health care reform: implications for us employers accounting and auditing conference wichita 19 may...

Health care reform: Implications for US employersAccounting and Auditing ConferenceWichita19 May 2011

19 May 2011 Health care reform: Implications for US employers

Discussion overview

► Survey results

► Financial implications and strategic considerations

► Case studies


Ernst & Young LLP survey results


What are we hearing from Boards regarding health care reform?

► Have we prepared a detailed financial business model regarding all of the provisions of the new law, including benefit design implications and compensation changes?

► How do we make sure all mandatory changes are implemented, including 2011 payroll and reporting changes?

► Do we have a team focused on the implementation of the compliance requirements, including payroll, information reporting, worker classification and non-discrimination requirements?

► Does the company have a multidisciplinary team in place to address health care reform, including legal, tax, human resources, finance, payroll and internal audit?


EY company readiness survey

► EY conducted a health care reform client readiness survey between 11 August and 14 September 2010

► More than 380 respondents at C-suite level► Companies represent a broad range of business sectors

and vary in size to more than 250,000 employees


Survey themes


Survey result: employers weigh implications of dropping coverage

► Employee reaction and

relations

► Competitive practices

► Tax penalties

► Loss of employer deduction

► Community reaction

Are you considering no longer offering health care benefits to your employees?

Key considerations


Survey result: other options employers are considering

►76% of respondents said they are at least somewhat likely to increase the employee-paid portion of health care coverage

►Retiree drug coverage is the benefit respondents said they were most likely to eliminate

►Reducing business process inefficiencies is the most commonly cited area to offset costs, followed by reducing supply chain costs and updating IT reporting systems

Cost sharing

Benefit changes

Business model


Financial implications and strategic considerations


Health care reform timeline

2010 2011 2012 2013 2014 . . . 2018 2019

Medicare provider cuts*Economic substancePart D “Donut Hole” Retiree reinsuranceTanning tax (7/1)

Medicare payroll taxInvestment income taxRetiree drug subsidy tax*FSA limitsMedical device tax*Outcomes research fee*162(m) limits in insurers

Excise tax on high cost plans*

* Impacts health plan costs Constitutional Challenge

Repealed


Expectations by industry


Modeling observations

► Employee demographic information is a key factor in assessing risk areas under the employer and employee mandate provisions.

► The inflationary issues inherent in health care reform can be significant and are often overlooked.

► The high-cost plan excise tax will likely be a significant issue for an employer to address.


Key risk factors for cost implications

Employee categorization

Parameter

Low paid Those whose household income falls below 400% of the Federal poverty level can lead to affordability issues with a $3,000 employer tax penalty for employees who take coverage in the Exchanges and receive a Federal premium subsidy.

Opted-out Employees, especially those without a working spouse, currently opting out of coverage will likely create opt-out returnees due to the individual mandate.

Temporary or seasonal

If just one 30-plus hours per week employee isn’t offered coverage in any given month, there is a $2,000 (1/12 th on a monthly basis) employer tax penalty for every 30-plus hours employee [minus 30].

30-plus hours per week ineligibles

If this category of employees cannot be reduced to less than 30 hours per week, they will have to be offered coverage in order to avoid the same “no coverage” $2,000 employer tax penalty application.

Union Usually offered substantial health care benefits to which the high-cost plan excise tax is more likely to apply.


Employer strategies under consideration

► “Old” strategies may have new applications:► Increase employee cost sharing► “Unit” pricing► Wage-based health plan contribution schemes► Cost management strategies

► “Pay” or “Play”► “Play”► Exit in 2014► Contingent exit strategy

► Managing excise tax► 60% actuarial plan► Dropping FSA


“Pay or Play” options


Managing the high-cost plan excise tax

6 Years

80%

60%

Excise tax limit

3 Years


Summary

► Health care reform creates a dynamic environment with many moving parts.

► Health care reform changes the landscape with respect to cost, compliance, operational, and overall governance risks.

► Employers need to be prepared with a long-term strategy (or contingent strategies) based on external market reactions or “triggers” over the next several years.


Events to watch

► Legislative changes on targeted provisions► Cost changes in private plans► November 2012 Presidential elections► Employer design changes leading into 2014► Constitutionality of the individual mandate► Credibility and viability of state insurance exchanges► Employers exiting health care sponsorship


Case Studies


Case Study 1 – Salary Based Contributions: Overview

Employee demographics

Industry Professional services

Active employee count 250,000

Employees below 400% of federal poverty level 75,000

Employees above 400% of federal poverty level 175,000

Average age 39

Plan Statistics

Plan participants 210,000

Employees declining coverage 40,000

Gross cost per capita $10,750

Employer subsidy 77%


Case Study 1 – Salary Based Contributions : Observations

► Moving to salary based employee contributions effectively mitigated risk against employer mandate taxes ► Only 23 employees below 400% of federal poverty level with

employee contributions over 8% of income

► Moving to salary based employee contributions increased risk to individual mandate► It is expected that over 20,000 currently opted out

employees move back into employer sponsored coverage

► Increasing number of coverage tiers to mitigate against dependents to age 26 increased risk to excise tax

► Consider unintended consequences of strategy


Case Study 2 – Low Wage Workforce: Overview


Industry Retail/Hospitality

Active employee count 100

Full time salaried employees (offered coverage) 10

Full time hourly employees (no coverage) 40

Part time hourly employees (no coverage) 50

Average wages <$20,000

Plan Statistics

Plan participants 4

Employees declining coverage 6

Full time employee not offered coverage 40



Case Study 2 – Low Wage Workforce : Observations

► Low salaries plus high employee contributions create significant risk to employer mandate

► In 2014, this group would have to offer coverage to all full time employees or pay penalty on all employees

► If this group opened up coverage to all full time employees, it is expected that employer mandate penalties would reach cap of $40,000

► Penalty to eliminate coverage would be $40,000 annually

► This is an extreme case


Case Study 3 – Long Term Strategy: Overview


Industry Manufacturing

Active employee count 270

Employees below 400% of federal poverty level 152

Employees above 400% of federal poverty level 118

Average age 47

Plan Statistics

Plan participants 228

Employees declining coverage 42



Case Study 3 – Long Term Strategy : Grandfather status

Estimated savings value of maintaining grandfather status:

Plan Year Savings Percent Savings

2011 $17,182 0.5%

2012 $18,513 0.5%

2013 $19,902 0.5%

2014 $21,345 0.5%

2015 $22,839 0.5%

2016 $24,381 0.5%

2017 $25,965 0.5%

2018 $27,588 0.5%

2019 $29,244 0.5%


Case Study 3 – Long Term Strategy : Grandfather status

Sample projected PPO plan changes that can be made and still maintain grandfather status*:

Plan YearIndividual In-

Network DeductibleIndividual Out of Pocket Maximum

In network Coinsurance

In network PCP Copay

2011 $356 $4,750 90% $25.00

2012 $368 $4,906 90% $25.00

2013 $380 $5,067 90% $25.34

2014 $393 $5,235 90% $26.17

2015 $406 $5,408 90% $27.04

2016 $419 $5,589 90% $27.94

2017 $433 $5,776 90% $28.88

2018 $448 $5,970 90% $29.85

2019 $463 $6,171 90% $30.86

*Maximum allowable changes are dependent on Medical CPI. Based on historical Medical CPI as published by the Bureau of Labor Statistics, we have assumed Medical CPI to be 3.75% for the next 10 years.


Case Study 3 – Long Term Strategy : Observations► Client may wish to manage plans down towards a 60% actuarial

value over the next several years► Currently, EPO estimated to be at 86.4% actuarial value and PPO

estimated to be at 78.9% actuarial value► This can be achieved by adding a high deductible option and phasing out

EPO over time (Costs are more difficult to manage with EPO)► This will reduce risk to individual mandate by giving opted out employees

a less costly plan to move into and also reduce excise tax risk in 2018

► A sample 9-year approach is shown on the next page


Case Study 3 – Long Term Strategy : Observations

Years Plan changes Result

2011 -Increase PPO deductible to $500/$1,000-Reduce EPO employer contribution

percentage to 77.1% (same as PPO)

Manages health care trend and reduces incentive for employees to move to EPO

2012 to 2013

- Reduce EPO employer contribution percentage to 75%

- Increase PPO deductible to $600/$1,200 (consistent with trend)

Manages health care trend and incentivizes employees to move to PPO

2014 - Make EPO a “buy up” from PPO (employer contributions same for each plan)

- Add High Deductible PPO with 60% actuarial value and very low employee contributions

- Increase PPO deductibles to $750/$1,500

Moves employees out of EPO into high deductible plan and increases consumerism. Also, provides low cost plan for currently opted out individuals to enroll in.

2014 to 2018

- Eliminate EPO plan- Increase deductibles with trend- Transition from FSA to HSA

Fully transitions to manageable PPO plans with lower actuarial values and prevents FSA from triggering excise tax

Ernst & Young

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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health care reform: implications for us employers accounting and auditing conference wichita 19 may...

Documents

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benefit design implications

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