Businesses

(<25 Workers and

Microbusinesses)

Large Employers

9/4/2013

12

93.0%

70.1%

15.1%

77.6%

62.8%

14.1%

92.4%

68.8%

16.1%

78.1%

63.0%

14.3%

Full-Time Dependents Part-Time Full-Time Dependents

2013 2014

Part-Time

Medical Benefits Dental Benefits

MOST FIRMS EXPECT TO CONTINUE OFFERING BOTH MEDICAL AND DENTAL BENEFITS

FOR EMPLOYEES IN 2014

Firms Surveyed Anticipate a Very Small Drop in Medical Offer Rates & a Slight Increase in Dental Offers in 2014

Source: NADP, Employer ACA Implementation Tracking Study, May 2013.

9/4/2013

Employer Mandate and Decision to Delay

13

The Employer Mandate Places Onus on Large Employers to Offer Coverage

• Under the ACA, large employers are subject to a penalty when:

– Employers do not offer coverage

– Employers offer coverage that is not affordable

• Large employer is ≥ 50 full-time of full-time equivalent (FTE) employees

averaged across all months in the year.

• “Full-time” means an average of at least 30 hours per week.

• The employer mandate goes into effect on January 1, 2014.

FTE = Full-time equivalent Source: Proposed Rule on Shared Responsibility for Employers Regarding Health Coverage. http://www.gpo.gov/fdsys/pkg/FR-2013-01-02/pdf/2012-31269.pdf.

14

1

2

Employers With at Least 50 FTEs Must Offer Coverage that

Provides Minimum Essential Value or Face Penalties

Does the employer offer

coverage?

Applicable Penalties

Employer offers coverage that is

not affordable* and has at least

one full-time employee receiving a

premium assistance tax credit to

purchase exchange coverage

Penalty will be the lesser of:

(a) $2,000 times the number of full-time

employees excluding the first 30, or

(b) $3,000 times the number of full-time

employees receiving subsidies in an

exchange

Employer does not offer coverage

to its full-time employees and has

at least one full-time employee

receiving a premium assistance

tax credit to purchase exchange

coverage

Penalty will be $2,000 times the number of full-

time employees in the business, not counting

the first 30

Employers trigger penalties under the following scenarios:

*Unaffordable is defined as coverage with costs that exceed 9.5% of an employee’s household income. Source: Proposed Rule on Shared Responsibility for Employers Regarding Health Coverage. http://www.gpo.gov/fdsys/pkg/FR-2013-01-02/pdf/2012-31269.pdf.

15

HHS Delayed Employer Mandate Requirement by One Year

16

MOST OTHER KEY REQUIREMENTS, PARTICULARLY THE INDIVIDUAL MANDATE, REMAIN

EFFECTIVE FOR 2014

2013 2014 2015

Exchange

Coverage

Begins

January 1,

2014

Employer Mandate

Effective

January 1, 2015

Exchange Open

Enrollment

Begins

October 1 to March

31, 2014

Exchange Milestone

Employer Milestone

Individual

Mandate

Live

April 1, 2014

9/4/2013

Delay of Employer Mandate a Marginal Impact

17

A TEMPORARY REPRIEVE FOR MOST EMPLOYERS; MARGINAL IMPACT ON ENROLLMENT

PROJECTIONS

● Small impact on enrollment

projections for 2014

● 95% of large employers already offer

health insurance

● Some low-wage firms may elect to

not offer coverage in 2014,

potentially shifting these lives to the

exchanges

Impact on Enrollment Impact on Hiring

● Mandate incentivizes part-time over

full-time hiring for businesses large

and small

● Businesses on the cusp of 50 full-

time equivalent employees may not

delay hiring in order to avoid

increased benefit costs

Employers, large and small, were primarily concerned about the reporting

requirements, which was the primary impetus in the HHS delay

9/4/2013

Initial Enrollment Projections Intact Despite Mandate Delay

18

A TEMPORARY REPRIEVE FOR MOST EMPLOYERS; MARGINAL IMPACT ON ENROLLMENT

PROJECTIONS

Organization Impact

Initial Projections with

Enforced Mandate in

2014

Updated Projections

Based on Employer

Mandate Delay

Congressional

Budget Office*

Employer-Sponsored

Coverage Number 157 million 156 million

RAND

Corporation**

Workforce at Employed

Non-Offering Large Firms 2.3 million 2.6 million

Large Firms Not Offering

Insurance 23,000 24,000

* CBO Analysis of Employer Mandate Delay. July 30, 2013.

** Price, Carter C and Saltzman, Evan. “Delaying the Employer Mandate.” RAND Corporation.

9/4/2013

Monitoring Employer Behavior to Mitigate

Impact of the Mandate

19

Will Need to Monitor for Possible Employer Changes to Avoid

Mandate Penalties

20

POTENTIAL AVENUES EMPLOYERS MAY TAKE IN ORDER TO REDUCE HEALTHCARE

COSTS WHILE AVOIDING THE EMPLOYER PENALTY

Reduce number of employees (<50) or shift

workers to part-time status

Reduce the employer contribution to

premiums

Reduce or eliminate contribution for family

coverage

Reduce benefit design to the minimum value

Drop early retirees from coverage

9/4/2013

Employers with Close to 50 Full-Time

Workers May Cut Hours, Jobs, or Both

21

● Under the ACA, the 50-employee threshold is reached based on:

● To get around the mandate, employers may reduce employees’ hours to under 30 a week. However, cutting

hours may not be enough—some firms may eliminate jobs entirely:

o Full-time equivalency (FTE) is determined based on the total number of hours worked each month by

PTEs, divided by 120

o If a company has 500 hours worked by PTEs in a month, this would yield an extra 4.1 FTE employees

(500 ÷ 120)

− Notably, employers will not be penalized for PTEs that are uninsured

A combination of FTEs and PTEs that

equals at least 50

50 full-time employees

Move FTEs / Reduce Workforce

Or

Employees of Darden Restaurants Inc.* who work fewer than 30 hours a week will be considered part time

and will not be offered insurance, according to the company’s senior vice president of government and

community affairs. Darden Restaurants expects about 75 percent of its workforce to remain part time.

9/4/2013

Part-time Hiring a Likely Tactic to Manage Benefit Costs

22

Part Time Workers in

Retail, Restaurants,

Entertainment, and

Agriculture

Exchange

Market

LOW-WAGE EMPLOYERS LIKELY TO START HIRING PRIMARILY PART-TIME WORKERS IN

2014 TO MINIMIZE IMPACT

Source: “Fed Ponders Part-Time Shift as Obamacare

Role Questioned.” Bloomberg. July 19, 2013; “Study:

Most workers will keep employer insurance after 2014.”

Politico. December 19, 2012.

Part-time employees will have to find coverage in the individual market

Move FTEs / Reduce Workforce

9/4/2013

The Low-Wage Restaurant Industry Is

Attributing Benefit Changes to ACA Requirements

23

A SURVEY BY THE INTERNATIONAL FRANCHISE ASSOCIATION FOUND THAT 64% OF

FRANCHISERS AND 72% OF FRANCHISEES SAID THE ACA RAISES SOME UNCERTAINTY

OR SIGNIFICANT UNCERTAINTY IN LONG-TERM PLANNING.

Darden Restaurants Inc.

Owner of Olive Garden, Red Lobster,

and Longhorn Steakhouse Chains

In 2012, the company began hiring more

part-time workers in order to cut healthcare costs under the ACA

ECW Enterprises

Owner of East Coast Wings & Grille

ECW is limiting franchises to 3-5 units

in order to keep employment below 50

workers

White Castle Management Co.

Owner of White Castle fast food chain

Still assessing ACA impact, but plans to

open 2-3 new restaurants in 2013, down from about a

dozen three years ago

Move FTEs / Reduce Workforce

9/4/2013

Employer Contributions Could Be a Target

24

Reduce Employer Contribution

$466 $951

?

$2,617

$4,664

?

2002 2012 2015+

EmployerContribution

WorkerContribution

Average Health Insurance Premiums and Worker Contributions

for Single Coverage1

Employers may reduce

their contribution so that

low wage workers would

qualify for exchange

subsidies.

In this case, the

employer would have to

pay the mandate penalty,

but could maintain

coverage for high-paid

workers.

Source:

1. Kaiser Family Foundation. “Employer Health Benefits Annual Survey 2012.

94% increase in

average total

premium

Potential drop in

employer contribution

9/4/2013

Employer Contribution Could Decline

For Those With a Higher Number of Dependents

25

AVERAGE PERCENTAGE OF PREMIUM PAID BY EMPLOYERS FOR SINGLE AND FAMILY COVERAGE,

2002-2012

Reduce / Eliminate Family Coverage

Source: Annual Health Benefits Report: Research Institutes 2013 Benchmarks and Trends for Large Companies;

Kaiser/HRET 2012 Employer Health Benefits Annual Survery.

Because employers will not be penalized for not offering family coverage, some companies

may bring their family premium contributions down to align with those from single coverage.

Businesses may even decide to drop family coverage altogether.

72% 73% 72% 74% 73% 72% 73% 73%

70% 72% 72%

84% 84% 84% 84% 84% 84% 84% 83% 81% 82% 82%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Single Coverage Family Coverage

9/4/2013

Skinny Plans an Attractive Alternative for Some Employers

26

Source: “Some workplace health plans will be ‘skinny’.”

Politico. July 15, 2013.

● Cost of comprehensive coverage

exceeds $2,000 per employee

penalty

● Penalties assessed according to the

number of individuals obtaining

subsidized exchange coverage

● Discouraging employees from buying

coverage on exchanges is a hedge

against paying significant penalties

Generous Coverage More

Costly than Penalties…

…But Limited Benefit Plans

May Offer a Workaround

● “Skinny plans” designed to comply

with ACA

● Such plans may be more affordable,

yet less generous, than exchange

plans

● But, they may not cover most

expensive kinds of care may limit

access to drugs and physicians

Reduce Benefit to Minimum Value

9/4/2013

Although Broad “Employer Dumping” Is Unlikely,

Many May Send Early Retirees to the Exchanges

27

Drop Early Retirees

● Very few private-sector employers

currently offer retiree health benefits,

and the number offering them has

been declining

o In 2010, 18% of workers were

employed at establishments that

offered health coverage to early

retirees, down from 29% in 1997

o Further, recent surveys have

found that use of health accounts

for retiree health benefits is

already expanding rapidly;

starting in 2014, employers can

simply give retirees money in an

HRA to allow them to purchase

exchange coverage

15%

13%

7%

4%

35%

21%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Convert current subsidy toretiree health account

Offer retiree medical savingsaccount

Action taken/Tactic used in 2012

Planning for 2013

Considering for 2014 or 2014

“In the past, most employers were reluctant to send their retirees to the individual insurance market

because of concerns about high age-based rates and medical underwriting for pre-existing conditions.

However, the exchanges and related insurance reforms that become effective in 2014 create a

potentially more viable option for retirees.” – Bill Kramer, Pacific Business Group on Health

Plans to Use Retiree Health Accounts

Source: http://www.ebri.org/pdf/briefspdf/EBRI_IB_10-2012_No377_RetHlth.pdf

9/4/2013

Cities Considering Dropping Early Retirees and Moving Them to the Exchanges

The city’s Emergency Manager announced in June 2012 that Detroit may stop covering early retirees’ health benefits and instead send them to the state’s health insurance exchange. The city currently spends $177M on retiree benefits; by moving these individuals to the exchange, it expects

spending to decrease to between $27M and $40M per year.

Chicago plans to phase out retiree health coverage by 2017. The city projects that healthcare spending would increase to from $109M in 2012 to $541M in 2023 without changes, according to a Retiree Healthcare Benefits

Commission report published in January.

Retirees have filed a class-action against the city to prevent the transition; it is anticipated that Chicago will provide more details about its plan before the

end of the year.

Detroit

Some Cities Are Turning to the Health Insurance

Exchanges As A Means to Cut Costs and Reduce Deficits

28

Chicago

Source: “Detroit, Chicago Propose Ending Retirees’ Health Coverage.” June 14, 2013.

http://www.governing.com/news/local/gov-detroit-emergency-manager-proposes-moving-retirees-to-health-

exchanges.html

Drop Early Retirees

9/4/2013

Outlook for Other Employer Trends

29

30

Exchange Market Could Impact Employer Offerings

Exchange benefit designs may have spillover effects by setting a new standard for coverage

generosity

Commercial

Exchange

Lives Served by Market Today

Ant ic ipated Future Market

Less Generous More Generous

Benefit Design Generosity

Medicaid Catastrophic

9/4/2013

Continue to

Offer

Coverage

Restructure

Contributions

Offer ESI to

Limited Group

Drop Coverage

and Gross-up

Wages

Drop Coverage with

No Wage Gross-up

While Modelers Predict Stability of ESI in the Short Term, Many Expect the Nature of ESI May Change Considerably

Employers may shift toward a defined contribution model of coverage. Private exchanges are a new delivery mechanism that could encourage

this trend.

Based on “Performance in an Era of Uncertainty”, 17th Annual Towers Watson/National Business Group on Health

Employer Survey on Purchasing Value in Health Care , March 2012.

9/4/2013 31

Lack of Clarity Around Private Exchanges

Private Exchanges Are Largely Unregulated and Undefined

The lack of a definition for a “private exchange” is reflected in the assertions that have been made as to

the number of private exchanges in operation:

“HealthPass [is] one of ‘no

more than a dozen Health

exchanges [that] are

thought to exist

nationwide.’”

- HealthPass website, May 18,

2012 (citing report from May

2010)1

“Over 100 private exchanges

are in existence today and

cumulatively represent more

than one-third of most

insurance carriers’ distribution

efforts.”

- Bernard DiFiore, President and

CEO of BenefitMall, March 17, 20112

“Bloom Health Launches

Nation's First Private

Exchanges With Two

Health Plans.”

- PR Newswire, July 6, 20113

1. http://www.healthpass.com/about-healthpass.html 2. http://www.healthcareexchange.com/blog/bernard-difiore/need-private-exchanges-co-exist-public-exchanges 3. http://www.prnewswire.com/news-releases/bloom-health-launches-nations-first-private-exchanges-with-two-health-plans-125081889.html HHS = Department of Health and Human Services SHOP = Small Business Health Options Program

32 9/4/2013

Current Private Exchanges Serve a Diverse Set of Customers

Individual, Under- 65

Market

Medicare Advantage

Medigap

Medicare drug coverage

Self-insured employers

Fully-insured employers

Private Exchange Types

Many private exchanges serve multiple markets, while others specialize in

particular product offerings or customer types

Insurer-Operated Exchanges

Online Brokers/Web Portals

Contracted Exchanges

HealthPass New

York4

Extend Health

(Recently acquired by

benefits consultant

Towers Watson)2

eHealth1

Array Health 3

For more examples of exchanges, see appendix 1 http://www.ehealthinsurance.com 2 http://www.extendhealth.com 3 http://www.arrayhealth.com 4 http://www.healthpass.com

33 9/4/2013

Private Exchanges Typically Offer Both Medical and Dental Products

Private Exchange

Health Insurance

Dental/ Vision

Insurance

Health Savings

Accounts

Life Insurance

Employee Wellness Programs

Other Ancillary

Products*

*Other ancillary products include: pet insurance, retirement-related products, disability insurance, and long-term care insurance, travel insurance, critical illness insurance, accident insurance and discount cards for services such as chiropractic care and prescription drugs

34 9/4/2013

Conclusions

35

Dental Coverage Is Likely Stable in Near-Term, But Future Threats Remain Uncertain

• Employer coverage will be stable in the near-term

– No signs that employers are seeking to drop ancillary benefits

• Ongoing cost-pressure could result in continued, slow erosion of

benefits

– A few employers may drop all coverage (health and dental)

– Others are increasing cost-sharing to offset premium costs

– Are ancillary benefits at risk for increasing cost pressure?

• Impact of defined contribution model and private exchanges is uncertain

– Will defined contribution apply to all benefits in aggregate?

– May shift decision about whether to purchase dental insurance to the

employee—no mandate for adult dental

36 9/4/2013

Online Evaluation

Pearson.questionpro.com

9/4/2013 37