NATIONAL SURVEY OF EMPLOYER-SPONSORED HEALTH PLANS 2011

About the survey Now in its 26 th year, the survey was established in 1986 A national probability sample has been used since 1993. This means that survey results are representative of all employer health plan sponsors in the US with 10 or more employees 2,844 employers participated in 2011 In this presentation, we refer to: - small employers 10-499 employees - large employers 500+ employees - jumbo employers 20,000+ employees 2

Top Stories

Our headline stories! Health care reform is sharpening employers' focus on cost management and providing the business case for bold strategies CDHPs are poised to become a mainstream strategy by creating more cost-conscious consumers The big challenge in workforce health management is building employee engagement. Incentives clearly work to drive participation, and employers are starting to test their ability to improve health outcomes as well Employers that follow best practices -- such as data warehousing, valuebased designs and collective purchasing -- report significantly lower costs and trends 4

Growth in total health benefit cost per employee slowed to 6.1% in 2011 with a 5.7% increase expected for 2012 20.0% 18.0% 16.0% 14.0% 12.0% 17.1% 12.1% Annual change in total health benefit cost per employee 14.7% 11.2% The good news: Growth in the average total health plan cost per employee slowed in 2011 10.0% 10.1% 10.1% 8.0% 6.0% 8.0% 6.1% 8.1% 7.3% 7.5% 6.1% 6.1% 6.1% 6.3% 6.9% 6.1% 5.5% 5.7%* 4.0% 2.0% 2.1% 2.5% 0.0% -2.0% -1.1% 0.2% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *Projected Source: Mercer s National Survey of Employer-Sponsored Health Plans 5

Growth in total health benefit cost per employee slowed to 6.1% in 2011 with a 5.7% increase expected for 2012 20.0% 18.0% 16.0% 14.0% 17.1% Workers' earnings Annual change in total health benefit cost per employee Overall inflation 14.7% The bad news: Cost is still rising far faster than inflation or wages 12.0% 12.1% 11.2% 10.0% 10.1% 10.1% 8.0% 6.0% 8.0% 6.1% 8.1% 7.3% 7.5% 6.1% 6.1% 6.1% 6.3% 6.9% 6.1% 5.5% 5.7%* 4.0% 2.0% 2.1% 2.5% 0.0% -2.0% -1.1% 0.2% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *Projected Source: Mercer s National Survey of Employer-Sponsored Health Plans; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April) 1990-2011; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey (April to April) 1990-2011. 6

Total health benefit cost per employee in 2011 Average total health benefit cost per employee tops $10,000 + 6.1% $10,146 + 9.9% $9,702 + 3.6% $10,438 All employers Small employers (10-499 employees) Large employers (500 or more employees) 7

Employers that consider these PPACA provisions to be a significant concern for their organizations 48% Employers will face additional cost pressure in 2014 as more PPACA provisions kick in but their biggest worry is the excise tax in 2018 28% 27% 22% High-cost plans may be subject to 40% excise tax New full-time employees must be auto-enrolled Data based on employers with 50+ employees. Plans must pay 60% of covered services All employees working avg. 30+ hrs/wk in a month must be eligible for coverage 8

Against the backdrop of health reform, employers are taking bolder steps to manage cost Large employers They re planning to add low-cost plans like CDHPs... as the default plan for auto-enrollment 53% for newly eligible PTEs 17%* They re planning to narrow the scope of their benefit spending by transitioning some employer-paid benefits to voluntary 38% by reducing spending on dependent coverage 32% And they re determined to create a healthier workforce!. by adding or improving health management programs 87% *Among those not currently providing coverage to all employees working 30+ hours per week. 9

With reform adding administrative complexity, the trend toward outsourcing benefits administration is likely to accelerate 29% 18% 11% 2005* 2011 Likely to outsource as a response to reform (including those currently outsourcing) * Outsourced annual enrollment at a minimum 10

Will employers terminate medical coverage in response to PPACA? Large employers Very likely to terminate health coverage 2% 7% Likely to terminate No! Employers remain committed to offering coverage, so cost management will be a priority for years to come 49% 41% Not at all likely to terminate Not very likely to terminate 11

Biggest year-over-year increase in CDHP offerings and enrollment in 2011 Large employers Percent of employers offering CDHPs Percent of covered employees enrolled in CDHPs At the tipping point? Employers drive enrollment into lower-cost CDHPs 32% 20% 20% 23% 14% 6% 7% 8% 10% 13% 2007 2008 2009 2010 2011 12

Medical plan cost per employee Large employers $9,511 $10,020 $7,541 The appeal of HSAs is clear they cost about 20% less than other medical plan types PPO HMO HSA plan (includes employer account contribution) 13

Full replacement CDHPs becoming more common and survey results suggest that cost savings remain when entire population is enrolled Large employers Percent of CDHP sponsors offering no other plan Cost is higher for full-replacement, but not by much and still lower than even high-deductible PPOs HSA-eligible CDHP HRA-based CDHP 14% 9% 7% 17% 10% 21% Full replacement HSA-based plan: $7,744 All HSA-based plans: $7,541 All PPO plans: $9,511 High-deductible* PPO plans: $7,901 2009 2010 2011 *In-network individual deductible of $1,000+ 14

Employees becoming more comfortable with CDHPs Large employers About a fourth of employees now select a CDHP when they have a choice of another plan Employers that offer substantial account contributions to the HSA see higher enrollment HSA-eligible CDHP HRA-based CDHP 24% 25% 21% 18% 24% 29% 35% 14% 2009 2010 2011 Employer contribution to HSA >$750 Employer does not contribute to HSA 15

Health management -- the leading long-term cost containment strategy is migrating from the biggest organizations to the smallest Small employers (10-499 employees) Large employers (500+) Jumbo employers (20,000+) Case management 35% 83% 96% Nurse advice line 53% 80% 89% Health risk assessment 34% 70% 89% Disease management 42% 82% 86% Lifestyle / behavior modification 33% 55% 77% Health portal (w/activity or incentive tracking) 41% 52% 65% Health advocate services 30% 52% 61% End-of-life case management 22% 47% 47% 16

Investment in health management programs varies widely which makes it harder to compare results 66% Large employers Jumbo employers 42% 24% 36% 18% 31% 6% 13% Although more employers are using specialty vendors for health management, many still offer only their health plans standard services Through health plan standard services only Through health plan some optional services Contract with one specialty vendor Contract with 2+ specialty vendors 17

Employers that invest more in health management are more likely to be satisfied with ROI Among large employers that have attempted to measure ROI Offer HM through health plan standard services only Offer HM through specialty vendor or purchase optional services from health plan Don t know Don t know 11% Not 7% satisfied 22% Not satisfied 36% 53% Satisfied 71% Satisfied with ROI with ROI 18

Use incentives or penalties in health management programs 2009 2010 52% 2011 43% Employers are adding 40% incentives and 33% penalties to health 27% management programs to boost 21% participation and some have made them contingent on outcomes All large employers Employers with 10,000 or more employees 19

Average participation rates for health management programs Large employers 54% Employers that offer incentives see higher participation rates 42% 30% All employers offering program Employers offering incentives Employers not offering incentives 23% 24% 18% 19% 14% 12% Health risk assessment Disease management program* Lifestyle coaching* *Percentage of identified persons actively engaged in program 20

Employers are beginning to use incentives to reward outcomes rather than just participation Offering lower premium contributions to non-tobacco users is growing among all large employers and jumbo employers are beginning to provide incentives for achieving or maintaining health status targets 9% 10% 12% 5% 5% 5% 2009 2010 2011 Body mass index Cholesterol Blood pressure 21

New analysis shows employers are successfully controlling cost through use of best practices Employers with 5,000+ employees $10,622 7.3% $8,855 5.5% PPO/POS Annual cost PPO per cost employee per employee in 2011 Employers using most best practices Change PPO/POS in cost cost from per employee 2010 Employers using fewest best practices Employers that use the greatest number of best practices have lower costs and lower cost increases 22

Respondents costs were analyzed based on their use of more than 20 cost-management best practices Plan design and health management More advanced costmanagement strategies Contribution for family coverage in primary plan is at least 20% of premium PPO in-network deductible is $300+ PPO plan has higher cost-sharing for specialists Offer CDHP HSA sponsor makes a contribution to employees accounts Rx mail-order copay is at least 2.5x retail copay Spousal surcharge Smoker surcharge Offer optional HM services through plan or specialty vendor Use incentives for HM programs Use incentives for achieving or maintaining health status targets Offer EAP Voluntary benefits integrated with core benefits High-performance networks Data warehousing Collective purchasing Value-based design On-site clinic One or more Rx strategies (i.e. mandatory generics) One or more specialty drug provisions (i.e., step therapy) One or more health plan innovations: Surgical centers of excellence Retail clinics Telemediated care Medical homes 23

Best practice trends to watch: Value-based design The largest employers are rapidly adopting value-based design Most common value-based design provisions: 2010 2011 14% 17% 25% 31% Waive/reduce cost-sharing for maintenance drugs Waive/reduce cost-sharing for specific drug therapies shown to reduce overall cost Waive/reduce cost-sharing for nondrug treatments based on effectiveness All large employers (500+ employees) Employers with 20,000+ employees 24

Best practice trends to watch: More efficient delivery systems Employers with 5,000 or more employees Employers are looking beyond plan design to how and where care is delivered In place in 2010 In place in 2011 Interested in pursuing Telemedicine 5% 11% 38% Medical homes 3% 6% 56% Surgical centers of excellence Not available 18% 51% High-performance networks Not available 14% Not available 25

More on Health Management

More large employers able to measure health management return on investment (ROI) Employers offering health management programs Large employers Jumbo employers Have measured ROI using... Health plan or health management vendor Consultant or other third-party vendor (other than health management vendor) Internal staff Of those measuring ROI, percent that are satisfied with their return on investment in health management programs 14% 9% 3% 64% 33% 16% 4% 59% 50

Health management incentives Based on large employers offering the program Provide incentive for completion of health risk assessment Median annual amount of premium reduction Large employers 37% $240 Jumbo employers 57% $240 Provide incentive for participating in biometric screening Median annual amount of premium reduction 22% $226 27% ID Provide incentive for participating in lifestyle coaching Median annual amount of premium reduction 24% $300 54% ID ID = Insufficient data 51

Type of incentive used with health risk assessment Among large employers providing health risk assessment incentive Lower premium contributions 43% Cash 40% Contribution to HRA, HSA, FSA 10% Lower deductible, copay or other cost sharing 7% 52

Type of incentive used with biometric screening Among large employers providing biometric screening incentive Lower premium contributions 42% Cash 37% Contribution to HRA, HSA, FSA 9% Lower deductible, copay or other cost sharing 9% 53

Type of incentive used with behavior modification program Among large employers providing behavior modification incentive Lower premium contributions 37% Cash 36% Contribution to HRA, HSA, FSA 9% Lower deductible, copay or other cost sharing 9% 54

Eligibility and Coverage Provisions

Coverage for part-time employees Large employers with at least some PTEs Make coverage available to PTEs: 65% Average number of hours required for eligibility: 23/week Of the employers covering PTEs: 8% offer different plans to PTEs and FTEs Average PTE contribution, as a % of premium 35% for employee-only coverage 41% for family coverage 56

Same-sex domestic partner coverage varies by region Large employers 79% 2010 2011 64% 46% 49% 55% 39% 26% 34% 27% 28% All large employers West Midwest Northeast South 57

Special provisions addressing spouses with other coverage available Large employers Jumbo employers 13% 7% 7% 2% Spouses with other coverage are not eligible Spouses with other coverage must pay surcharge 58

Slim majority of employers cover bariatric surgery Large employers Large employers Jumbo employers 46% 48% 28% 24% 30% 24% Covered, but member must comply with behavior modification program/standards Covered the same as any medically necessary procedure Not covered 59

Preferred Provider Organizations

PPO* cost per employee, 2002-2011 Large PPO sponsors $5,220 $5,730 $6,181 $6,518 $7,029 $7,429 $7,861 $8,334 $9,033 $9,511 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: Some of the survey respondents that carve out prescription drug benefits to a freestanding pharmacy benefit manager did not include prescription drug cost in their PPO cost. If all cost for freestanding Rx benefits were included, we estimate the average PPO cost per employee would be 2.5% higher. * Results for 2002-2007 include PPO plans only. Results beginning in 2008 include PPO and POS plans 61

PPO* cost per employee, by region Large PPO sponsors 2010 2011 + 4.4% + 4.0% $9,816 $10,247 $9,019 + 4.9% $9,459 $9,989 $10,388 $7,988 + 7.3% $8,575 West Midwest Northeast South * Includes POS plans. 62

Employee contribution requirements for PPO Large PPO sponsors Individual Family Employers requiring contribution Average contribution as a % of premium Average monthly contribution 92% 96% 23% 31% $111 $366 63

Employee cost-sharing requirements for PPO Large PPO sponsors Deductible Require deductible Individual amount (median) Family amount (median) Primary care physician s office visit Require copay Copay amount (median) Require coinsurance Coinsurance amount (median) Specialist s office visit Require higher copay for specialist visit Copay amount, when higher (median) Lab tests / X-rays Require copay Require coinsurance Coinsurance amount (median) In-network 83% $500 $1,000 81% $20 23% 20% 48% $35 17% 59% 20% Out-of-network 93% $750 $1,800 12% $25 89% 40% -- -- 5% 91% 40% 64

Employee cost-sharing requirements for PPO, continued Large PPO sponsors Out-of-pocket maximum Plan includes maximum Individual OOP max (median) Hospitalization Require per-admission copay Copay amount (median) Require coinsurance Coinsurance amount (median) Emergency room visits Require separate copay Copay amount (median) In-network 86% $2,000 19% $250 72% 20% 80% $100 Out-of-network 86% $4,000 12% $250 93% 40% -- -- 65

Employee contribution requirements for PPO Smaller Employers Employee-only coverage Employers requiring contribution Average contribution as a % of premium Average monthly contribution 50-499 employees 79% 27% $124 500-4,999 employees 92% 23% $112 Family coverage Employers requiring contribution Average contribution as a % of premium Average monthly contribution 95% 45% $524 96% 32% $367 66

Employee cost-sharing requirements for PPO Employers with 50-499 employees Deductible Require deductible Individual amount (median) Family amount (median) Primary care physician s office visit Require copay Copay amount (median) Require coinsurance Coinsurance amount (median) Specialist s office visit Require higher copay for specialist visit Copay amount, when higher (median) Lab tests / X-rays Require copay Require coinsurance Coinsurance amount (median) In-network 85% $1,000 $1,500 89% $20 12% 20% 40% $40 25% 37% 20% Out-of-network 90% $1,000 $2,500 26% $30 76% 30% -- -- 9% 80% 30% 67

Employee cost-sharing requirements for PPO, continued Employers with 50-499 employees Out-of-pocket maximum Plan includes maximum Individual OOP max (median) Hospitalization Require per-admission copay Copay amount (median) Require coinsurance Coinsurance amount (median) Emergency room visits Require separate copay Copay amount (median) In-network 77% $2,500 15% $250 58% 20% 76% $100 Out-of-network 77% $4,000 9% ID 85% 40% -- -- ID = Insufficient Data 68

Prescription Drug Benefits

Prescription drug benefit cost is now growing more slowly than overall medical plan cost Cost increase in primary medical plan for large employers 16.9% 16.1% 14.3% 11.5% 9.9% 9.3% 7.6% 7.6% 6.3% 5.1% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 70

About one in ten employers have added a fourth cost-sharing tier in their drug plans Cost-sharing provisions in employers primary plan Cost-sharing structure: Same level of cost-sharing for all drugs 2 levels for generic, brand drugs 3 levels for generic, formulary brand, non-formulary brand 4 or more levels Other Retail 3% 10% 72% 12% 3% Mail-order 5% 11% 71% 10% 4% 71

Average copayment amounts in prescription drug plans In large employers primary medical plan Retail Mail-order In plans with 2 copay levels Generic $11 $19 Brand-name $27 $50 In plans with 3 copay levels Generic $10 $19 Formulary brand $30 $57 Non-formulary brand $49 $97 72

Use of coinsurance in drug plans Percent of large employers requiring coinsurance Generic drugs Formulary brand Non-formulary brand Specialty / biotech Any drug category Retail 10% 16% 17% 5% 27% Mail-order 9% 13% 15% 4% 24% 73

Drug benefits have been carved out of primary medical plan, by employer size 500-999 employees 10% 1,000 4,999 employees 19% 5,000 9,999 employees 42% 10,000 19,999 employees 48% 20,000 or more employees 57% 74

Participates in a prescription drug purchasing coalition or collective 22% 15% All large employers (500 or more employees) Jumbo employers (20,000 or more employees) 75

Specialty drug cost-management strategies Based on employers with 1,000 or more employees Utilization management 49% Step therapy 42% Formulary management 38% Retail lockout 30% Higher cost-share for specialty medications 24% Medical lockout 12%

Dental Care Benefits

Dental cost per employee, by region Large dental plan sponsors All large employers / -0.5% West / +0.1% Midwest / +0.5% Northeast / -5.3% $761 $757 $732 $736 $809 $766 2010 2011 $913 $914 South / +3.5% $635 $657 78

Dental plan design Large dental plan sponsors Plan includes annual benefit maximum 93% Individual maximum (median) $1,500 Plan includes separate max for orthodontic 89% Individual ortho lifetime max (median) $1,500 79

Dental plan design (continued) Large dental plan sponsors In-network Out-of-network Individual deductible % requiring deductible 81% 75% Median deductible $50 $50 Family deductible % requiring deductible 76% 71% Median deductible $150 $150 80

Other dental services covered Large dental plan sponsors Sealants 81% Implants 55% Adult orthodontics 38% Posterior composites 37% TMJ treatment 19%

Voluntary and Work-Life Benefits

Voluntary benefits are integrated with core benefit program on same administrative platform Large employers that offer one or more voluntary benefits Voluntary benefits are not integrated 38% 62% Voluntary and core benefits are integrated on same platform 83

Provide voluntary insurance benefits (paid partially or fully by employee) Large employers Supplemental employee term life 86% Disability 83% Dependent term life 82% Vision 76% Accident 58% Cancer / critical illness 38% Whole / universal life 36% Long-term care 32% Travel 20% Auto / homeowners 17% Hospital indemnity 14% 84

Most important objectives for offering voluntary benefits Large employers To help employees take advantage of group purchasing power 70% To give employees the opportunity to fill gaps in employer-paid benefits 66% To offer additional benefits at no cost to the employer 59% To accommodate employee requests 46% Other 4% 85

Retiree Health Care

While employers remain committed to providing coverage to active employees, offerings of retiree medical plans* are falling once again Percent of large employers 46% 40% 41% 35% 38% 31% Offer coverage to pre-medicare-eligible retirees Offer coverage to Medicare-eligible retirees 35% 28% 29% 23% 28% 29% 31% 28% 25% 24% 21% 21% 21% 21% 19% 16% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2010 2011 *Plan must be offered on an ongoing basis (i.e., new hires are eligible). 87

Offer retiree coverage* in 2011, by employer size Pre-Medicare-eligible Medicare-eligible 45% 35% 35% 22% 23% 30% 26% 29% 14% 16% 7% 4% 10-499 500-999 1,000-4,999 5,000-9,999 10,000-19,999 20,000 or more Number of employees *Plan must be offered on an ongoing basis (i.e., new hires must be eligible). 88

Have reduced or terminated benefits for employees hired or retiring after a specified date Large retiree plan sponsors Pre-Medicare-eligible retirees Medicare-eligible retirees Terminated coverage Terminated coverage 19% 27% 64% 20% Reduced benefits 58% 20% Reduced benefits All retirees receive the same benefits All retirees receive the same benefits 89

Expect to continue to offer a retiree medical plan to new hires for at least the next five years Large retiree plan sponsors Not sure 18% No 17% 65% Yes

Key takeaways: Health reform is sharpening focus on cost management Cost pressures in 2011 included new PPACA provisions: Extending dependent eligibility to children up to age 26 (resulted in an average increase in enrollment of 2%) Removing lifetime and some annual benefit limitations Removing pre-existing condition exclusions for children under 19 Looking ahead to the PPACA provisions still to hit, many employers are concerned about the excise tax on high-cost plans Still, relatively few expect to terminate health coverage -- so cost management will be a top priority in the years of change ahead As the 2011 survey results show, many employers have already accelerated their cost management efforts 92

Key takeaways: CDHPs poised to become mainstream cost management strategy Offerings of CDHPs grew sharply in 2011 -- from 23% to 32% of large employers, and from 16% to 20% of small employers 65% of large employers expect to offer one within the next 5 years Enrollment in CDHPs rose from 11% to 13% of all covered employees; this is up from just 3% in 2006 The average per-employee cost of an HSA-based CDHP is about 20% lower than that of a PPO -- $7,541 compared to $9,511, among large employers Employers adding CDHPs may be looking ahead to 2014, when many will experience an increase in enrollment due to auto-enrollment and the requirement to extend coverage eligibility to all employees working 30+ hours per week CDHPs may also help employers avoid hitting the threshold for the excise tax, the PPACA provisions that concerns the most employers 93

Key takeaways: The big challenge in health management right now is building employee engagement Use of health management incentives jumped from 27% to 33% of large employers. Over half of employers with 10,000+ employees now use them. More employers are tying the incentive to the health plan. For Health Assessments, most common incentive among large employers is now a lower premium contribution (43%) rather than cash (40%). Median value of contribution: When cash/gift card: $75 When lower contribution: $240 Incentives work! Average participation in lifestyle programs doubles when incentives are used, and Health Assessment completion nearly doubles. Outcomes-based incentives are emerging: More than a third of jumbo employers offer lower premium contributions or other incentives to nonsmokers and 5% provide incentives for achieving healthy BMI, BP, cholesterol levels. 94

Key takeaways: Employers that follow cost-management best practices are experiencing success in controlling health benefit cost The survey asks employers about 25 strategies that could be considered cost-management best practices. Respondents were divided into four equal groups based on the number of best practices they follow. When the top and bottom groups were compared, the employers using 8 or fewer best practices had, on average, 13% higher total cost per-employee cost than those using 13 or more and 20% higher PPO/POS cost. Average cost increases for 2011 were higher as well for the group using the fewest best practices compared to those using the most. For employers with PPO/POS plans, the difference was 7.3% versus 5.5%. While not conclusive, these results* support what many employers believe: effective strategies exist to reduce health benefit cost growth! *This analysis was based on survey respondents with 5,000 or more employees because only employers of this size were asked to complete all of the questions concerning best practices. Results are unweighted. 95

Questions