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1 Health Insurance Exchanges: Implications for Hospitals and Health Systems Traverse City, Michigan February 20, Kaufman, Hall & Associates, Inc. All rights reserved.

2 Agenda Private Exchange Primer National Public Exchange Update Public and Private Exchange Summary Outlook Strategic and Financial Implications Concluding Thoughts Questions and Discussion Appendices Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 1

3 Private Exchange Primer Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 2

4 Health Insurance Exchanges Are Here Exchanges are marketplaces for individuals and businesses to comparison shop and purchase healthcare coverage Seek to increase competition and/or consumer choice while providing benefit standardization, lower costs Public and private exchanges will co-exist in many areas Public: Individual Public: SHOP Private Federally mandated for January 2014 Individual exchanges targeting uninsured and selfinsured individuals SHOP exchanges targeting small employers early on Community-rated premiums with limited riskadjustment Small business tax credits and individual subsidies will make exchanges attractive Won t exist in all states Less regulated than public exchanges Will support defined contribution models Various exchange models will target different employer segments Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 3

5 Private Exchanges What Are They? As the commercial insurance market continues to move from defined benefit to defined contribution plans, employers will seek new benefit models to maximize or cap the value of their healthcare benefit subsidies Defined Benefit Defined Contribution Private exchanges will support this market shift by offering a broader choice of plan and coverage options sponsored by a variety of organizations Private Exchange Sponsors Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 4

6 2014 Enrollment Amongst Select Major Private Exchange Operators Has Reached 1.2 Million Commercial Lives Exchange Operator # of 2014 Enrollees # of 2014 Employers # of Enrollees per Employer 600, , , , ,000 2, , ,273 46, ,500 Total 1,221,500 2, Private exchange operators are quickly growing their enrollee bases and appealing to employers of all sizes Source: Company press releases and investor conference calls. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 5

7 Early Private Exchange Adopters Include Many Household Names with Outsized Representation by the Retail/ Restaurant Industries Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 6

8 Drivers That Could Impact Commercial Shift to Private Exchanges Driver Me Too Effect Rising Administrative Costs Delivery Cost Cadillac Tax Exchange Plan Options and Premiums Paternalism Union and Public Sector Influence Factors Secondary wave of fast followers will emerge if initial wave of employers demonstrates success Employers continue to look for ways to lower administrative expenses of employee benefits Favorable insurer network contracts will increase plan participation and pressure on employers to shift Some employers may use private exchanges to avoid the excise tax stipulated to begin in 2018 Plan designs and premiums must be as good or better than current group coverage Employers can be paternalistic and resistant to significant changes in employee benefit design Collectively bargained cohorts and public sector employers typically are slower to change Shift Impact Source: Sizing Up The Healthcare Exchanges - Big Long-Term Opportunity, Credit Suisse, Sept 26, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 7

9 Private Exchanges Are Likely to Lead Some Employees to Trade Down to Cheaper Options Impact on Plan Choice of Shift From Defined Benefit to Defined Contribution Liazon Corporation 1 Primary Options for Employees Seeking to Trade Down 70% Chose Less Expensive Plan Very few people spend other people s money as carefully as they spend their own. Milton Friedman Nobel Prize-Winning Economist High Deductible Narrow/ Tiered Network Source: 1. Based on interview with Liazon Corporation (a defined contribution benefit company) documented in Singhal S, Stueland J, and Ungerman D, How US Health Care Reform Will Affect Employee Benefits. McKinsey & Company, June Liazon Corporation available at: Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 8

10 Transparency Tools Are a Key Catalyst for High Deductible Impact Growth in high deductible plans has prompted payers and employers to develop price transparency tools revealing cost and quality data to members Informed patients are likely to choose the low-cost/ high-quality providers when faced with increased cost sharing Providers in competitive markets are at risk of revenue and market share erosion as payers and patients become aware of reimbursement variance Improving cost structure and competing on value is the only viable long-term option Select Companies Offering Transparency Tools Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 9

11 Private Exchanges Will Break Apart Employee Populations, Leading to New Contracting and Strategic Considerations Wholesale Employee populations will break apart Open Access Networks Retail Narrow/ Tiered Networks Lives will be broken up across multiple carriers and networks, many which could be narrow or tiered, resulting in increased fragmentation, risk of share and revenue loss Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 10

12 Private Exchanges and Value-Based Payments Have Already Merged In Some Markets Open Network ACO Options Medica Private Exchange Exchange offers MN participants 5 Options (4 with partner ACOs and 1 open network) ACOs seek to lower cost via fee reductions and enhanced coordination/ outcomes More than 40% of enrollees chose ACO plan; all of year-one employers renewed Source: Anderson J.: Medica Partners with Four Diverse ACOs on Unique Private Exchange Model, ACO Business News, October Shafer L.: Exchanges Have Been Tried, and Worked, Star Tribune, October 3, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 11

13 National Public Exchange Update -Enrollment Update and Outlook -Reimbursement and Network Design Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 12

14 Public Exchange Enrollment Improved Markedly in December But Still Fell Short of Administration Targets Cumulative Public Exchange Enrollment 1 Thousands Federal Exchange State Exchange , ,196 Oct Nov Dec % Target 2 21% 30% 65% Public Exchange Enrollment National public exchange enrollment surged to 2.2M in Dec. Enrollment is still lagging the 3.3M Dec. target set by the administration (consistent with its 7.1M total 2014 enrollment goal) Enrollment through Nov. was limited as the federal exchange struggles continued ~20% of enrollees have not paid their premium as of late January Notes: (1) HHS definition of enrollment (those who have selected a plan ) (2)Percentage of HHS enrollment target. Sources: ASPE, Health Insurance Marketplace Enrollment Reports, 13 Nov 2013, 11 Dec 2013, and 13 Jan Tavenner M, Projected Monthly Enrollment Targets for Health Insurance Marketplaces in 2014, 5 Sept Luhby T, Obamacare Deadbeats: Some don t pay up, CNNMoney, 30 Jan Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 13

15 The Majority of National Enrollment Is From Those Who Previously Had Coverage, Not the Uninsured % of Public Exchange Enrollment by Uninsured Enrollment Through Dec % 44% 11% National - Mckinsey National - Broker/Consultant State - NY Exch. A recent McKinsey survey and broker/ consultant data suggest that a majority of those enrolled nationally thus far previously had individual or employer coverage New York reported that 44% of those enrolled through Dec. previously were uninsured Mix dynamics likely to change before enrollment ends in March and will vary by state Notes: McKinsey data from 11/25 to 1/10 survey; Broker/consultant estimates from 1/17 WSJ article; NY data based on enrollment through 12/24. Sources: Weaver C and Mathews A, Exchange See Little Progress on Uninsured, WSJ, 17 Jan, 2014; NY State Exchange Press Release, 13 Jan Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 14

16 The Vast Majority of Those Enrolled Nationally Are Choosing Silver and Bronze Plans National Plan Selection by Metal Level Enrollment Through Dec 2013 Bronze 20% Cat. (1%) 1% 1 60% 7% Silver Platinum 13% Gold Plan Choice Trends 80% of those enrolled nationally chose cheaper Bronze or Silver plans Silver plans (eligible for cost-sharing subsidies) are the most popular and account for 60% of all enrollment Mix likely to change before enrollment period ends, particularly if the share of formerly uninsured and healthier individuals increases Note: (1) Catastrophic plan. Source: ASPE, Health Insurance Marketplace Enrollment Report, 13 Jan Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 15

17 Initial National Public Exchange Enrollment Is Skewing Older Than Administration Targets National Exchange Age Distribution Enrollment Through Dec % Well below national HHS target of 39% National Enrolling young and healthy people is critical to a stable risk pool Age enrollment is lagging the 39% administration target How enrollment compares to health plan expectations will dictate plan profitability The 3Rs will mitigate premium changes in the near to medium term 22% 15% 24% 6% <18 Source: ASPE, Health Insurance Marketplace Enrollment Report, 13 Jan Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 16

18 Drivers That Could Impact Commercial Shift and Employer Dumping to Public Exchanges Driver Firm Size Subsidy/Tax Credits Delivery Cost Wages/Part-Time Workforce/Retirees Exchange Implementation and Promotion Timing Recruitment and Retention Exchange Plan Options and Premiums Penalties Influence Factors Small firms are more likely to choose SHOP exchanges or dump to HIX Subsidy and tax credit availability will stimulate exchange uptake Favorable insurer network contracts will increase plan participation and pressure on employers to shift Low-wage geographies will have greater subsidy availability; part-time employees and pre-65 retirees more apt to shift Good communication, promotion, and receptivity will stimulate enrollment Uptake could initially be slow but increase over time once the market settles out, particularly if the me too effect takes hold Higher skilled/wage employers who prioritize recruitment and retention may not be willing to shift to public exchanges Fewer plan options and higher premiums will delay uptake Employer responsibility penalties a key deterrent for larger employers; fear among some that penalties could be increased in the future Shift Impact Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 17

19 Low Early Penalties May Slow Public Exchange Enrollment by the Uninsured Penalty as a Percentage of Income 1 2.5% Flat Dollar Penalty per Person & Family 2 $2, % 1.0% $975 $695 $285 $95 $ = Individual = Family The penalty for not obtaining coverage will be the greater of a flat dollar amount or a percentage of income unless certain exemptions are met 3 1) Penalty applied to income above income tax filing threshold (roughly $10,000 for individuals and $20K for families in 2012). 2) Flat dollar penalty is indexed to inflation after ) Some individuals may be exempt from penalties based on religion, citizenship, income, time noninsured, access to affordable coverage, etc. Source: Kaiser Family Foundation: The Requirement to Buy Coverage Under the Affordable Care Act. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 18

20 National Public Exchange Update -Enrollment Update and Outlook -Reimbursement and Network Design Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 19

21 A Broad Range of Public Exchange Contract Rates Is Emerging System in Ohio System in Florida Medicaid Medicare Medicare (+) Commercial (-) Commercial Hospital in South Carolina System in Texas Hospital in Kentucky Reimbursement rates will be driven by a variety of factors including provider competition, payer competition, current contract rates, and network design Payers in some markets are defaulting to current networks/ rates; however, discounts from current commercial rates are the norm Note: Rate examples listed are not meant to be representative of a given state s exchange contract rates across all providers/ markets. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 20

22 Narrow Network Insurance Products Have a Significant Presence on the Public Exchange in Many Markets 70% of Hospital Networks on Exchanges Are Narrow or Ultra-Narrow Distribution of Networks by Network Breadth 38% 30% 32% Ultra Narrow Broad Narrow Carriers are adapting to affordability imperatives by actively excluding some Carriers higher cost are hospitals adapting while to affordability collaborating imperatives more closely by with actively those hospitals excluding some higher cost willing hospitals to accept while lower collaborating reimbursement more rates. closely with those hospitals willing to accept lower reimbursement rates. Notes: Networks offered in 2014 silver individual exchange product (n=120), as of Nov. 15, Definitions broad networks: less than 30% of largest 20 hospitals by number of beds are not participating; narrow networks: 30-69% of largest 20 hospitals are not participating; ultra narrow networks: at least 70% of the largest 20 hospitals are not participating Sources: McKinsey Center for U.S. Health System Reform: Hospital Networks: Configurations on the Exchanges and Their Impact on Premiums. Dec. 14, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 21

23 NH SC IN NJ FL UT DE VA GA WY SD MS WI MI TX ME PA OK IA OH AZ ND TN IL LA NC NE AK AL AR KS MO MT WV Limited Network Prevalence Varies Widely 120% 100% 2014 Limited Network Percentage of Plan Offerings By State Federal Exchange States 80% 60% 40% 20% MI: 46% Limited Network Penetration Network adequacy regulations, hospital competition, spare capacity will influence prevalence 85% of MHA survey respondents have/plan to have some or all narrow/tiered network exchange contracts 0% Note: Limited network defined as EPO and HMO plans. Survey results exclude the 49% of respondents who indicated that they did not know their exchange contract network plan design. Source: Health Insurance Marketplace Premiums for 2014 Databook (Information Current as of Sept 18, 2013); MHA member survey. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 22

24 2014 Is Not the Finish Line Narrow Network Penetration/ Pricing Will Be Dynamic Over Time Narrow Network Exchange Lives and Reimbursement by Year Conceptual Illustration Higher Reimbursement More Lives Narrow network discounts are likely to increase over time as narrow network penetration increases and payers leverage larger plan memberships to demand greater discounts Fewer Lives 2014 Year 2018 Lower Reimbursement Exchange Lives in Narrow Networks Narrow Network Reimbursement Rates Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 23

25 Collections Will Be a Challenge Due to Preference for Bronze and Silver Plans Standardized Deductible Levels by Plan California Health Exchange Subsidized Cost-Sharing Unsubsidized Plan Tier Silver Silver Bronze Incomes Eligible <150% FPL 150% - 200% FPL 200% - 250% FPL All All Deductible $0 1 $500 1 $1,500 2 $2,000 2 $5,000 3 No Deductible High Deductible Low-income enrollees are likely to choose bronze or silver plans Sicker enrollees may prefer the lower out-of-pocket spending of (subsidized) silver plans Actual out-of-pocket expenses will depend on provider charity policies Providers should educate uninsured on comparative risks of plans Note: 1) Hospital care not subject to deductible. 2) Medical deductible. 3) Deductible for medical and drugs. Income categories correspond to the following incomes: <150% FPL = <$17,235, 150% - 200% FPL = $17,235 - $22,980, 200% - 250% FPL = $22,980 - $28,725. Source: Covered California. Available at Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 24

26 Public and Private Exchange Summary Outlook Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 25

27 Projected Shift of Commercial Lives to Public and Private Exchanges 2018 Illustrative National Scenario Summary Low Scenario Midpoint Scenario High Scenario 66% 40% 31% 16% 8% 1% 7% 23% 4% 13% Individual SHOP Private 6% 29% Note: See appendix for sources and methodology/limitations. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 26

28 Strategic and Financial Implications Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 27

29 Balancing New Revenue Opportunities and Cannibalizing the Existing Commercial Business Uninsured Exchange New Rev. Commercial Exchange Lost Rev. What is the optimal way to balance these threats and opportunities? Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 28

30 Exchange Participation Timing Implications Current market position should drive participation timing First and second mover options present unique costs and benefits Health System A Non dominant market position and low rates Enter Exchange Market First Mover Advantage Increase market share via initial wave Narrow network priority access Revenue growth Health System B Strong market position and high rates Enter Exchange Market Second Mover Advantage Rate/ revenue preservation Market settling Access more favorable contracts Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 29

31 Exchange Participation Timing Implications (continued) Current market position should drive participation timing First and second mover options present unique costs and benefits Health System A Non dominant market position and low rates Enter Exchange Market First Mover Dis-Advantage May lock-in unsustainable low rates Increased bad-debt exposure Slow exchange uptake could delay benefits Health System B Strong market position and high rates Enter Exchange Market Second Mover Dis-Advantage Carved out of narrow networks Revenue and share loss Less favorable contract options Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 30

32 Concluding Thoughts Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 31

33 Exchanges Will Accelerate Transition to Emerging Payment Models and Create New Strategic/ Financial Challenges Today s Model Emerging Models Open Access PPO High Deductible Narrow/Tiered Public Exchanges Deployed in some markets Catastrophic and low actuarial value plans Common payer strategy absent regulatory/market restrictions Private Exchanges Expected to decline over time Likely near-term model of choice Expected to increase over time as narrow/tiered networks mature Implications Risk of Share Loss Price Pressure Bad Debt Use Rate Pressure Limited Threat Significant Threat Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 32

34 Summary Implications Exchanges will catalyze the shift of purchasing healthcare benefits from the wholesale to the retail channel This channel shift will change the behavioral economics of plan purchasing decisions and increase the prevalence of high deductible and narrow network plans Value-based reimbursement will increase over the long-term as pricing and cost pressures grow, which will require improved cross-continuum care coordination Competing on value and improving cost structure are the only viable long-term options for continued growth Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 33

35 Key Leadership Questions What proportion of our market is likely to purchase insurance through the exchanges? What effect will the exchanges have on the size of our currently commercially insured population? Will we participate in exchange offerings and, if so, with which health plans, employers, payers, and providers? Do we look for narrownetwork exclusivity within our market? What is our contracting strategy? Do we contract independently, or with our physicians and other providers? What reimbursement contracting models do we wish to pursue? What is our pricing strategy? Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 34

36 Questions and Discussion Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 35

37 Appendices Appendix 1: Private Exchange Primer Appendix 2: Michigan Public Exchange Analysis Appendix 3: MHA Survey Results Appendix 4: Other Appendix 5: About Kaufman Hall Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 36

38 Appendix 1: Private Exchange Primer Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 37

39 Private Exchanges How Do They Work? Employer Contracts with Private Exchange Sponsor for coverage Determines plan offerings Provides defined contribution Eliminates administrative role Facilitates transition to exchange Private Exchange Contracts with insurance providers Single or multi carrier models Provides decision and enrollment support to employees Facilitates employer subsidy Employee Receives employer s subsidy via limited spending account Selects coverage through the exchange Seeks care through contracted providers Exchange provides defined contribution/ enrollment support Each stakeholder has a defined role in the exchange The exchange becomes the central hub connecting stakeholders Employees gain greater choice and control Insurer Develops insurance products to offer in private exchange Fully insured or self funded (ASO) products Bills employee full cost of coverage Provides customer service to employees Provider Hospitals and physicians contract directly with insurers May have different reimbursement fees and methodologies Standard patient billing and collection process Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 38

40 Employer Surveys Suggest That a Material Shift to Private Exchanges Is Likely Key Aspects of Private Exchanges Attractive to Employers Reduced administrative expense Improved predictability of health benefits expense Potential to save by reducing spending on over-insured employees New plan designs may lower employer costs over the long term Increased employee choice Percentage of Employers Who Anticipate Moving to Private Exchanges Over the Next 3 to 5 Years 28% 28% Deloitte Survey Aon Hewitt Survey 1 2 Our research as well as other surveys seems to indicate that over the next three to five years, 25% to 35% of employers will provide benefits through a private exchange. Steve Kreuger, Exchange Solutions Leader Mercer Source: 1. Deloitte Center for Health Solutions: 2012 Survey of U.S. Employers. 28% of respondents plan to shift to a defined contribution model. 2. Aon Hewitt: Aon Hewitt Survey Reveals Growing Shift in How Employers Intend to Offer Health Care Benefits in the Future. Feb 28, % of respondents plan to shift to a private exchange. 3. Inside Health Insurance Exchanges: Private Exchanges Woo More Employers, But Real Traction Won t Begin Until August 15, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 39

41 Survey Data Also Indicates Receptivity to Private Exchanges Among Employees Consumer Response to Private Exchanges Accenture, % Neutral to Positive Projected 2018 National Exchange Enrollment Accenture, Millions ~25% of commercial group lives 1 Aspects of Private Exchanges Attractive to Consumers Choice Flexibility Personalized product selection Shopping experience Public Exchange Private Exchange 1) Share of the approximately 150M commercial group lives present today. Source: Are You Ready? Private Health Insurance Exchanges Are Looming. Accenture, June Based on March 2013 online survey of 2,000 consumers between the ages of 18 to 64. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 40

42 Recent News Reflects Private Exchange Activity Across a Range of Employer Sizes Liazon Forges Partnerships with National Brokers Mercer Announces 2014 Private Exchange Participants Walgreens Joins AON Hewitt Private Exchange BAN/USI have 150 US offices; Liazon exchange includes 2,400 employers 33 mostly midsize companies across range of industries will enroll 75K employees 160K Walgreen s employees will enroll in 2014; total AON 2014 enrollment will be 600K Small to Midsize Employers Midsize to Large Employers Large Employers Note: 600K AON enrollees includes employees and dependents across 18 employers, an increase of 15 employers vs. the 3 employers enrolled in Sources: Shutan, B: BAN Partners with Liazon, Health Insurance Exchange News, Sept 17, USI Helps Clients Manage Employee Benefits Through Launch of Private Insurance Exchange, Fort Mill Times, Oct 17, McCann, D: Midsize Companies Move to Private Health Exchanges, CFO.com, Oct 15, Armstrong D, Walgreen Joins in Exodus of Workers to Private Exchanges, Bloomberg, 18 Sept, Private Exchanges Woo More Employers, But Real Traction Won t Begin Until 2015, Inside Health Insurance Exchanges, Aug 15, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 41

43 Sears and Darden Among the Major Employers to Pioneer the Private Exchange Concept Sears and Darden Private Exchange Sears and Darden chose a defined benefit/ private exchange healthcare benefit model for 2013 More than 100,000 active employees of Sears, Darden, and other employers were given a company credit to purchase benefits via an exchange sponsored by Aon Hewitt Aon Hewitt decision support tools and benefits advisors facilitated employee plan decisions Source: 1. Enrollment Results Show Aon Hewitt s Corporate Exchange Empowers Employees to Become More Astute Health Care Consumers. Aon Hewitt, March 18, Mathews A.W. Big Firms Overhaul Health Coverage. The Wall Street Journal, Sept 26, online.wsj.com. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 42

44 Many Participants Shifted to CDHPs in the First Year of the Sears and Darden Private Exchange Distribution of Sears and Darden Employee Health Benefits by Type of Plan 12% 18% 70% 39% 14% 47% Consumer-Directed Health Plan HMO PPO Sears and Darden found that choice of plans changed when employees were presented with expanded plan options and control over employer subsidy Source: Mathews A.W. To Save, Workers Take on Health-Cost Risk. The Wall Street Journal, Mar online.wsj.com. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 43

45 Private Exchanges Likely to Be a Catalyst for the Shift to Narrow Networks Over the Longer Term Providers and health systems may have limited or no access to existing and new managed care populations under private exchange plans Current State Employer groups have traditionally chosen open access PPO plans with large provider networks where patients are free to choose any network provider Future State Private exchanges will offer a variety of new plans which may have narrow or limited networks and require PCP referrals Open Access Provider Network Exchange Product Provider Networks Seek Care Across Broad Network Seek Care Across Limited or Narrow Networks Employee Populations Enrolled in Traditional Group Plan Employee Populations Enrolled in Private Exchange Plans Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 44

46 Appendix 2: Michigan Public Exchange Analysis Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 45

47 Public Exchange Enrollment Will Come From Both the Uninsured and Commercially-Insured Populations Commercial (Group) Currently Uninsured Michigan Public Health Exchange Commercial (Non-Group) Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 46

48 CA FL NH TX NC PA MI WA IL GA CO VA WI OH TN CT NJ MO KY IN AL AZ SC NV ID MN UT OR MD LA VT OK NE KS ME MT AR NM RI MS NY IA MA WV WY AK DE SD DC ND HI Absolute Levels of Public Exchange Enrollment in Michigan Through December Exceeds National Averages 250,000 Cumulative December Public Exchange Enrollment by State Absolute Enrollment 200,000 California: 498,000 Federally-Run Exchange State-Run Exchange 150, ,000 Michigan: 75,511 50,000 National Average: 42,000 0 Source: Department of Health and Human Services; Health Insurance Marketplace: January Enrollment Report; January 13 th, 2014 Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 47

49 CT RI NY NH ME NC CO WI ID MI IL MT DC PA CA NE NJ VA AL FL UT TN MN GA MO KS SC VT WY AZ AR HI IN ND OH WA WV NV LA TX IA OK AK SD KY MS MD NM OR DE MA Michigan Public Exchange Enrollment Through December Also Exceeds National Averages as a Percentage of HHS Targets 250% 200% 150% Cumulative December Public Exchange Enrollment by State % of HHS Targets Connecticut: 232% Michigan: 99% Federally-Run Exchange State-Run Exchange 100% National Average: 65% 50% 0% Source: Department of Health and Human Services; Health Insurance Marketplace: January Enrollment Report; January 13 th, 2014 Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 48

50 WY AK MS CT VT NJ ME DE IN SD WI NH NC ND WV CA NY AR SC GA LA RI WA OH FL MT Avg. AL MO NE VA CO PA ID NV MI NM AZ IA TX OR DC IL UT KS MD TN OK MN Exchange Rates Vary Widely Across the US with Michigan Slightly Below the National Average $450 $400 $425 Monthly Premium of Lowest Cost Bronze Plan in State 1 $350 $300 $250 National Avg: $249 MI: $222 $200 $150 $144 $100 $50 $0 Note: 1) Age weighting for all states is based on expected age distribution in the Marketplaces, estimated by the RAND Corporation. Source: APSE Issue Brief, Health Insurance Marketplace Premiums for 2014, Health and Human Services, avail able at: aspe.hhs.gov (accessed Oct 1, 2013). Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 49

51 Bronze and Silver Plans Make the Majority of Public Exchange Enrollment Across the US and in Michigan Michigan 1 Plan Selection by Metal Level Enrollment Through Dec 2013 National Bronze Bronze 12% 20% 1% Cat. (1%) 70% 2 1% 60% Silver Silver 7% 14% Platinum 13% Gold Gold Plan Choice Trends Plan selection in Michigan skews strongly toward low cost bronze and silver plans, slightly less than the national average for Bronze plans and slightly higher for Silver plans Mix likely to change before enrollment period ends, particularly if the share of formerly uninsured and healthier individuals increases Notes: (1) Michigan reports 3% enrollment in platinum and 1% enrollment in catastrophic plans. (2) Catastrophic plan. Source: ASPE, Health Insurance Marketplace Enrollment Report, 13 Jan Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 50

52 Public Exchange Geographic Rating Areas Michigan Rating Areas The public exchange splits Michigan into 16 rating areas Insurers must price their plans at the same level for all counties within a rating area However, plans do not need to participate in all counties within a rating area Rating areas provide a useful way to summarize geographic variation within a state Note: See appendix for a list of counties included in each rating area. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 51

53 Michigan Geographic Rating Areas Rating Area Counties 1 Monroe, Wayne 2 Macomb, Oakland 3 St. Clair 4 Lenawee, Washtenaw, Livingston 5 Lapeer, Genesee, Shiawassee 6 Huron, Sanilac, Tuscola 7 Clinton, Eaton, Hillsdale, Ingham, Jackson 8 Arenac, Gratiot, Saginaw, Bay 9 Berrien, St. Joseph, Cass, Van Buren 10 Branch, Calhoun, Kalamazoo 11 Allegan, Barry 12 Ionia, Kent, Lake, Mason, Mecosta, Montcalm, Muskegon, Newaygo, Oceana, Osceola, Ottawa 13 Gladwin, Clare, Isabella, Midland 14 Antrim, Benzie, Charlevoix, Emmet, Grand Traverse, Manistee, Kalkaska, Missaukee, Wexford, Leelanau 15 Alcona, Alpena, Cheboygan, Chippewa, Crawford, Iosco, Mackinac, Montmorency, Ogemaw, Oscoda, Otsego, Presque Isle, Roscommon 16 Alger, Baraga, Delta, Dickinson, Gogebic, Houghton, Iron, Keweenaw, Luce, Marquette, Menominee, Ontonagon, Schoolcraft Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 52

54 WY AK MS CT VT NJ ME DE IN SD WI NH NC ND WV CA NY AR SC GA LA RI WA OH FL MT Avg. AL MO NE VA CO PA ID NV MI NM AZ IA TX OR DC IL UT KS MD TN OK MN Michigan Exchange Rates Compare Favorably to Those of Other States Monthly Premium of Lowest Cost Bronze Plan in State 1 $450 $400 $350 $300 $250 $425 National Avg: $249 $222 $200 $150 $144 $100 $50 $0 Note: 1) Age weighting for all states is based on expected age distribution in the Marketplaces, estimated by the RAND Corporation. Source: APSE Issue Brief, Health Insurance Marketplace Premiums for 2014, Health and Human Services, avail able at: aspe.hhs.gov (accessed Oct 1, 2013). Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 53

55 Exchange Premiums Vary Materially Across the State Adult Age 50 Lowest Cost Silver Rates Silver Rates $401-$450 $351-$400 $301-$350 $251-$300 Rating Area Lowest Silver Rates 1 $266 2 $267 3 $339 4 $339 5 $313 6 $349 7 $342 8 $333 9 $ $ $ $ $ $ $ $426 Source: Health Insurance Marketplace Premiums for 2014 Databook (Information Current as of Sept 18, 2013). Plan Premiums Plan premiums (before subsidies) vary across the state Rates are lowest around Detroit, where plan competition is greatest Rates are highest in the Upper Peninsula, where the number of plans and exchange eligibles is low Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 54

56 Rating Area Rating Area Blue Cross Has the Lowest Premiums in Most Regions Lowest Cost Bronze Age 50 Monthly Premium Issuer 1 $235 2 $236 3 $261 4 $261 5 $268 6 $280 7 $264 8 $257 9 $ $ $ $ $ $ $ $329 Lowest Cost Silver Age 50 Monthly Premium Issuer 1 $266 2 $267 3 $339 4 $339 5 $313 6 $349 7 $342 8 $333 9 $ $ $ $ $ $ $ $426 Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 55

57 More Exchange Enrollment Is Projected to Originate From Commercial Lives than the Uninsured Projected Michigan Public Exchange Ultimate Enrollment by Source Society of Actuaries Currently Uninsured 341K (34%) Exchange Lives: 1,011K MI Public Health Exchange 512K (50%) 158K (16%) Commercial (Group) Commercial (Non-Group) Note: Figures represent ultimate or steady-state enrollment. 9K enrollees from Medicaid excluded for simplicity. High risk pool classified as individual. ESI shift includes SHOP (361K) and individual exchange (151K) lives. Source: Society of Actuaries. Cost of the Future Newly Insured under the Affordable Care Act. March Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 56

58 Penetration Rate Limited Networks Will Have a Meaningful Presence in All Regions But the Upper Peninsula 70% Michigan Limited Network Penetration Rate By Rating Area 60% 50% Michigan Avg: 46% 40% 30% 20% 10% 0% Rating Area Note: Limited network defined as EPO and HMO plans. Source: Health Insurance Marketplace Premiums for 2014 Databook (Information Current as of Sept 18, 2013). Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 57

59 Michigan Public Exchange Plan Offerings by Issuer and Plan Type Issuer Name HMO PPO Grand Total BCN of MI BCBSM Consumers Mutual HAP Humana McLaren Meridian (Bronson) Molina 9 9 Priority Health ,320 Total Health Care 8 8 Total 1,293 1,502 2,795 Source: Health Insurance Marketplace Premiums for 2014 Databook (Information Current as of Sept 18, 2013). Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 58

60 Monthly Premium (Pre-Subsidy) Limited Network Case Study: Rating Area 1 Minimum and Maximum Pre-Subsidy Premiums Adult Age 50 Bronze $500 $450 $461 $400 $350 $300 $250 $200 $328 $235-29% $331 $150 $100 $50 $- HMO Plan Type PPO Source: Health Insurance Marketplace Premiums for 2014 Databook (Information Current as of Sept 18, 2013). Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 59

61 Appendix 3: MHA Survey Results Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 60

62 Survey Data Indicates that Private Exchanges Are (Slowly) Beginning to Gain Traction in Michigan Q: Does Your Organization Plan to Participate in Private Health Insurance Exchanges through Contract Arrangements with Employers, Payers, or Health Benefits Firms? Q: At What Stage is Your Organization in Conversations with Parties Regarding Private Health Insurance Exchanges? Yes - Starting in % Contract(s) Finalized 2% Yes - Starting in % Active Final Negotiations Taking Place 0% No 13% Initial Discussions Have Occurred 31% Don't Know 60% No Discussions To Date 67% Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 61

63 Fee-For-Service Will Still Be the Most Common Payment Mechanism for Exchange Contracts Q: If you have an exchange related contract for the public exchanges, what is its payment structure? (Please check all that apply) Fee-for-service 38% Upside only risk-based fee-for-service 13% Upside and downside risk-based fee-for-service Partial capitation Full capitation All of the above 4% 4% 2% 2% Question is not applicable 58% Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 62

64 Survey Data Confirms that Limited Networks Will Play a Major Role on the Michigan Exchange Q: If You Have, Or Plan to Have, An Exchange Related Contract, Do You Expect That It Will Be for a Narrow or Tiered Network Plan Design? Yes, we have/plan to have all narrow/tiered network contracts 9% We have/plan to have some narrow/tiered network contracts 36% No, we do not have/plan to have any narrow/tiered network contracts 7% Don t Know 49% Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 63

65 Survey Data Provides a View into the Risk of Employers Dropping Coverage in Michigan Q: Are you hearing about employers in your market that are considering discontinuing health insurance coverage and "dumping" employees to the public exchanges? MHA Membership Survey Percentage of Midsize to Large Employers in Southeast Michigan Planning to Continue Offering Health Benefits to Full-Time Employees Under Health Reform McGraw Wentworth 2013 Survey 1 No 53% 91% Yes Yes 47% Note (1): Survey of 440 Southeast Michigan employers with 100 to 10,000 employees. Source: McGraw Wentworth Survey of Michigan Employers Show Cost of Providing Health Care Growing at 4%, Lowest Rate in Ten Years, Wall Street Journal, May 20, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 64

66 Many Michigan Providers Planning to Participate in Public Exchanges, Few Have a Strategy Q: Does Your Organization Plan to Participate in Public Health Insurance Exchanges through Contract Arrangements with Payers? Q: Has your organization developed a "health insurance exchange strategy covering private and public exchanges? Yes, Starting in % Yes 20% Yes, Starting in % Yes, Starting in % No 67% No 4% Don t Know 13% Don't Know 13% Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 65

67 Appendix 4: Other Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 66

68 Many of Those Who Have Selected a Plan Have Not Yet Paid Their Premiums National Estimated Distribution of Enrollees by Payment Status As of Jan 30, 2014 Premiums Paid 80% 20% Premiums Unpaid CNNMoney Survey CNNMoney survey of insurers during mid/late January Found that between 12% and 30% of enrollees had not paid premium A haircut should be applied to reported enrollment figures to adjust for these non-payments Sources: Luhby T, Obamacare Deadbeats: Some don t pay up, CNNMoney, 30 Jan Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 67

69 The Long View: Value-Based Reimbursement Must Be Considered Continued reductions in FFS rates are not sustainable Health systems will need to compete on value to maintain and grow market share Markets will likely offer a variety of choices based on payers, providers, costs, and sophistication FFS Incentive -Based FFS P4P Case Rates Partial Risk Full Risk Health Plan No risk Quality and cost payments PQRS VBP Bonuses Withholds Episodic Bundled payments Limited scope Gain-share MSSP PMPM Percent of premium Full integration Health plan and delivery system Upon determination of the appropriate value-based model, specific skills and capabilities must be in place to produce optimal results Notes: FFS = fee for service; P4P = pay for performance; PMPM = per member, per month; PQRS = Physician Quality and Reporting System. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 68

70 Small Business Exchange Eligibility by Business Size # of Employees Mandatory Mandatory Mandatory Mandatory Mandatory State Option State Option Mandatory Mandatory Mandatory > 100 No No No State Option State Option = Mandatory = State Option = No Eligibility Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 69

71 Projected Shift of Commercial Lives to Public and Private Exchanges Illustrative National Midpoint Scenario Group - Public Estimated Commercial Lives Distribution by Segment 17% 5% 2018 % Shift to Public and Private Exchanges - by Segment 2% 15% 22% 2018 % Shift to Public and Private Exchanges - Total Group - Private >100 EE 53% 3% 1% 30% 34% Group - Private EE 8% 20% 8% 25% 53% 40% Group - Private <50 EE 13% 27% 15% 20% 62% 23% 4% Individual 9% 65% 65% 13% Note: See appendix for sources and methodology/limitations. Individual SHOP Private Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 70

72 Public Exchange Uptake Among the Uninsured Likely to Vary Considerably by State Public Exchange Uptake Driver Penalties Subsidies Price Shock Exchange Promotion Political Support Exchange Readiness Commentary Concerns regarding low early penalties; penalty exemption prevalence will vary by market Subsidies taper off markedly at higher income levels; income mix of uninsured varies by region Higher premium increases will reduce uptake by those not eligible for subsidies Concerns regarding limited enrollment assistance budget for Federal Exchanges Key enabler of Massachusetts success; political opposition could be barrier in many states Not all exchanges were equally ready for open enrollment on October 1, 2013 Varies by State? Note: Other key factors include the size of the illegal immigrant population and whether a state decides to expand Medicaid. Source: 1. Gold J.: Worries Mount About Enrolling Consumers in Federally Run Insurance Exchanges. Kaiser Health News, April 7, Citigroup Exchange Conference Call. April 8, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 71

73 Discounts the Norm for Public Exchange Contracts Expected Public Exchange Reimbursement Rates 1 National Sample of Hospitals, n = 149 Total Percentage with Some Level of Discount from Existing Commercial Rates: 74% 42% 26% 16% 2% 8% 6% Medicaid Rates Medicare Rates Medicare Plus 0% to 10% Commercial/ Medicare Midpoint Commercial Less 0% to 10% Existing Commercial 1) Survey responses to the question: Realistically, where do you expect to end up, in terms of rates with your largest potential payor for participation in that payor s exchange network? 7% of respondents indicated they do not know yet. These responses were excluded from the chart above. Source: Catalyst Healthcare Research, ReviveHealth: Exchange Rates Survey, Summary Report June Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 72

74 Simulations Are Demonstrating the Willingness of Many to Trade Network Access for Price Factors Rhode Island Consumers Ranked as Most Important in Picking Public Exchange Plans 1 Monthly Premium Max. Out of Pocket Amount 11% 26% 29% 48% Public Exchange Simulations Consistently demonstrating that price is a key driver of plan choice Cost per Doctor Visit Prescription Drug Benefit 5% 8% 31% 27% Enrollees with health problems want coverage with less cost sharing Individual Deductible Amount Brand of Insurance Company Network Access Inpatient Hospital Benefits Emergency Room Benefit 3% 3% 2% 8% 5% 14% 13% 10% 8% 22% Ranked 1 Ranked 2 or 3 Premiums are the most important factor in consumers' choices, with more than half typically opting for a narrow-network product if it costs them at least 10% less than an equivalent with broader choice. Stonegate Advisors Note: 1) Data is from a simulation conducted by Stonegate Advisers. All participants were from Rhode Island. Source: 1. Mathews A.W.: Price, Price, Price: Health-Insurance Shoppers Have Priorities, WSJ, July Mathews A.W. and Kamp J.: Another Big Step In Reshaping Health Care. WSJ, Feb 28, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 73

75 Limited Networks Will Have a Significant Presence on Public Exchanges PPO 2014 Individual Public Exchange Product Filings Across 13 States By Product Type 48% 42% 5% 5% EPO POS HMO McKinsey Study Analyzed 955 plan offerings in 13 states on individual public exchanges 1 Filings were analyzed in Arizona, California, Colorado, Connecticut, Georgia, Indiana, Maryland, Ohio, Oregon, Rhode Island, Tennessee, Virginia, and Washington Found that approximately 47% of plan filings were limited networks (either HMOs or Exclusive Provider Organizations) 1 Filings through August 5 th were analyzed. Source: 1. M.P. McQueen, Less Choice, Lower Premiums Many Exchange Plans Will Offer Narrow Networks, Modern Healthcare, August 17, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 74

76 Provider Search Tools Are Weak in the Federal Exchange and in Many State Exchanges Washington Exchange Screenshot Only select state exchanges (CA 1, CO, KY, NV, WA) allow users to browse health plans by provider participation In the federal exchanges and some state exchanges (CT, HI, MN, NY, VT), only a link to insurance company provider directories is provided A few state exchanges (MD, OR, RI) are working toward including provider search tools but currently link to provider directories Note (1): California had to take its search function offline due to poor performance and inaccurate information. Source: Goodnough, A: Search Tools Wanting on Many Exchanges, New York Times, Oct 16, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 75

77 Implications of Exchange Participation on Managed Care Strategy Impact Area Commentary Imperative Rates Non Traditional Plans Reimbursement Methodologies Price Transparency Market Share Lower exchange product rates may negatively impact existing commercial rates ( spillover effect ) via employer and payer pressure New payers (i.e., provider-sponsored health plans, COOPs, Medicaid payers) and plans could greatly impact current revenue and volume Initially will likely not differ from current models but future models will be valuebased Transparency will drive consumers to select low-cost/high-quality providers Short-term growth may result in longterm loss based on changing market conditions Evaluation of current commercial book to determine risks/ opportunities of accepting new rates May dilute existing revenue, require increased administration; however provide new opportunities Must possess or develop key skills and competencies for increased risk and value-based contract success Cost reduction and management are critical for long-term sustainability Population segmentation analysis necessary to understand full market opportunity Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 76

78 Strategic Dynamics Will Vary by Market Driver Commentary Commercial Price Levels Higher prices relative to Medicare create more room for undercutting and amplify the potential for material financial impacts Capacity Utilization Narrow/tiered networks less impactful if capacity constraints preclude meaningful steerage; some spare capacity needed for tiered/narrow networks to be effective Market Willingness to Give Up Choice The price discount required to give up choice will vary by market, leading to different tradeoffs between price and volume Urban vs. Rural Competition is required for narrow/tiered contracts to be practical/effective; rural markets with sole community providers will be less dynamic Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 77

79 Churn Will Create Opportunities and Challenges Frequency of Income Fluctuation Across Medicaid-Exchange Eligibility Threshold Adults Initially Under 200% FPL 50% 3% 66% 8% 73% 29% 76% 1 Yr 2 Yrs 3 Yrs 4 Yrs 38% 1 Year 2 Years 3 Years 4 Years Churn Considerations Churn in eligibility levels will be a key dynamic once exchanges are up and running Providers/health plans able to serve Medicaid and exchange populations seamlessly may have opportunities The Basic Health Plan (BHP) is designed to address these concerns Churn between commercial plans may also occur At Least 1 Change 4+ Changes Source: Sommers, B., and Rosenbaum S., Issues in Health Reform: How Changes in Eligibility May Move Millions Back and Forth Between Medicaid and Insurance Exchanges, Health Affairs, Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 78

80 How Do You Prepare for the Exchanges? Kaufman Hall believes that operational and financial success with healthcare exchanges requires an integrated planning framework Strategic Planning: A Health Insurance Exchange Strategy will be necessary to compete in the changing market environment. New reimbursement and contract models, in addition to FFS, will be used for exchange-based products, most likely requiring providers to assess and acquire new strategies and tactics Financial Planning: Many health systems and providers are in the early stages or have not yet begun to plan for how health insurance exchanges will impact their current and future patient populations and revenue base. A thorough analysis and plan to quantify the implications and potential financial impact should be completed Tactical Planning: New skills and capabilities will certainly be required for financial and operational success when working with health insurance exchanges. Developing the right tactical plan, resources, and investments while taking into consideration specific opportunities, priorities, risks, and benefits will be necessary Exchanges are here; make sure your organization is prepared Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 79

81 2014 Individual Penalty by Income Level $ Penalty 170% of FPL $700 Income: $19,500 Penalty: $95 $600 $500 $400 $300 $200 $100 $0 400% of FPL Income: $45,960 Penalty: $360 Penalties Fixed % of Income Fixed $ Penalty Amount Paid % of FPL 1 0% 100% 200% 300% 400% 500% 600% Income $ $0 $11,490 $22,980 $34,470 $45,960 $57,450 $68,940 % of Income 0.0% 0.8% 0.6% 0.7% 0.8% 0.8% 0.9% Note: Some individuals may be exempt from penalties based on religion, citizenship, income, time noninsured, access to affordable coverage, etc. Source: Kaiser Family Foundation: The Requirement to Buy Coverage Under the Affordable Care Act. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 80

82 2016 Individual Penalty by Income Level $ Penalty 329% of FPL $1,600 Income: $37,800 $1,400 Penalty: $ % of FPL Income: $45,960 Penalty: $899 $1,200 $1,000 $800 $600 Penalties Fixed % of Income Fixed $ Penalty Amount Paid $400 $200 $0 % of FPL 1 0% 100% 200% 300% 400% 500% 600% Income $ $0 $11,490 $22,980 $34,470 $45,960 $57,450 $68,940 % of Income 0.0% 6.0% 3.0% 2.0% 2.0% 2.1% 2.1% Note: Some individuals may be exempt from penalties based on religion, citizenship, income, time noninsured, access to affordable coverage, etc. Source: Kaiser Family Foundation: The Requirement to Buy Coverage Under the Affordable Care Act. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 81

83 Post Subsidy Exchange Plan Price Maximum Premium as a Percentage of Income for Second-Lowest Cost Silver Plan Individual 6.3% 8.1% 9.5% 9.5% 2.0% 3.0% 4.0% Income as % of FPL 1 <133% 2 133% 150% 200% 250% 300% 400% Premium $ $230 $458 $689 $1,448 $2,312 $3,275 $4,366 Income $ $11,490 $15,282 $17,235 $22,980 $28,725 $34,470 $45,960 Note: 1) 2013 FPL for 48 Contiguous States and the District of Columbia: $11,490 for an Individual, and $23,550 for a family of 4. 2) 100% of the FPL was used to represent the Premium $ and Income $ for the <133% range. Source: US Department of Health and Human Services, hhs.gov, 2013 HHS Poverty Guidelines. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 82

84 Salary Threshold for FPL Multiples Family Size 100% 133% 1 133%- 150% 1 % of FPL 150%- 200% 1 200%- 250% 1 250%- 300% 1 300%- 400% 1 1 $11,490 $15,282 $17,235 $22,980 $28,725 $34,470 $45,960 2 $15,510 $20,628 $23,265 $31,020 $38,775 $46,530 $62,040 4 $23,550 $31,322 $35,325 $47,100 $58,875 $70,650 $94,200 6 $31,590 $42,015 $47,385 $63,180 $78,975 $94,770 $126,360 8 $39,630 $52,708 $59,445 $79,260 $99,075 $118,890 $158,520 Note: 1) The upper bound from each income range was used to calculate the corresponding Salary Benchmark. Source: US Department of Health and Human Services, hhs.gov, 2012 HHS Poverty Guidelines. Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 83

85 Projected Shift of Commercial Lives to Public and Private Exchanges 2018 Illustrative National Scenarios Methodology Notes Distribution of lives by segment were estimated using national data on employees by segment (Census, BLS), insurance uptake by segment (Kaiser/HRET survey), and individual market size estimates (Urban Institute) Key limitations to distribution estimates Linear interpolation applied to the segment to estimate <50 and segments Public firms assumed to have the same coverage rates as large national private firms High scenario definition reflects adapted 2011 McKinsey survey results1 for group coverage shift to individual public exchange Shift to public exchange of 37% (<50 EE), 31% ( EE), and 22% (500+ EE) 1) McKinsey survey results represent portion of employers who would definitely or probably shift assuming exchanges become an easy and affordable way to obtain coverage. Source: 1. Historical Data Tabulations by Enterprise Size U.S. Census. 2. Employment, Hours, and Earnings. Bureau of Labor Statistics. 3. Employer Health Benefits Survey. Kaiser Family Foundation and Health Research & Educational Trust, Blavin F., Buettgens M, and Roth J. State Progress Toward Health Reform Implementation: Slower Moving States Have Much to Gain. The Urban Institute, Jan Singhal S, Stueland J, and Ungerman D, How US Health Care Reform Will Affect Employee Benefits. McKinsey & Company, June Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 84

86 Appendix 5: About Kaufman Hall Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 85

87 Introduction to Kaufman Hall Kaufman Hall provides a wide range of strategic and corporate finance services and related software analytical tools exclusively to healthcare providers Established in 1985 Offices based in Chicago, Atlanta, Boston, Los Angeles and New York, with clients throughout the United States Over 150 full-time professionals Impeccable industry credentials; AHA endorsed Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 86

88 CAPITAL MARKETS Since 1985, Kaufman Hall has acted as financial advisor to more than 1050 healthcare debt transactions. Total debt and swaps issued on behalf of our clients exceeds $105 billion and $50 billion, respectively Kaufman Hall Services at a Glance COMPREHENSIVE SOFTWARE SUITE Over 1,400 software licenses are in place nationwide. The ENUFF Software Suite uses corporate finance principles to directly support the financial management cycle MERGERS, ACQUISITIONS, AND DIVESTITURES Kaufman Hall has advised on hundreds of M&A-related engagements including analyzing, structuring, negotiating and executing mergers, acquisitions, divestitures, joint ventures, strategic partnerships and affiliations FINANCIAL AND CAPITAL PLANNING Introduced concept of strategic financial planning to healthcare field in Kaufman Hall has prepared financial and capital plans for over 800 hospitals and healthcare systems STRATEGIC SERVICES Kaufman Hall provides a broad range of strategy-related services to support organizational management and decision making. Kaufman Hall pioneered the development of the integrated strategic financial plan CAPITAL ALLOCATION Kaufman Hall helps organizations design and implement capital allocation processes which provide consistent and rigorous methodologies to guide the capital decision-making process Michigan Health & Hospital Association 2014 Kaufman, Hall & Associates, Inc. All rights reserved. 87

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