What is the What is the difference between difference between

an HRA, HSA, and an an HRA, HSA, and an FSA? FSA?

What Is Consumer What Is Consumer ChoiceChoice

Health Care?Health Care?

The Renewal MeetingThe Renewal Meeting

• Why have my rates doubled in five years?

• What type of health plan can stop the bleeding?

• My employees have no understanding of the cost of health care.

““Consumerism” is Coming Consumerism” is Coming Late to the Healthcare Late to the Healthcare

Industry …It’s Out of Step Industry …It’s Out of Step With Our Emerging EconomyWith Our Emerging Economy

• U.S. inflation in 2004 was 3%, while healthcare inflation was 12%.

• “Employee health care costs will wipe out the equivalent of every penny of 2003 profitability for the company’s Consumer Products Division”, without major changes according to GE’s Chairman Jeffrey Immelt.

Annual Prescription Drug Annual Prescription Drug UtilizationUtilization

Source: IMS Health, Pharmaceutical Pricing Update, March 2000.

**Increased utilization: Number of prescriptions dispensed annually in the United States rose from 2 billion in 1992 to 3 billion in 1999 and is projected to reach 4 billion by 2004.

Factors affecting prescription $

Price inflation

Increasedutilization**

Newmedicators

21%

50%

29%

2.0

bil

lio

n

2.6

bil

lio

n

2.7

bil

lio

n

3.0

bil

lio

n

4.0

bil

lio

n*

Prescriptions dispensed

Source: (National Association of Chain Drug Stores, Inc., “Industry Facts,” 1999: 1999 Retail Rx Sales Projected to Rise 18%, Surpass $121B on Volume of Nearly 3 Billion Prescriptions. Aug. 29, 1999.

* Projected

Healthcare Healthcare ConsumerismConsumerism

• Healthcare Consumerism is about transforming a health benefit plan into one that puts economic purchasing power—and decision-making—in the hands of participants

• It’s about supplying the information and decision support tools they need, along with financial incentives, rewards, and other benefits that encourage personal involvement in altering personal behavior and healthcare purchasing behaviors.

Two Basic Principles Two Basic Principles for Successful for Successful ConsumerismConsumerism

1. Must work for the Sickest Members, as well as the healthy

2. Must work for those not wanting to get involved in decision-making, as well as the “techies”

Divergent / Convergent Futures?Divergent / Convergent Futures?HRAs – Best for Larger Groups?HRAs – Best for Larger Groups?

HSAs – Best for Individuals and Small HSAs – Best for Individuals and Small Groups?Groups?

Current State

CombinationAccounts

1. Employer- based healthcare2. Special Purpose Accounts3. Incentive Matching

HRAs

Employer-based healthcareWith IndividualAccountability

1. Individual-based Healthcare2. Employer-based3. Defined Contribution Developments

HSAs

1. Employer-based Healthcare2. Traditional (Ltd Carry-over?)3. Special Purpose Non-Plan

FSAs

Incentive AwardsIncentive Awards – – Three Very Different Personal Care Three Very Different Personal Care

AccountsAccounts• FSAs – Traditional Group Plans

• Health Reimbursements Arrangements (HRAs)

• Employers’ choice for cash flow flexible incentive based medical plan benefit designs

• Health Savings Accounts (HSAs)

• Employees’ choice for funded portable triple tax advantaged with “High Deductible Health Plans”

• Combination Accounts – creative but confusing

FeatureFSA

Flexible Spending Account

HRAHealth Reimbursement

Account

HSAHealth Savings Account

Plan Design Any type Any type Qualified HDHP

Employee Contributions Pre-Tax N/A Pre-Tax

Employer ContributionsYes, but typically employee-funded

Yes Yes

Funds Available Day One Yes Yes As Deposited

WithdrawalTax-free for qualified expenses

Tax-free approved by sponsor

Tax-free for qualified expenses

Qualified Expenses Section 213dSection 213d or sponsor specific

Section 213d

Forfeiture Yes, at end of year Yes, upon termination No

Portability No No, but some exceptions Yes

Interest Bearing No No Yes

Balance at Risk from Investment

N/A N/A Yes

Expense Substantiation Yes Yes No

Above-the-line Tax Deduction

N/A N/AYes – no itemization required

“Traditional”Approach

“Traditional”Approach

NewApproach

NewApproach

NewestApproachNewest

Approach

Full Replacement HSAs Full Replacement HSAs and and

HRAs Are Very DifferentHRAs Are Very Different• HSA – A law, with specific requirements

and benefit design requirements

Most TAX ADVANTAGED vehicle ever created*************************************************************

• HRAs – No Law, this is a regulatory creation based upon an IRS ruling.

Most FLEXIBLE vehicle ever created

HRA’s Consist Of…HRA’s Consist Of…

The Reimbursement Account

Individual Responsibility Gap

Health Insurance Policy

Health Reimbursement Health Reimbursement Account…Account…

1. Health Reimbursement AccountThe Health Reimbursement Account (HRA) is a specific allocation of employer dollars which are pledged to each plan member. The employee uses these funds to pay for all services covered by the plan until they reach their Individual Responsibility Gap. At the end of the plan year, the employer may allow the remaining balance to roll-over to the following year.

Claim

Employer Sponsored $$

Pays 1st in our example

Individual Responsibility Individual Responsibility Gap…Gap…

2. Individual Responsibility GapShould an employee exhaust their individual HRA, the employee would then be responsible for paying the difference between the HRA and the point where the insured portion of the plan begins.

IMPORTANT! The Individual Responsibility Gap can be anywhere in the out of pocket area of the plan!

Claim

$$$

Health Insurance…Health Insurance…

3. Health InsuranceShould an employee exhaust their individual HRA and go through their Individual Responsibility Gap, a traditional Health Insurance plan would then take effect and provide the remaining benefits.

Claim

$$$

The typical Healthcare HRA is compatible with virtuallyany insurance plan but is most effective when combined with aplan that features the following three elements:

1) A deductible in excess of $1,500/$3,000 (Family).

2) No office visit Copay—Office visits applied to deductible.

3) No Rx Card—Applied to deductible.

Remember, Consumer Choice!

Compatible Compatible Products…Products…

HSA vs. HRAHSA vs. HRA

HSA HRAHigh deductible medical plan generates premium savings. √ √Employer may finance account/reimbursement. √ √Employee may finance account/reimbursement. √Money in reimbursement account is pre-funded √Unused funds roll over for future use. √ √Emp. receives tax deduction for medical reimbursements. √Emp/employee receive tax deduction for account funding. √

An Introduction to An Introduction to HealthHealth

Savings Accounts Savings Accounts AgendaAgenda

• What is a Health Savings Account (HSA)?

• HSA Eligibility and Contributions

• HSA Distributions

• Other Matters

• A Health Savings Account, or HSA, is an account that can receive contributions on a tax-favored basis on behalf of an eligible individual and allows tax-free distributions used to pay for qualified medical expenses

What is a Health What is a Health Savings Account (HSA)?Savings Account (HSA)?

• An eligible individual is:

• Covered under a high-deductible health plan (HDHP);– Not covered by another health plan that is

not an HDHP– Not enrolled in Medicare

(generally, younger than age 65) and– Not claimed as a dependent

EligibilityEligibility

Contribution Limits1

Tax Year

Standard Limit 2 Catch-Up Contribution

Amount

Total Contribution Limit Including

Catch-Up Amount

Self-Only Family Self-Only Family

2005 $2,650 $5,250 $ 600 $3,250 $5,850

2006 $2,700 $5,450 $ 700 $3,350 $5,950

1May be reduced by smaller HDHP deductibles, partial year eligibility, Archer MSA contributions, and special rules for married couples.

2Subject to cost-of-living adjustments (COLAs).

John

John’sEmployer

John’s HSA

Eligible Individual*

Any OtherIndividual

or Entity

*includes self employed or certain unemployed individuals

Who May Contribute to Who May Contribute to an HSA?an HSA?

• HSA contributions made by the owner, any other individual, or an entity other than the HSA owner’s employer, are deductible on the HSA owner’s tax return.

John’s Form 1040

Any Other Individual

or Entity(other than

John’s employer)

John (HSA Owner)

John’s HSA

Contribution Contribution DeductibilityDeductibility

• Reported on employee’s Form W-2– Not subject to FICA, FUTA, or RRTA– Not deductible on employee’s Form 1040

• Comparable contributions to “comparable participating employees”– Same amount, or– Same percentage

Employer ContributionsEmployer Contributions

ABC Engineering

John

Form W-2Box 12 (W)

John’s Form 1040

Employer ContributionsEmployer Contributions

• HSA owner’s tax-filing due date, excluding extensions

2006 2007

4/15

Contribution DeadlineContribution Deadline

• An HSA owner can take distributions any time• Financial organizations and employers are not

required to verify any HSA distribution• An HSA owner may use checks, or debit, credit,

or stored value cards to take qualified HSA distributions

• A financial organization may contractually restrict distribution frequency and minimum amounts

HSA DistributionsHSA Distributions

• Tax free if used to pay for qualified medical expenses

• Tax and 10 percent penalty tax apply to nonqualified distributions

• Some exceptions to the penalty tax

HSA DistributionsHSA Distributions

• Distributions for the following reasons will avoid the 10 percent penalty tax:– Death – Disability– Attainment of age 65*

*A financial organization is responsible for tracking the ages of its HSA owners and can rely on the birth date as provided by the HSA owner.

Exceptions to the Exceptions to the Penalty TaxPenalty Tax

• Distributions used to pay for the following individuals’ qualified medical expenses are tax free: – HSA owner– His/her spouse– Dependents

Eligible IndividualsEligible Individuals

• Same as IRC 213(d) definition for itemized deductions*

• Must be incurred after an HSA is established, earlier expenses are nonqualified

• No age restriction

• Cannot be used to pay health insurance premiums, some exceptions apply*Qualified medical expenses paid for with an HSA distribution are not eligible for a tax deduction.

Qualified Medical Qualified Medical ExpensesExpenses

• HSA contributions may not be deductible on certain state income tax returns

Unanswered QuestionsUnanswered Questions

1. Health Savings Accounts – Legislative and Regulatory Basics

2. Consumerism in Healthcare – Why are We Doing This?

3. Carrier Experience – Does It Work?

15 Minute HSA 15 Minute HSA OverviewOverview

Consumerism in Healthcare – Why are

We Doing This?

Healthcare Cost Landscape

Healthcare costs more Employee share of health costs increased for 2003, at 49% of large employers

(1)

Plus, I spend my own money Typical insured spends $675/yr on uncovered health services, not including

deductibles and copays (2)

But I’m not preparing wisely 72% did not put money in a Flexible Spending Account, but report spending

significant dollars out of pocket. (3)

Employees underestimate health costs/their health spending by more than 50% (4)

Nearly half of participating employees put $100 – 500 in their Flexible Spending

Account (3)

(1) Source: Mercer National Study of Employer-Sponsored Health Plans 2002 (2) Source: Lieberman Research study of Out-of-Pocket Spending by Health Care Consumers 1999, adjusted for annual increases in the Health Care Consumer Price Index (3) Source: Digital Research study, February 2002 (4) Source: Watson Wyatt survey

Growing understanding of personal exposure and unreadiness

Why a Consumer Why a Consumer Strategy- Consumers’ Strategy- Consumers’

ViewView

I need help

85% of employees expect their employer to provide pre-negotiated savings on non-covered services.

88% would like to know their physician’s background when purchasing a non-covered service

94% would like to know in advance what their costs will be when purchasing a non-covered service. (3)

Why a Consumer Why a Consumer Strategy- Consumers’ Strategy- Consumers’

ViewView

Engaging Consumers

Health Financial Planning

Health Advocacy

Consumerism in health care is simple and yet fundamentally different: engaging consumers in a decision-making process regarding

wellness and the management of sickness.

Accessible, actionable health information is paired with personal financial choice to facilitate effective outcomes.

HSAs are Not Just Accounts- HSAs are Not Just Accounts- They Help Fundamentally They Help Fundamentally

Change HealthcareChange Healthcare

Q: Consumerism in Healthcare – Why are We Doing This?

Answer:HSAs are not about changing how we finance healthcare…HSAs are about improving healthcare.

A Consumer Strategy- A Consumer Strategy- The Power of The Power of EngagementEngagement

Yes (and quickly – this measures only the first year change)

Consumers are more engaged:

33% higher registration

From 300 to 1000 online inquiries/week for account balances

85% of 2003 enrollees carried a balance into 2004

8% Increase in Preventive Services

Two-thirds of Consumers report increased

awareness of health choices and costs

Do Consumers Engage Do Consumers Engage More?More?

Use of preventative care services increased by 8%

Preferred, in-network professionals, utilized over 90% of the time

ER utilization decreased by 18% - people used the ER for true emergencies

Yes.

30% Reduction compared to most carrier’s book of business

Does Engagement Change Does Engagement Change Behavior?Behavior?

$6500 $6500

Pre-CDHP Average Cost All

Employees

CDHP-Only EmployeesAverage Cost

Left Unsaid:

•Positive Selection

•Benefit Buy-Downs

•One-time Rx gain

Real AnswersA) Short Term: Traditional View of Employer Costs

B) Longer Term: Consumerism View of Employer Costs

Covered Units

CostPer Unit

# OfUnitsX X

• One-Time Savings possible via plan changes

• Network Cost Matters • Ongoing Savings

•At least a 25% decrease in trend due to utilization change

Quality Care

Efficient Care

Plan has strong ability to increase quality and drive down costs using Premier Networks

Yes, when offered as an option.

(But please be wary of hype…)

Hype Answer

“Hey! 0% Trend”

Do Plan Sponsors Save Do Plan Sponsors Save Money?Money?

• Enrollment and satisfaction cuts across employee type, industry– Plan 2004 slice enrollment averages are highest among CDHP players– High Plan adoption seen in manufacturing, financial services, retail and

more• Consumers report increased awareness of health choices and costs

– Two-thirds said that they are more aware of costs, more actively involved in choices

Satisfaction is high– 90%+ satisfaction ratings of customer service, enrollment materials– 87% overall satisfaction is at or above industry benchmarks– Follows inverse sine distribution relative to length of time from enrollment

period, which means that follow-up post-enrollment communication needs to be carefully utilized

• … and the consistent, persistent negative feedback is…– …that most consumers prefer to be called ‘members’ and not ‘consumers’

Yes … and satisfaction grows as consumers engage more

Are Customers Are Customers Satisfied?Satisfied?

Questions & Questions & AnswersAnswers