Financial impact of health care reform

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Financial Impact of
Affordable Healthcare Act
Presented by Philip Corsano
January 14th 2013

Gnostam Consulting Copyright 2013

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US Supreme Court Ruling 28 June
2012
n  Individual Mandate: ~ Constitutional;

n  Entire Affordable Care Act, [ACA] ~ Stands;

n  Medicaid Expansion: ~ State Option;


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Main Findings
n  Mind the Gap*!
n  Both large and medium sized employers >50 employees are likely to
want to manage the gap in actuarial value of the employer sponsored
plans;
n  United Healthcare in November 2012 expects a continued decline in
fully insured commercial customers in 2013;
n  More businesses will cover healthcare costs themselves, while hiring
insurer to manage benefits;
n  Supplemental benefits as a class will grow in importance because
employers see this as an cost effective (after employer taxes) way to
minimize their overall healthcare risk;
n  Employees are mainly interested in supplemental insurance because
of the depletion of their savings that a major medical issue like
cancer can have on their liquidity and net worth.
* Gap in Actuarial Value

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Summary of Impact on Businesses
n  Main Impact of ACA is deliberate shifting of premium costs
between, Employers ~ Employees ~ Insurers ~ Public Sector;

n  On average, [which does not mean much] premiums will
apparently go up by 3% to 5% according to Willis, the Re-
Insurance broker;

n  Coverage minimum may be lowered to 60% to 70% of actuarial
value * by companies, which will mean a greater opportunity to
offer “self insured” payroll deduction plans funded by reducing
employee salaries, [saving “employer taxes”];

n  Insurers will be required to spend a certain % of premiums on
medical care and quality improvement activities:
n  80% for individual & small group Health Insurance;
n  85% for large e group health insurance market.

Gnostam Consulting Copyright 2013 * actuarial value = % medical expenses paid by insurer

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What happens in 2013
n  On Jan. 1st 2013, $2,500 annual limit will be imposed on health FSA
deferrals; currently there is no such limit (effective January 1, 2013);

n  Employers must provide notice to employees of the upcoming
existence of state insurance exchanges, which are to be established by
all the states in 2014. Notice must be in the form specified in upcoming
DOL guidance (effective March 1, 2013 or such later date as set forth in
future DOL guidance)

n  Medicare surtax: Individuals earning > $200K and couples earning >
$250K will pay a 3.8% Medicare contribution tax, a 0.9% increase for
salary and self employment;

n  The deduction for the portion of health care expenses that are
reimbursed to the employer through the Medicare Part D subsidy
program is eliminated (effective January 1, 2013).

n  December 14th 2012 was deadline for States to declare intention of
whether would establish and Health Insurance Exchange. See current
situation of States who have expressed intention of establishing
exchanges overleaf.


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Historical Significance of Personal
Life and Health Insurance
n  1741-1744, two Scottish Minister’s Wallace & Webster set up Scottish
Ministers Fund in Edinburgh;

n  Actuarial calculations ~ statistics based on avg. # Ministers for period
1722-1741, a 4% interest rate;

n  Largest Welfare State in World, in terms of National Insurance is Japan, or
Aflac’s biggest market. People want supplemental insurance because of
two huge trends:
n  Demography of Developed Countries, [see next slide];
n  Re-investment risk, fixed income market in US 1.7% for 10 years, can you even
think of 4% any longer, with 30 year TIPS show a zero yield, 2.95%- 2.917%*, 30
year inflation will be 0.03% per annum, when today we have over 1.8-2.0 **%?

* On the run 30 year Treasuries/On the run 30 year Indexed Liked CUSIP 912810QY7. See RINF for an ETF
that tracks the TIP spread.

** Current 2012 estimates from BLS


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Effective Insurance is needed
more than ever
n  In 2008 we saw impact of no intellectual property protection in financial
markets:
n  Cannot patent innovation in Finance;
n  Economies of scale drive profits in financial institutions;
n  Business model was to create non transparent derivatives like CDO’s – CDS
in dark pools of unsupervised capital, offshore;
n  Huge impact on profitability of banks, who were arbitraging edge in
information flows against clients, and regulatory capital environment;
n  Solution in exchange mark to market transparency kills old bank business
model;
n  So only free lunch in finance is to arbitrage the last legitimate option,
personal “tax advantaged investing”, or more simply
n  PERSONAL ~ PORTABLE INSURANCE
n  Risk sharing between employer and employee, given the expense of
health and life insurance will not diminish in current economic
environment.


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ACA Healthcare Reform Terms and
Definitions
n  Employer Sponsored Insurance [“ESI”]: Represents insurance
coverage offered by an employer to its employees;

n  Health Insurance Exchange, [“Exchange”] – an exchange is an
insurance marketplace where individuals or certain small
business employees can purchase insurance as a part of a large
risk pool. Each state must establish its own exchange or a
federal exchange option will be provided. Four plan levels will
be offered;

n  Full Time Employee: Working an average 30+ hours/week
annually;

n  Waived: A full time employee who elects not to obtain health
insurance through employer. Future coverage decisions made
by these employees will impact the employer’s tital healthcare
costs;


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Definitions, [Continued]
n  Exchange Subsidy: Individuals who meet the income and
healthcare insurance affordability criteria will be eligible for
premium and cost sharing, [e.g. deductibles, co-payments]
subsidies in the Exchange;
n  “Affordable Insurance” Employee premium cost < 9.5% of
Household income;
n  “Household Income” [HHI] Employees adjusted gross income,
[AGI] as reported on annual tax return. Baseline simulation in
case study uses TAXABLE WAGES as a proxy for AGI, excluding
spousal income. HHI will be assessed in relation to FPL to
determine ELIGIBILITY FOR EXCHANGE SUBISIDIES;
n  “Federal Poverty Level” [FPL] is a government established
income threshold used to determine eligibility for assistance
through various Federal programs.


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Definitions, [Continued]
n  Penalty: Assessed on individuals who fail to obtain adequate
health insurance in 2014 or beyond. Also assessed on
employers who have employees who access subsidies and
purchase insurance through exchange 2014 onwards;
n  Employer Penalty for no or inadequate insurance: $2,000 x all
FTE, minus first 30 employees, if no ESI is provided, or actuarial
value is < 60%;
n  Employer Penalty for Unaffordable Employee Insurance: $3,000
x number of employees receiving exchange subsidies due to
low income/unaffordable premiums.


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States Establishing Exchanges


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The US Problem, pass the hot
potato


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ACA OVERVIEW:

n  HEALTH REFORM EXPANDS COVERAGE BY:
n  Expanding Medicaid availability;
n  Developing a new marketplace for purchasing insurance,
“Exchange”;
n  Mandating Individuals enroll in health insurance;
n  Impose penalties on large employers who do not offer health
coverage/unaffordable health coverage for employees;
n  Subsidize low and middle income individuals in the Exchange;


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2014 Individual Mandate –
ACA
n  Individual Mandate to obtain health coverage: Beginning 2014, most
individuals must obtain minimum-level of health insurance coverage or
pay penalty;

n  Minimum essential coverage includes:
n  Medicare, Medicaid, TRICARE
n  Insurance purchased through an Exchange, on the individual market;
n  Employer-sponsored coverage that is affordable & provides minimum value;
n  Grandfathered plans, [group plans in effect on 3/23/2010]

n  Penalties for failure to obtain coverage: HARDSHIP EXEMPTION
n  In 2014: > $95 or 1% of income; Premium Cost for “Lowest
n  In 2015: > $325 or 2.0% of income; Plan >8% of Household
n  In 2016: > $695 or 2.5% of income; Income
n  Penalty is capped at 3 x per person amount/family;
n  Assessed penalty for dependents ½ Individual Rate.


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2014: Government Assistance to help
some individuals obtain coverage
n  Medicaid Expansion: Expands eligibility to individuals and
families up to 133% of Federal Poverty Level, [FPL]
n  If cost effective, states can opt to subsidize employer sponsored
premiums for this group.

n  Premium and cost share assistance:
n  Individuals and families with “household income” of 100 -400% of
FPL may be eligible for sliding scale assistance in form of:
n  Tax credits to help pay premiums; and
n  Out of pocket reductions to help with cost sharing, [co-payments
and co-insurance]. [Big AFLAC opportunity]

133% of FPL: 400% of FPL
Individual $14,856 Individual: $44,680
Family of 4 $30,656 Family of 4: $92,200

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Penalties for Individual non
Compliance with ACA
n  Penalties are administered by IRS from Jan. 1st 2014:

n  Individuals: Not covered, [except for 3 months hiatus]
penalty is $95 per adult, $47.5 per child up to a total of $285
or 1% of family income in 2014;
n  2015 Individual penalty $325/adult, $162.5/child, family maximum
of $975 2% of family income;
n  2015 Individual penalty $695/adult, $347.50/child, family
maximum of $2,085 or 2.5% of family income.


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Penalties for Employer non
compliance with ACA
n  Plans with >50 workers, that impose a >30 day waiting period
on coverage eligibility, $600/full time employee;

n  Tax on large employers [.50 employees] who do not offer
health coverage, or coverage that costs more than 9.8% of
employee modified gross income, [MGI]:
n  $2000/employee when no coverage offered;
n  Penalty when coverage offered is more than 9.8 percent of MGI
is $3,000 per employee receiving subsidies or $750 per
employee, whichever is less


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Adjusted Gross Income [AGI]
Deductions
n  The current 7.5 percent of AGI floor on income-tax
deductions for health care expenses is raised to 10 percent of
AGI (effective January 1, 2013; however, new floor is waived
during 2013, 2014, 2015, and 2016 for individuals who turn
age 65 before the close of those years)


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Group Health Plan requirements
n  Group health plans must comply with "administrative
simplification" rules (to be published) for electronic exchange
health information and electronic fund transfers and file a
certification with the federal government that the plans are in
compliance. In addition, the employer must ensure that service
providers also comply with the transaction and certification
requirements. The penalty for non-compliance is $1.00 per
covered life per day of non-compliance up to a maximum of
$20.00 per covered life per year, but a double penalty applies
in the case of any employer misrepresentation. This applies to
grandfathered plans. Systems must be effective starting
January 1, 2013, and employers must certify compliance by
December 31, 2013


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Modeling Financial Impact on
Businesses
n  Key inputs that need to be modeled for NEW HEALTH CARE PLANS:

n  If in State where there is an exchange, [entire West Coast plus Nevada], these are the
types of exchanges that need to be offered by insurers:

n  Bronze: 60% actuarial value;

n  Silver: 70% of actuarial value;

n  Gold: 80% of actuarial value;

n  Platinum: 90% of actuarial value/

n  Catastrophic plans: only for <30 year olds, must cover, “minimum essential benefits”
and minimum of 3 primary healthcare visits/p.a.

n  NB all “exchange metal” plans must cover essential health benefits, limit cost sharing,
[but can include supplementary plans like AFLAC] and must have a specified
ACTUARIAL VALUE.


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INSURER MEDICAL LOSS RATIO’s
[or MLR]
n  The ACA requires insurance companies in 2012 to spend a certain % of
premium $ on medical care and “quality” improvements:
n  80% for individual and small group health insurance markets;
n  85% for large group health insurance market.

n  Insurance Companies that do not satisfy MLR standards in 2011 must
provide “rebates” to customers. This does NOT apply to self funded or
limited dental/vision policies.

n  Rebate in form of:
n  Premium credit;
n  Lump sum payment;
n  Refund to credit/debit card;
n  Pre-paid debit card.

n  If employees pay premiums on a pre-tax basis, MLR rebate is taxable. If
not is not subject to Federal and employment taxes.


+ Subsidies to Employers in State vs.
Federal Subsidy Eligibility under
ACA
n  QUESTION:

n  If a State has a Federal Exchange and not a State Exchange,
[does not apply to WA,OR,CA, NV], then are its citizens still
eligible for premium tax credits/cost sharing assistance in ACA?
n  If yes, large employer penalties may be incurred;
n  If no, then employers are NOT in jeopardy of penalties being
assessed if they do not offer coverage or if their employer plan is
not affordable.

n  CONTEXT: THERE ARE SUBSIDIES PROVIDED BY FEDERAL
GOVERNMENT FOR EMPLOYERS WHO PROVIDE HEALTCARE
PLANS FOR THEIR EMPLOYEES. THESE ARE DISCUSSED LATER
ON.


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2014: Employer Penalties
THE ACA Law does NOT require Employers to Offer health Insurance
n  Beginning in 2014, employers with 50+ FTE’s must pay a
shared responsibility penalty if any employee receives
“Exchange Subsidies”
n  Different penalties whether or not employer offers
affordable “minimum value” to employees;
n  “Minimum essential coverage * ” = Bronze Plan 60% of
actuarial value;
n  “Affordable” = Employee annual premium cost <9.5% of
household income.

FTE = FT employees + FT equivalents
* Minimum essential FT employee works on avg. >30 hours/
coverage see IRS notice week
2012-31 www.irs.gov/pub/
irs-drop/n-12-31.pdf FT equivalents = Hours worked in a
month by all PT employees / 120

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Employer “shared responsibility”
penalty
Penalty only assessed if FTE receives Exchange subsidies
Employees are not
n  NO or INADEQUATE Insurance Penalty: eligible for Exchange
subsidies if their
n  $2,000 x each FTE, after first 30 workers;
employer coverage is
deemed affordable.
n  UNAFFORDABLE EMPLOYER COVERAGE “Affordable” means
Penalty: the employee
n  At least $3,000 x number of full-time contribution under the
employees who receive exchange subsidies; employer plans is
n  Maximum penalty = $2,000 x each full time <9.5% of their
employee [except for first 30 FTE] penalty; household income
n  No penalty for Medicaid eligible employees.


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Other Employer Requirements

n  Government Reporting Obligations [2014]:
n  Names of FTE on health plan
n  Employer contribution levels to employee coverage
n  Plan waiting and length periods
n  Whether employer-sponsored plan meets “minimum essential
coverage” requirements

n  Large Employers to auto-enroll: Employers with 200 + FTE’s
will be required to auto enroll employees into their
employer-sponsored health plan:
n  Employees can opt out;
n  Won’t be effective until the US Dept. of labor issues rules.
Expected Q2-Q3 2013.


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KEY PROVISIONS OF PROPOSED
RULES [12 Aug 2012]
n  Employees MUST file a Tax Return: All individuals receiving
“advanced premium assistance tax credit” must file tax return.

n  Affordability for Employee:
n  Employee Premium Cost/W2 wages for the employer < 9.5%,
coverage deemed affordable, even if have family and take family
coverage. No employer penalty;
n  Employer’s not subject to penalty if employee receives tax credit,
but later employer sponsored insurance is determined affordable;
n  Affordability for related individuals: For premium tax credits
eligibility = cost of self only coverage related to household income;
n  For the individual mandate penalty = family coverage premiums in
proportion to household income.


+ CASE STUDY: ACA Affordability
Full Time Employees: 1,922 (1,319 insured/603 waived)
Total Staff: 2,725 (106 PT insured/697 PT No ESI)
2014 PPACA FTE’s 2,361

n  HEALTHCARE REFORM DRIVERS Exchange Subsidy Eligibility =Affordability
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133-400% of FPL
Health Insurance
In 2014, employer pays penalty when an FT
Affordability for Employees employee is eligible for an Exchange
Subsidy.
Greater than 15% 165 Subsidy Eligible
11.0% to 15.0% 87 Subsidy Eligible Household Income [HHI] % >
9.5% to 11.0% 41
Subsidy Eligible FPL
8.0% to 9.5% 59 Employee # Pct Total
6.5% to 8.0% 191
0.00% to 6.5% 1379 Less than 100% 137 7.1%
Medicaid Eligible
11.0% Greater 100% to 133% 69 3.6%
0.00% 6.5% to 8.0% to 9.5% to
to than 133% to 266% 822 42.8%
to 6.5% 8.0% 9.5% 11.0% Subsidy Eligible
15.0% 15%
# Employees 1379 191 59 41 87 165 266% to 400% 467 24.3%
Over 400% 427 22.2% Status Quo
0 100 200 300 400 500 600 700 800 900
Number of Employees
Gnostam Consulting © Copyright 2013, prepared from public information deemed to be accurate.

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2014 Post Reform Coverage

Assuming a Baseline premium cost/ Post Reform ESI FTE mix
employee of $5,826 in 2013, [or the
equivalent of a “Silver” ESI] - of the 1,922
FTE insured, a total of 1,657 will be Medicaid
Eligible
insured by current ESI, or 86.2%, with 3% 11% Subsidy
Eligible
eligible for “Exchange” subsidies. 3%

Medicaid Eligible
Subsidy Eligible

ESI Coverage ESI Coverage
86%


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Health Reform/Employee Cost
Dashboard
n  Assumptions:
n  100% of waived converted;
n  Single “Silver” Exchange Premium ~ Current Bronze Avg.
$5,826 in 2013, rising to $5,940 for Silver, with 9% premium
growth in 2014;
n  60% or premium EMPLOYER FUNDED, on wages from $30,000
to $340,000)
n  “Opportunity” for AFLAC to provide for “Gap” supplementary
insurance for all 1,922 employees….


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Change in Avg Premium/Employee
< 134% of FPL
n  206 employees in this category, or 11% of total;

n  101 FTE or 8% of total

n  105 waived or converted.


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Change in Avg. Premium/Employee
134% to 266% of FPL
n  821 employees in this category;

n  558 FTE [42%]

n  263 waived or converted

2014
Pre
Ref
Post
2014

Post
Reform
2014
Funded

134%-‐266%
Avg
Prem
Cost/Employee
Today
ESI
Reform
ESI
No
ESI
AlternaEve

Employer
Share
$4,000.00
$6,000.00
$5,000.00
$2,000.00
$2,000.00

Employee
Share
$1,000.00
$2,000.00
$1,000.00
$2,000.00
$2,000.00

Government
Subsidy
$1,000.00
$6,000.00
$6,000.00

Total
$5,000.00
$8,000.00
$7,000.00
$10,000.00
$10,000.00


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Change in Avg. premium/Employee
267% to 400% of FPL
n  467 of total employees in this category, or 24%;

n  338 FTE, [26%];

n  129 waived or converted employees.


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Change in Avg Premium/Employee
> 400% + FPL
n  427 of employees in this category or 22%;

n  322 FTE or 24%;

n  105 waived or converted.

2014
Pre
Ref
Post
2014

Post
Reform
2014
Funded

>
400
+
FPL
Today
ESI
Reform
ESI
No
ESI
AlternaEve

Employer
Share
$4,000.00
$6,000.00
$6,000.00
$2,000.00
$7,000.00

Employee
Share
$2,000.00
$3,000.00
$2,000.00
$8,000.00
$3,000.00

Government
Subsidy

Total
$6,000.00
$9,000.00
$8,000.00
$10,000.00
$10,000.00


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