PREPARING FORHEALTH CARE EXCHANGESREVISED JULY 22, 2014

Tim LambingKansas City

Not Peer Reviewed

MERCER

CONTENTS

Evolution of health care benefits environment

Exchange environment• Public exchanges• Private exchanges…and defined contribution

Strategic opportunity for employers

1

MERCER

Managed care Consumerism Reform

17.1%

12.1%

10.1%

8.0%

-1.1%

2.5%

0.2%

6.1%

8.1%

11.2%

14.7%

10.1%

7.5%

5.5%5.2%*

2.1%

4.1%

6.1%6.9%

6.3%6.1%6.1%6.1%7.3%

2.1%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Workers' earnings Annual change in total health benefit cost per employee Overall inflation*ProjectedSource: Mercer’s National Survey of Employer-Sponsored Health Plans; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April toApril) 1990-2013; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey (April to April) 1990-2013.

EVOLUTION OF HEALTH CARE BENEFITS ENVIRONMENT

2

WHAT IS A PUBLIC EXCHANGE?

• Created by ACA• Structured marketplace to sell and purchase health insurance• Subsidies provided for those who qualify based on income• Goal: Insure all Americans

MERCER 4

State-run exchange Partnership exchange Federally FacilitatedExchange

State operates all exchange activities(subject to federal guidelines)

State takes responsibility for activitiesrelated to plan management, consumerassistance or both.

State plan management partnershipexchange. State recommends plans forQHP certification, manage QHP issueraccounts and day-to-day administrationand oversight of QHPs.

State consumer partnership exchange.State manages navigators and the in-person assistance program. HHSoperates call center, website; and fundsand awards navigator grants. Statesmay also manage outreach andeducation efforts.

HHS operates all exchange activities

State maintains role as enforcer ofmarket reforms inside and outsideexchange

STATE PUBLIC EXCHANGE OPTIONS

Sources: National Conference of State Legislatures; HHS.gov

MERCER 5

STATE PUBLIC EXCHANGE DECISIONS FOR 2014(AS OF JULY 2, 2014) Declared state exchange (15)

Planning partnership exchange (8)

State SHOP/Federally Facilitated Individual (3)

Default to federal exchange (25)

*Nevada residents will be directed to Healthcare.gov until the Silver State Exchangeinfrastructure is repaired, expected to occur in late 2015.

Source: Kaiser Family Foundation

MERCER 6

WHAT DO THE PUBLIC EXCHANGES DO?

Provide financial management

Ensure plan accountability

Assist consumers

Determine eligibility,enroll individuals

Manage plan activities

MERCER

WHO IS ELIGIBLE FOR SUBSIDIZED GOVERNMENT INSURANCE?ASSUMES STATES EXPAND MEDICAID TO 138% FPL1

Household income <138% FPLEligible for Medicaid.2

Federal Poverty Level(FPL) 2015 eligibility threshold3

Family size of 2014Medicaid138% FPL

Exchange400% FPL

1 (single) $11,670 $16,105 $46,680

2 $15,730 $21,707 $62,920

3 $19,790 $27,310 $79,160

4 $23,850 $32,913 $95,400

5 $27,910 $38,516 $111,640

6 $31,970 $44,119 $127,880

7 $36,030 $49,721 $144,120

8 $40,090 $55,324 $160,360

Household income between138% and 400% FPL.Could be eligible for

subsidized exchange coverage.

1. Most adults will be eligible for Medicaid up to 138% of FPL.2. Health reform legislation specifies income threshold of 133% FPL but also requires states to apply an “income disregard” of 5% of FPL in meeting income test;effective income threshold for eligibility is 138%.3. Based on 2014 FPL (note that some states may use 2013 FPL ($11,490) for Medicaid eligibility in 2014).

7

MERCER

2014: PRODUCTS OFFERED IN EXCHANGESEXCHANGE PRODUCTS WILL DIFFER FROM GROUP PLANS

Plan options in public exchange are named after metals.

Public exchanges Large ER |Group

Bronze Silver Gold PlatinumCatastrophic

age <30 andthose eligible for

a hardship waiver

Plandesign1Features

Plan value 60% 70% 80% 90% under 60% >60%

• Silver – second-lowest cost plan – is baseline for calculating government subsidy.

• Government subsidy and member contribution requirement calculated based onincome, vary by level between 100% FPL and 400% FPL.

• Once subsidy determined for silver plan, can use for gold plan (pay more) orbronze plan (pay less).

• No subsidies are available for catastrophic coverage.

8

1.Some provisions apply differently for grandfathered and non-grandfathered plans. Employer plans generally must offer coverage of at least 60% value to full timeemployees to avoid shared responsibility payments.

MERCER

ELIGIBILITY FOR EXCHANGE PREMIUM TAX CREDITSBASED ON SECOND-LOWEST COST SILVER PLAN IN 2014

Maximum monthly contribution to avoid employer penalties if using FPL safe harbor($11,670 x 9.5% ÷ 12 = $92.39 (based on 2014 FPL; safe harbor for 1/1/15 calendar year plans)Other options for affordable contribution safe harbor are: W-2 earnings and rate-of-pay.

% Povertylevel

Annualhousehold

incomePlan value with

cost-sharing credit

Maximum monthly employeecontribution in exchange

% Householdincome Dollars

<100% <$11,670 Medicaid / Access gap N/A N/A

<138% <$16,105 Medicaid (if expanded) N/A N/A

138% $16,105 +24% to 94% 3.00% $41

150% $17,505 +17% to 87% 4.00% $59

200% $23,340 +3% to 73% 6.30% $123

250% $29,175 70% 8.05% $196

300% $35,010 70% 9.50% $278

400% $46,680 70% 9.50% $370

>400% >$46,680 70% No maximum Full cost

Individual in 2015 (Based on 2014 FPL of $11,670)

9

MERCER 10

2014: FAMILY COVERAGE IN A PUBLIC EXCHANGEPREMIUMS AND SUBSIDIES WILL DETERMINE APPEAL

Total monthly premium forsecond lowest cost silver plan2

Family of 4 Average TN NJ$912 $659 $1,033

Full Premiumat 100%

$912/month

Individual premiums may behigher than in group plans.

Individual product costs willvary by state

1. Mercer Survey of Employer-Sponsored Health Plans, 2012 – Average monthly employee contribution for PPO coverage: Employers 500+ = $111/monthfor individual; $391/month for family; All employers = $148/month for individual; $544/month for family

2. Straight-average of second lowest cost silver plans from each rating area across the state. Based on federally-facilitated exchange states.

$47,000$35,000 $100,000

Family of 4 average household income

$391

Averagegroup

plan totalpremium1

$Second

lowest costsilver plan

MERCER

EMPLOYERS AND PUBLIC EXCHANGESHOW WILL IT WORK WHEN EMPLOYEES APPLY FOR SUBSIDIES?

Individual appliesto Exchange

Provides & attests to certaininfo, including:• Income and family size• Lowest cost employer

plan option that meetsminimum value (employeeonly cost)

Exchangeverification

• Verifies income and otherinformation

• Verification process foremployer coverage(statistical sample only)

• Individual can enroll duringverification process

Exchange EligibilityNotice

• Notice to individual ofeligibility determinationafter verification complete

• Notice to employer ifindividual determinedeligible for exchangesubsidies after verificationcomplete

1 2 3

Employer Appeal IRS reporting &reconciliation

After close of calendar year,IRS has at least threesources of info to confirmsubsidies were providedcorrectly:

• Employer reporting• Exchange reporting• Individual tax filing

• Employer requests appealwithin 90 days of noticedescribed in step 3

• Exchange tells employeeof appeal request

• Written appeal decisionw/in 90 days of receipt ofappeal request

IRS Employer SharedResponsibility

processIRS has said, afteremployee tax returns forcoverage year are due:

• IRS will contactemployer about possibleliability

• Employer opportunity torespond

• IRS notice & demand forpayment

4 5 6

11

MERCER 12

NAVIGATING PUBLIC EXCHANGESCOMPLEX FOR EMPLOYERS AND EMPLOYEES

Employeecommunications

Requirement to communicate modelexchange notice to employees

Likely intense confusion based onpublic/press information

Inform employeeshow to make their selections

Datarequirements

Paper/electronic environmentErroneous enrollmentson public exchanges

Rolling enrollment all year if changein status

Multi-stateemployers

Public exchange options andMedicaid expansion – and therefore

employer coordination– will vary by state

Systemrequirements

Technology and tools totrack employee hours

Reporting and disclosurerequirements

Cost to upgrade and implement

WHAT IS A PRIVATE EXCHANGE?

Marketplace with core and voluntary product offerings acrossmany benefits and services

Exchange sponsor stocks products and manages end-to-endconsumer experience

MERCER 14

PUBLIC VS PRIVATE EXCHANGES

Medical,prescription

Dental, vision, life,voluntary, plus more

Governmentsponsored

Broker, insurer, TPAtechnology firm

Actives, retirees

PUBLIC PRIVATEOpen Closed

Single ormultiple carrier

IndividualsSmall Group

Group plans

Insured orself-funded

MERCER 15

GROWING INTEREST IN PRIVATE HEALTH CARE EXCHANGES

25%

45%

In 2 years In 5 years

Percent of employers thatwould consider offering a

private exchange

Employer advantages

§ Cost control

§ Choice for employees

§ Streamlined managementand administration

Employee advantages

§ Cost-efficient, convenientbuying

§ Comprehensive coverage

§ Personalized portfolios

Source: Mercer’s National Survey of Employer-Sponsored Health Plans 2013.

MERCER 16

HOW DOES DEFINED CONTRIBUTION RELATE TO EXCHANGES?

With private exchanges, employers can successfullyimplement defined contribution• Offer employees an array of choices• Encourage employees to “buy down” to lower-cost medical

coverage and use remaining dollars for other purchases

Best achieved when employees can purchase otherattractive products (life, accident, disability, critical illness, auto, etc.)

• Better meets employees’ personal needs• Helps manage their benefit spend

Defined contribution = Funding arrangement where employers manage their year-over-year increase in health and welfare benefits spend to a pre-defined amount

MERCER

HOW DO PRIVATE EXCHANGES WORK?

Funding

DC or DB

Standard PlanDesigns

Choice amongmultiple, pre-screened plans

EmployeeCommunicationsand Education

Online

Call Center

Print and email

Election Data

HRProfes-sionals

Carriers

PayrollDeductions

Reporting andPremium Data

Administration

• Eligibilitydetermination

• Data-drivenevents

• Electionmanagement

• Contributioncalculation

Enrollment

17

MERCER 18

§ Comprehensive, one-stop benefitsmanagement§ Purchasing strength§ Defined contribution

facilitation§ Proactive project

management andaccountability§ Compliance with

evolving legislation

EmployerExperience

§ All insurance needs metwith one-stop, on-lineshopping

§ Personalized experienceand portfolio

§ Multi-channel, targetedmessaging

§ Call center withexperienced, objectivebenefits counselors§ More benefits value for

the money

EmployeeExperience

§ Core & supplemental benefits§ Vendor Management§ Financial Projections§ Open Enrollment§ Ongoing Event Management

§ Payroll Reporting§ Carrier Eligibility Reporting§ Premium Reporting§ Member Service Center§ Member Communications

§ Compliance§ FSA administration§ Health Savings Accounts§ COBRA administration

Comprehensive Solution

MERCER MARKETPLACE… EMPOWERING BENEFITSWHAT WE DELIVER

MERCER

PRIVATE EXCHANGEVALUE TO EMPLOYERS

Resources required to managebenefit programs

79% of US employers cite one-stop shop forall administration as reason to integratecore and voluntary benefits

Health care reform

How to address increased costs plusdesign, communication, and administrationimplications

Cost of providing benefits

Employers’ costs continue to outpaceearnings and inflation by three times

EMPLOYER CHALLENGES

Choice for employees

Expanded plan options and tools to helpmake decisions

Streamlined management andadministration

End-to-end process for delivering benefits

Cost control

Innovative ways to control costs instead ofcost-shifting

HOW MARKETPLACE HELPS

19

MERCER

PRIVATE EXCHANGEVALUE TO EMPLOYEES

Low satisfaction with current benefits

24% think that their benefit program is “verygood”

Flexibility to choose benefits that fit theirneeds

Almost half would like to have flexibility toreduce the value of some benefits andincrease the value of others

Importance of benefits asattraction/retention factor

53% say benefits play a significant role intheir decision to stay with their employer

EMPLOYEE ISSUES

Comprehensive coverage

Wider range of coverage options

Personalized benefit portfolios

Customized benefit plans to meetemployee and family needs

Cost-efficient, convenient buying

Informed benefits buying decisions

HOW MARKETPLACE HELPS

20

MERCER

STRATEGIC OPPORTUNITY FOR EMPLOYERS

MERCER

Gro

upSe

lf-in

sure

dIn

divi

dual

Insu

red

RIS

K

ControlNone Total

DIFFERENT INDUSTRIES,CHALLENGES AND DIRECTIONS

Exchange

Exit

Maintain

Delay

22

MERCER

DIFFERENT INDUSTRIES,CHALLENGES AND DIRECTIONS

Gro

upSe

lf-in

sure

dIn

divi

dual

Insu

red

RIS

K

ControlNone Total

Decision variables includeCarrierDesignCost

ContributionMessagingWellness

23

MERCER

BROADER REWARDS CONSTRUCT

Benefits

Life balance

Pay

Career

24

MERCER

DELIVERED EFFECTIVELY, BIG IDEAS WILL…

25

…control the rate of increaseyear-over-year

Reduce administrativeburden of managing

benefits – and optimizeyour investment

Improve per-capitacosts and…

ValueBenefitresources

More effectively engageall of your people and –

meet their individual needs

Securities offered through MMC Securities Corp., Member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036; Phone 212 345 5000.

Variable insurance products distributed through Marsh Insurance & Investments Corp., MIIC Insurance Services in California and Marsh Insurance Agency & Investments Corp. in New York.