High Deductible Plans and Health Savings Accounts

General Background & Maryland Health Insurance Plan Experience

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Agenda

Background

Maryland Health Insurance Plan (MHIP) Experience

HSA Trends in the Employer Marketplace

Questions?

Background

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HSA Overview

A Health Savings Account (HSA) is a tax-favored account owned by an individual used to pay for current and future medical expenses.

HSAs are used in conjunction with a “High Deductible Health Plan”(HDHP).– Insurance that does not cover first dollar medical expenses (except

for preventive care)– Can be an HMO, PPO or indemnity plan, as long as it meets the

requirements

HSAs were created in Medicare legislation signed into law by President Bush on December 8, 2003.

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HSA Eligibility

Any individual that:– Is covered by an HDHP– Is not covered by other health insurance– Is not enrolled in Medicare– Can’t be claimed as a dependent on someone else’s tax return

Children cannot establish their own HSAsSpouses can establish their own HSAs, if eligible

No income limits on who may contribute to an HSA

No requirement of having earned income to contribute to an HSA

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Definition of a HDHP

Health insurance plan with minimum deductible of (for 2007):– $1,100 (self-only coverage)– $2,200 (family coverage)

Annual out-of-pocket (including deductibles and co-pays) cannot exceed (for 2007):– $5,500 (self-only coverage)– $11,000 (family coverage)

HDHPs can have:– first dollar coverage for preventive care (copays allowed)– higher out-of-pocket for non-network services

All covered benefits must apply to the plan deductible, including prescription drugs

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Definition of a HDHP

If HDHP provides prescription drug benefit, prescription drug expenses must be subject to the annual deductible or the individual may not contribute to an HSA.

Preventive care generally does not include any service or benefit intended to treat an existing illness, injury or condition.

Certain drugs and medications can be considered preventive care.

Safe harbor list of preventive care that HDHP can provide as first-dollar coverage before minimum deductible is satisfied:– Periodic health evaluations (e.g., annual physicals)– Screening services (e.g., mammograms)– Child and adult immunizations– Obesity weight loss programs

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HSA Contribution Rules

Contributions to HSA can be made by the employer or the individual, or both– If made by the employer, it is not taxable to the employee

(excluded from income and wages)– If made by the individual, it is an “above-the-line” deduction– Can be made by others on behalf of individual and deducted by the

individual– Beginning in 2007, individuals can make a one-time transfer from

their IRA to an HSA

For 2007, the maximum amount that can be contributed (and deducted) to an HSA from all sources is:– $2,850 (self-only coverage)– $5,650 (family coverage)

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HSA Contribution Rules

For individuals age 55 and older, additional “catch-up” contributions to HSA allowed– 2007 - $800, 2008 - $900, 2009 - $1,000– Contributions must stop once an individual is enrolled in any type

of Medicare.

The total amount of contributions to an HSA are based on the number of months that the individual is covered by an HDHP as of the first day of the month.– 3 months of HDHP coverage with an annual high deductible

amount of $1,200 will mean that the maximum contribution will be3/12ths of $1,200 or $300.

“Catch-up” contributions must also be pro-rated for number of months eligible.

Maryland Health Insurance Plan Experience

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Maryland Health Insurance Plan Experience

Enrollment & Demographics

Cost Analysis– HSA $2,500 deductible– PPO $1,000 and $500 deductible– EPO– Restricted to Medically Eligible and HIPAA Eligible– Open and closed group experience– Removed $300,000 from HSA medical experience due to $434,000

IP hospital stay

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Evolution of MHIP HDHP in Maryland

End of Year

84523% less than $1,000 non-

HDHP$2,500$2,500July06 – June07

237Same as $1,000 deductible non-

HDHP$2,500$1,200July05 – June06

88Same as $1,000 deductible non-

HDHP$4,500$1,200July04 – June05

SubscribersPremiumsInc. DeductDeductiblePeriod

OOP Max

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Maryland Health Insurance Plan – Monthly EnrollmentOpen Group

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07

Month

Mem

bers

HDHP $1,000 PPO $500 PPO EPO

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Maryland Health Insurance Plan – Subscriber Income Distribution by Plan

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Income < $35,000 $35,000 < Income < $55,000 $55,000 < Income < $75,000 $75,000 < Income

HDHP Non HDHPNotes:Income is self reported

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Maryland Health Insurance Plan – Subscriber DemographicsClosed Group

Plan Subscribers Average Age % Male Mem/SubHDHP 242 52.4 55% 1.37$1,000 PPO 808 51.8 50% 1.32$500 PPO 1,256 47.5 43% 1.30EPO 458 44.2 46% 1.20Total 2,764 48.6 46% 1.30

Plan Subscribers Average Age % Male Mem/SubHDHP 153 51.7 59% 1.26$1,000 PPO 579 50.6 50% 1.28$500 PPO 785 45.7 44% 1.27EPO 325 42.5 50% 1.16Total 1,842 47.2 48% 1.25

Plan Subscribers Average Age % Male Mem/SubHDHP 89 53.6 48% 1.56$1,000 PPO 229 54.8 49% 1.42$500 PPO 471 50.5 41% 1.36EPO 133 48.5 38% 1.29Total 922 51.6 43% 1.39

Total

Medically Eligible

HIPAA Eligible

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Maryland Health Insurance Plan – PMPY CostOpen Group

HIPAA Eligible$7,260$840$6,420293HDHP$5,701$1,249$4,452544$1,000 PPO$7,263$2,087$5,1761,058$500 PPO$10,401$2,619$7,783301EPO

$10,753$2,263$8,491670EPO

Medically Eligible

$6,755$1,664$5,0911,701$500 PPO$7,842$1,236$6,6061,187$1,000 PPO$9,206$951$8,255469HDHP

TotalRxMedicalMembersPlanPMPY Cost

Notes:Per Member Per Year data on an estimated incurred basisNo pre-existing exclusion for MHIP during data period

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Maryland Health Insurance Plan – PMPY CostClosed Group

HIPAA Eligible$7,083$899$6,184139HDHP$3,966$599$3,368325$1,000 PPO$6,012$1,359$4,652641$500 PPO$7,458$1,759$5,698172EPO

$8,818$1,973$6,844378EPO

Medically Eligible

$5,825$1,011$4,814996$500 PPO$6,881$945$5,936739$1,000 PPO$10,161$1,132$9,029193HDHP

TotalRxMedicalMembersPlanPMPY Cost

Notes:Per Member Per Year data on an estimated incurred basisRx average assumed to be same as open groupNo pre-existing exclusion for MHIP during data period

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Maryland Health Insurance Plan – Inpatient Utilization StatisticsClosed Group

3.7260.070.0Pop. Avg.

Avg. DaysAvg. Days

HIPAA Eligible3.9482.0122.3139HDHP4.9424.686.2325$1,000 PPO4.3418.198.3641$500 PPO5.4790.7145.3172EPO

4.7645.5137.6378EPO

Medically Eligible

4.2482.9115.5996$500 PPO4.6462.8101.5739$1,000 PPO8.81,145.1129.5193HDHP

Per AdmitPer 1,000Per 1,000MembersPlanAvg. Admits

Notes:Utilization statistic on an immature incurred basisNo pre-existing exclusion for MHIP during data period

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Maryland Health Insurance Plan – Member Out of Pocket (OOP) ExpensesClosed Group

TotalTax

HIPAA Eligible$3,172($350)$1,773$1,748HDHP$4,437$0$3,198$1,239$1,000 PPO$4,706$0$3,394$1,313$500 PPO$6,541$0$5,234$1,307EPO

$6,525$0$5,234$1,291EPO

Medically Eligible

$4,585$0$3,394$1,192$500 PPO$4,529$0$3,198$1,330$1,000 PPO$3,082($327)$1,773$1,636HDHP

Member OOPSavingsPremiumsCopaysPlanMemberMember

Notes:Per Member Per Year data on an estimated incurred basisRx copays estimated to equal 18% of total Rx cost for non HDHPRx copays estimated as difference between $500 PPO and HDHP paidAssumed 20% tax rate

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Maryland Health Insurance Plan – Conclusions and Observations

HSA plans:– Have higher members in upper income brackets– Have a slighlty older population– Attract more male subscribers– Attract members with higher risk profiles

Pros and Cons of High Risk Pools offering HSA plans– Pros

Consistent with general trend of medical consumerismAffords members tax advantaged savings

– ConsExposes High Risk Pool to anti-selectionLower member OOP expenses increase overall loss ratio

HSA Trends in the Employer Marketplace

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Survey results suggest CDHP growth will accelerate among smaller employersPercent of employers offering/likely to offer CDHP, by employer size

Very likely to offer in 200720062005EMPLOYER SIZE

37%21%18%12%6%7%7%5%

39%22%20,000 or more22%19%10,000-19,99921%10%5,000-9,99915%4%1,000-4,99910%4%500-99913%5%200-49917%1%50-19913%2%10-49 employees

Source: Mercer 2007 National Survey of Employer-Sponsored Health Plans

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28%30%21%22%Jumbo employers9%10%6%6%Large employers8%10%2%4%Small employers

HRA-based CDHP

HSA-based CDHP

HRA-based CDHP

HSA-based CDHP

Very likely to offer CDHP in 2007Offer CDHP in 2006

HSA-based CDHPs quickly overtaking HRA-based plans

Source: Mercer 2007 National Survey of Employer-Sponsored Health Plans

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Assistance required by employees enrolling in HSA-based CDHP, compared to other medical plansLarge CDHP sponsors

About the same amount

17%

More assistance

40%

Less assistance

5%

Much more assistance

31%

Don't know6%

Source: Mercer 2007 National Survey of Employer-Sponsored Health Plans

Questions?