Account Based Health Plans Emerging Opportunities Insights from U.S. experience May 2011 2011 Towers Watson. All rights reserved.
Account-Based Health Plans: HSA Overview Enabling Legislation: Medicare Prescription Drug, Improvement and Modernization Act of 2004 HSA Account requires a high deductible health plan Regulatory guidelines for 2011: Individual Family Minimum Deductible $1,200 $2,400 Maximum Out of Pocket Amount $5,950 $11,900 Maximum Annual Contribution $3,050 $6,150 Preventive Care 2
What is an Account Based Health Plan? PPO High Deductible Health Plan Account Based Health Plan Coinsurance Insurance Coverage Coinsurance Deductible Coinsurance Coinsurance Insurance Insurance Coverage Coverage Deductible HRA/HSA Coinsurance Insurance Coverage Deductible Gap HRA/HSA Preventive Care Preventive Care Preventive Care 3
ABHP Structure Health Reimbursement Arrangement (HRA) Health Savings Account (HSA) Similarities Triple tax protection Balance accumulates IRC Section 213(d) allowable expenses Differences May be used only for allowable expenses FSA-compatible Employer contributions only Notional funding allowed No true portability No HDHP requirement Employer determines amount and accumulation levels Employer determines life event rules Education & Decision Support Coinsurance Insurance Coverage Deductible Gap HRA/HSA Preventive Care Networks & Care Management Similarities Triple tax protection Balance accumulates IRC Section 213(d) allowable expenses Differences May be used for non-allowed expenses, with tax impact FSA incompatibility Employer/ee contributions Actual funding required Full portability Statutory HDHP required Statute determines contribution levels IRS determines life event rules 4
Why Would Employers Consider ABHPs? High Deductible: Promotes Consumerism and shared accountability Shares cost through design HSA Account: Tax advantaged savings vehicle Wealth accumulation for retirement Changes focus from spend to save HSA funds deposited by Employer or Employee Portable Deductible Gap : Remains after use of HSA funds HSA design can approximate value of PPO Coinsurance Account Based Health Plan Insurance Coverage Deductible Gap HRA/HSA Preventive Care 5
Why Should Employees Consider ABHPs? Triple Tax Advantage: Funds not taxable upon deposit Accrues interest tax free Not taxable upon withdrawal if for medical expenses HSA illustrative growth at 5% per year: $2,500 annual contribution Annual Medical Expenses $500 $1,000 5 Years $11,604 $8,703 15 Years $45,315 $33,986 30 Years $139,522 $104,641 Preventive Care 6
Prevalence of ABHPs has grown dramatically in the U.S. However, another 13% of respondents plan to offer one in 2012 a 27% increase. 70% 60% 50% Today, 53% of companies have an ABHP in place leveling over the last three years 47% 51% 54% 53% 66% 40% 33% 39% 30% 21% 20% 11% 10% 2% 5% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* *Planned for 2012 Source: 2011 Towers Watson/NBGH Employer Survey on Purchasing Value in Health Care 7
Percentage of ABHP enrollments continues to grow The percentage of companies with at least 20% ABHP enrollment is up to 46% an increase of more than 70% in the last five years 50% 45% 40% 35% 35.1% 38.8% 43.0% 45.5% 44.1% 30% 27.2% 25% 20% 15% 10% 5% 8.0% 14.0% 12.0% 10.0% 4.9% 5.4% 5.0% 5.4% 15.0% 15.0% 7.6% 9.3% 0% 2006 2007 2008 2009 2010 2011 Median ABHP enrollment Percentage with enrollment over 20% Percentage with 100% enrollment Note: Year 2006 is based on the 12th annual Towers Watson/ National Business Group on Health survey; 2007 is based on the 13th annual survey; 2008 is based on the 14th annual survey, and 2009 and 2010 are based on the 15th annual survey. 8
Higher ABHP enrollments linked to lower medical costs However, the level of enrollment is not linked to lower health care cost trends $11,000 12% $10,500 $10,000 $10,417 $10,317 $10,123 $9,821 9% 2010 Total PEPY Costs $9,500 6% Annual Trend $9,000 $8,500 3% $8,000 Non-ABHP Under 20% Enrollment 20 to 50% Enrollment 50%+ Enrollment 0% Enrollment rates in 2010 Source: 2011 Towers Watson/NBGH Employer Survey on Purchasing Value in Health Care 9
Wealth accumulation opportunities make ABHPs unique 10
ABHPs link health care planning and retirement planning
How are ABHPs philosophically different from other medical plan designs? Health Plan design that includes Long-Term Equity accumulation Plan design that encourages: Efficient use of services and Consumerism Engagement and accountability Maintenance of individual health ABHPs help participants view their health as a long-term, economic asset 12
The U.S. ABHP financial model reflects the durable nature of health Well designed ABHPs create equity and link active and retiree health. Birth Death Traditional Health Insurance Buying traditional term health insurance is like paying rent for a house you will live in your entire life. Under traditional health insurance, we sign a new lease every year, but never accumulate equity. Equity-based insurance models create participant loyalty/ownership of the asset represented by health. Active Retiree The Goal: Help employees treat health as a long-term asset
ABHP in a Retiree Medical Setting: Health and Wealth Accumulation Evaluate ABHPs for active employees in the context of retirement benefits In the traditional health care, employees have limited opportunity to defer a portion of health care value for future consumption. In the U.S. 401(k) deferrals are the only mechanism for employees to defer compensation Health Insurance Typical Current State for Most Employers Today s Employee Compensation Employee deferrals Match Cash Cash 401(k) Pension Current Consumption Future Consumption Future State Rewards Mix Health Insurance Future Employee Compensation Cash Cash 401(k) Pension ABHP ABHP plans give employees more flexibility and choice to spend funds now or later Leading-edge employers are using ABHP plans to help employees accumulate wealth. Educating employees about tax advantages and and promoting health to wealth culture Current Consumption Future Consumption
In the U.S. an HSA is more tax effective than 401(k) for funding medical costs All else equal, an employee can fund six months or more of retirement by saving for retiree medical in an HSA or HRA instead of a 401(k) Annual Retirement Income (1) Gross/Net FIT Marginal Tax Rate Present Value of Medical Costs (2) 401(k) assets used for Medical Costs (3) Potential Tax Savings (4) Amount Months of After-tax Income $38,000/$36,500 15% $100,000 $118,000 $18,000 6 mos. $48,000/$44,000 15% $100,000 $118,000 $18,000 5 mos. $68,000/$58,000 25% $100,000 $133,000 $33,000 7 mos. 1. Consisting of $18,000 of Social Security and distributions from 401(k) 2. Based on Age 65 in 2011; expected lifetime; 5% medical trend; 7% discount rate 3. Distribution includes amounts to cover FIT tax liability 4. Value of using HSA/HRA funds versus 401(k) to pay retiree health costs 15
But Challenges Remain with Employee Understanding of ABHPs 16
Employees do not always appreciate the wealth accumulation opportunity How do you view your health care account? (ABHP respondents only) I use the account primarily to pay for current health care expenses. If I have money left in the account at the end of the year, it s a bonus Strongly/ somewhat agree 52% Partly disagree/ partly agree 19% Strongly/somewhat disagree 29% I try to reserve the account money for future financial protection 29% 26% 45% The amount of money I can accumulate in the account represents a significant financial opportunity for me 21% 28% 51% I use the account to save for health care expenses in retirement 16% 21% 63% I pay for current health care expenses out of pocket rather than out of the account so I can accumulate account balances tax-free 12% 23% 65% Source: 2007 Towers Watson Study on Account-Based Health Plans.
ABHP participants indicate lower satisfaction How satisfied are you with your current health benefit program? (% very satisfied/satisfied) Providing protection against the risk of major health care costs Helping me find quality doctors and hospitals Giving me access to affordable health care Preparing for health care 22% expenses in retirement 30% 44% 44% 50% 65% 63% 63% ABHP enrollees Traditional plan enrollees Source: 2007 Towers Watson Study on Account-Based Health Plans.
ABHP participants indicate lower level of understanding To what extent do you agree or disagree with the following statements about your health benefits? (% strongly/somewhat agree) I understand how my health benefit program works My experience in the health plan so far has been good My organization communicates clearly about benefit changes and impact I am comfortable with the level of financial risk my health plan exposes me to My health plan is easy to 49% 71% understand and use ABHP enrollees Traditional plan enrollees 54% 61% 68% 65% 72% 76% 81% 80% Source: 2007 Towers Watson Study on Account-Based Health Plans.
However, employee comfort with risk seems to drive the overall ABHP experience To what extent do you agree with the following statements? (% ABHP respondents who strongly agree/agree) My experience in the health plan so far has been good 29% 88% I understand how my health benefit program works 41% 86% My health plan is easy to understand and use 16% 71% ABHP Comfortable with risk under the plan ABHP Not comfortable with risk under the plan Source: 2007 Towers Watson Study on Account-Based Health Plans.
ABHP Closing Thoughts By next year, approximately TWO THIRDS of U.S. companies will offer an account-based health plan Enrollments are growing rapidly in the U.S. Almost half of ABHPs have enrollments of 20% of more Almost 10% of ABHPs are full replacement Effective medical cost management is already being demonstrated Great potential remains to capitalize on wealth accumulation and employee understanding ABHPs have become an essential part of health care delivery in the U.S. and yet their potential remains largely untapped
Obrigado!