HEFFERNAN BENEFIT ADVISORY SERVICES 2014 HEALTH CARE TREND REPORT

HEFFERNAN BENEFIT ADVISORY SERVICES 2014 HEALTH CARE TREND REPORT

HEFFERNAN BENEFIT ADVISORY SERVICES TABLE OF CONTENTS What is Trend 1 Medical Trend Projections 2 Historic National Medical Trend 2 Dental & Vision Trend 4 Health Care Reform 5 Employer Strategies 8 Conclusion 11

Since the Patient Protection and Affordable Care Act (PPACA) was passed, employers have been strategizing and planning in order to offer the best employee benefit package to their employees that not only satisfies the continually evolving requirements of the Affordable Care Act; but also controls costs for both the employer and employees. For employers, 2015 will be a pivotal year. Heffernan Benefit Advisory Services (HIB) strives to prepare large employers for the costs they may encounter in 2015, the first year that they will be required to offer affordable employee coverage to their full time employees. We are excited to provide our tenth annual Health Care Trend Report, which surveys medical, dental, and vision carriers to give our employers the most complete projection of the costs they will face in 2015. What is Trend? Trend is a projection of the increase in health care costs over the next policy year. The trend is primarily affected by price inflation and utilization; government mandated benefits, new treatments and therapies, new technology, and deductible leveraging also influence trend. Components of trend are: Price Inflation The average increase in the cost of goods and services, such as medical supplies, equipment, staffing, etc. Utilization The usage of medical care and services. Government Mandated Benefits The change in cost due to government regulations on plans and benefits, such as removal of annual and life-time limits, coverage of dependent children up to age 26, cost-sharing limits, etc. New Technology, Treatments, and Therapies The change in cost due to new procedures or equipment replacing older ones. Deductible Leveraging The cost added to a health plan as a result of increases to the cost of services while benefits, such as copays and deductibles, remain constant. For example: Year One: A $3,000 claim with a $500 deductible costs the carrier $2,500. Year Two: The same $3,000 claim trended at 10% now costs $3,300. With a $500 deductible, this claim now costs the carrier $2,800 which represents a 12% increase to the carrier. Because trend is such a key component, HIB provides our clients with the most current trend predictions both nationally and regionally for medical, RX dental and vision benefits. In order to accomplish this, we survey more than 50 health, dental, and vision providers asking the carriers for the trend factors that they would be using to determine their 2015 renewals. (See a list of carriers surveyed on last page.) The focus of our annual trend report is to prepare our clients for the costs that may lie ahead in 2015 by getting the projected costs estimates from those that the set the price, the insurance carriers. Heffernan Benefit Advisory Services: 2014 Trend Report 1

Medical Trend Projections for 2015 2015 Survey Results Plan Type Northern California Southern California Northwest New York National HMO w/rx 6.3% 7.1% 8.9% 10.2% 8.2% PPO w/rx 7.4% 8.2% 8.9% 10.0% 9.0% POS w/rx 6.9% 7.7% 8.3% 10.3% 8.7% Indemnity w/rx 13.0% 14.5% 9.5% n/a 12.7% CDHP w/rx 6.8% 7.6% 8.7% 9.3% 8.4% Definitions: Health Maintenance Organization (HMO) plans are those that require a Primary Care Physician (PCP) gatekeeper referral for specialty services. Preferred Provider Organization (PPO) plans are plans that do not require a PCP referral. Point-of-Service (POS) plans require a PCP referral on the first tier, and offer a PPO type structure on the second and third tiers. Consumer Directed Health Plans (CDHPs) are employee-directed, tax-advantaged health account plans designed to encourage consumer engagement. Historic National Medical Trend 12 10 8 6 4 2 0 2009 2010 2011 2012 2013 2014 2015 HMO PPO CDHP RX To get the most accurate picture of the medical trend, HIB has chosen to show the actual medical and prescription trends for 2008 through 2 1. The 2012 through 2014 trends show the projected trend that the health plans expected. Heffernan Benefit Advisory Services: 2014 Trend Report 2

Historic National Medical Trend (continued) 10.2% 2011 Projected v. Actual Trend 11.0% 9.7% 9.2% 8.0% 8.1% 7.5% 5.0% HMO PPO 9.6% 2012 Projected v. Actual Trend 10.4% 9.0% 7.2% 7.3% 6.7% 6.3% 5.5% CDHP RX Projected 2011 Actual 2011 Projected 2012 Actual 2012 Summary of Medical Trend Results Across all products the national trend projections for 2015 are lower than both the 2014 and 2013 trend projections. Northern California s trend projections are the lowest of the four regions represented in our survey. New York is projecting the highest trends for 2015. The smallest regional variance in the trend projections is for the PPO and CDHP products while the largest regional variance is for the HMO product. In 2012, actual trends were once again significantly lower than the carrier trend projections for all products. Heffernan Benefit Advisory Services: 2014 Trend Report 3

Dental & Vision Trend Projection for 2015 Survey Results Plan Type 2009 2010 2011 2012 2013 2014 2015 DMO 4.7% 4.1% 4.3% 4.7% 4.2% 3.6% 4.2% PPO 6.7% 6.5% 6.2% 6.1% 5.8% 5.5% 5.5% Indemnity 7.1% 7.0% 7.0% 7.2% 6.2% 6.4% 5.4% Vision 3.1% 2.9% 3.0% 2.6% 2.6% 2.9% 2.2% Historic National Dental & Vision Trend 8 7 6 5 4 3 2 1 0 2009 2010 2011 2012 2013 2014 2015 DMO PPO Indemnity Vision *All trends for Dental and Vision are projected trends, not actual trends. Trend results are based on the direct survey results from HIB. Summary of Dental & Vision Trend Results While the trend projection for the dental HMO was at a ten year low in 2014, the trend projection for this product for 2015 has increased to the 2013 trend level. The dental PPO however is projected to have the same increase as 2014. While steadily declining in trend increases year over year, the dental indemnity product s overall trend projection is 1% lower than it was last year. In fact the trend increase for the dental Indemnity is 0.1% lower than the trend increase for the Dental PPO. The projected vision trend has significantly decreased to 2.2%. Heffernan Benefit Advisory Services: 2014 Trend Report 4

Health Care Reform Since the Affordable Care Act (ACA) was passed in 2010, employers have been strategizing on the best way to comply with the Employer Mandate portion of the ACA. After numerous delays and modifications (transition relief) to the ACA, it looks like the Employer Mandate will be in force for plan years beginning on or after January 1, 2015. Employer Mandate The Employer Coverage Mandate (also known as the Pay or Play Penalty) applies a penalty to an employer with 50 or more full-time equivalent employees that doesn t offer coverage that is both of minimum value and affordable to at least 95% of its full-time employees. In 2015, additional transition relief was offered to Applicable Large Employers (ALEs). This transition relief allows employers with 50-99 full time equivalent employees to delay compliance with the Employer Mandate for an additional year (until 2016). Larger employers (ALEs with 100 or more full-time employees) will have to comply in 2015 but only need offer coverage to 70% of their full-time employees. Furthermore, the maximum penalty for not offering coverage that is both affordable and of minimum value will be limited to the number of full-time employees minus the first 80 x $2000. (The original law limits the penalty to the number of full-time employees minus the first 30 x $2000.) In 2016, the transition relief offered to employers will end and all ALEs will have to comply with the original requirements of the Pay or Play Penalty. Likelihood of Continuing Health Benefit Coverage in 2015 60% 50% 60% 40% 30% 20% 10% 0 26% 1% 1% 1% Don t know 12% Zywave 2014 Survey Results: Affordable Care Act Heffernan Benefit Advisory Services: 2014 Trend Report 5

Why Employers Would Continue to Offer Coverage 100 80 60 40 20 0 89% Retain current employees Recruit talented new employees 63% 71% Maintain/increase employee satisfaction Maintain/increase employee productivity 36% 28% Avoid paying penalties 16% 7% Don t know Zywave 2014 Survey Results: Affordable Care Act Employer Reporting In addition to the Employer Mandate, the ACA created new reporting requirements under Internal Revenue Code sections 6055 and 6056. Under these new reporting rules, certain employers will be required to provide information to the IRS about the health plan coverage that they offer (or do not offer) to their employees. These reporting requirements were set to take effect in 2014. However, on July 2, 2013, the Treasury delayed these requirements for one year, until 2015. The first returns will be due in 2016 for coverage provided in 2015. The employer shared responsibility final rules include transition relief delaying compliance for medium-sized ALEs for one year, until 2016. Medium-sized ALEs are those with at least 50 full-time employees (including FTEs), but fewer than 100 full-time employees (including FTEs). ALEs eligible for this transition relief will still report under section 6056 for 2015. As part of this transition relief, the ALE must certify on its section 6056 transmittal form for 2015 that it meets certain eligibility criteria. Heffernan Benefit Advisory Services: 2014 Trend Report 6

Fees and Taxes on Healthcare Costs While the cost of government-mandated benefits such as the coverage of dependent children up to age 26 and no-cost contraceptive care are included in trend projections, special fees and taxes that are mandated by the ACA are not built into trend estimates. However, these fees are generally paid by employers and are built into your required renewal increase. The fees and taxes that you will likely see built into your 2015 renewals are the PCORI fees, Transitional Reinsurance Fees, and the Health Insurance Provider Fees. While most of these fees were already included in employers 2014 renewals, they will still significantly affect projected costs for 2015. While overall projected trend is lower for 2015, the addition of the special taxes and fees could make overall plan costs trend higher than in previous years. Patient-Centered Outcomes Research Institute (PCORI) Fee The goal in creating the Patient-Centered Outcomes Research Institute was to help patients, clinicians, and the public make informed health decisions. The assessed fees will fund comparative effectiveness research which will evaluate clinical effectiveness, risks and benefits of various medical treatments and services. The first possible PCORI fees were due on July 31, 2013 for plans that ended between October 1 and December 31, 2012. In the first year, the fee was $1 per covered life; the fee increased to $2 in the second year. In the subsequent years until plans ending before October 1, 2019, the fee will we be indexed annually. Transitional Reinsurance Fee (Reinsurance Fee) Coinciding with the opening of the state and federal exchanges in 2014, employees have already seen the addition of a transitional reinsurance tax in their 2014 renewals. The reinsurance fee will be used to stabilize premiums in the individual market during the first three years of Exchange operation (2014, 2015, & 2016). In 2014, employers were charged $63 per member per year. This fee will decrease to $44 per year in 2015. The fee in 2016 has not yet been determined. The ACA requires contributing entities to pay fees to support the reinsurance program. For insured health plans, the issuer of the health insurance policy is required to pay fees to the reinsurance program. Although sponsors of fully-insured plans are not responsible for paying the reinsurance fees, issuers will likely shift the cost of the fees to sponsors through premium increases. Health Insurance Provider Fee The third significant ACA fee that will affect employers is the Health Insurance Provider Fee. This fee also began in 2014. This fee imposes an annual, non-deductible fee on health insurers with revenue above $25 million. Self-funded plans, however, are exempt from this fee. The health insurance provider fee is expected to collect $8 billion in 2014 and $11.3 billion in 2015. Because the fee is assessed on each insurer based on overall market share, it is hard to quantify how much will be attributed to each employer s renewal. For 2014 renewals, employers saw from 0% to 3.5% in premium added to their required renewals. Heffernan Benefit Advisory Services: 2014 Trend Report 7

Employer Strategies While projected trend costs for 2015 remain relatively low compared to prior years, total premiums that employers face will likely increase due to ACA fees and the employer mandate. While many large employers are already offering benefits, the employer mandate may cause employers to have to offer insurance to employees that may not have been eligible before. The higher plan participation will increase overall health care spending even if the renewal increases are minimal. With increased spending, it becomes even more critical for employers to employ strategies and products that manage and contain costs. CONSUMERISM CHDPs Private Exchanges TRANSPARENCY Captives Level Funding Consumerism A successful strategy in reducing health care costs has been to increase consumerism. Traditionally consumerism has been the ideology that encourages the acquisition of goods and services in ever greater amounts. Recently the term has evolved to mean the concept that consumers should be informed decision makers in the marketplace. Products and benefit structures that increase consumerism are helping to manage benefits costs. With the increased financial responsibility, consumers are re-evaluating how and when to spend on health care. Consumer Directed Health Care Plans (CDHPs) A tool that many employers are using to mitigate rising health care costs is the use of consumer driven health plans, (CDHPs). CDHPs typically include decision support tools that help consumers better manage their health, health care, and medical spending. According to a recent study, families in consumer-directed plans used fewer brand-name drugs, had fewer visits to specialists and were hospitalized less all of which lowered their costs. 1 Some employers are having a hard time getting enrollment into CDHP plans when they are offered alongside more traditional benefits because employees may be scared of the higher out-of-pocket costs. However, these plans not only typically have lower premiums and tax advantages; but also encourage employees to spend their health dollars wisely and motivate employees to take charge of their own health and wellness. Heffernan Benefit Advisory Services: 2014 Trend Report 8

Enrollment and Offering of High-Deductible Plans, 2009-2014 80 70 60 50 40 30 20 10 0 73% 66% 59% 54% 51% 53% 26% 21% 17% 17% 13% 8% 2009 2010 2011 2012 2013 2014 Enrollment in a High-Deductible Plan Enrollment in a High-Deductible Plan Source: PwC 2014 Tourchstone Survey Private Exchanges Despite the auspicious beginning to the public exchanges in 2014 and the resulting low confidence in the public marketplaces, an increasing number of employers are exploring the option of offering a private exchange. With the increasing costs of health care and employees having to contribute more to their employer sponsored plans, private exchanges offer several key benefits: Technology Many private exchanges offer employee decision making services that help employees to select the most cost effective solution for their needs. Collective Buying Power Small and Mid-Sized employers could gain collective buying power and influence to help control total benefit costs. One-Stop Shopping Some exchanges allow employees to purchase core medical, life, disability and voluntary benefits all at one time. Defined Contribution Approach Employers can set a defined contribution per employee and the employee can chose the benefits that best fit their needs a the cost provided. Choice Employees would gain a wider variety of medical plans from which to choose. However, while interest in the concept of private exchanges remains high, there hasn t been much movement to this vehicle of benefits insurance. Employers are waiting to see if this approach really can deliver greater value than their traditional plans. If proven successful, private exchanges offer a real opportunity to employers to lower costs without reducing the quality of the health care offered to their employees. The private exchanges encourage an environment of consumerism which will help decrease the cost of health care in the long term. Heffernan Benefit Advisory Services: 2014 Trend Report 9

Transparency The flip side of the coin to encourage employees to take greater responsibility in managing their own health and benefits, is to give the employees and employers the information and tools that they need to make better health decisions. With greater transparency, employers can establish the benefit plans that best suit the wellness needs of their employee populations. The need for transparency has opened the door to more self-funded plan options to both larger and smaller employers. Historically, it has been difficult for smaller employers to assume the risk of a partially self-funded plan. However, the demand for transparency of claims for groups of all sizes has increased the number of self-funded vehicles available to employers. Captives Most large employers have discovered that the best way to control costs is to self-fund or partially self-fund their health plans. Because of the volatility of claims, self-funding has not been a viable option for mid-sized groups (groups with 50-500 employees). An employee benefits captive allows mid-sized companies to group together to share in the risk of large claims. It allows participating employers to gain control over their health insurance costs without the financial volatility that could be experienced by traditional self-funding. In a traditional fully insured health plan, small and mid-sized employers don t receive detailed claims information. Participating in a captive program will give these small groups transparency in the claims that are driving health care expenses. Employers can then design their benefit plans and wellness programs around the large health care costs that are specific to them. Level Funding A stop-loss product that has been around for a long time but is increasing in utilization is level-funding. In a traditional self-funded plan, employers pay for claims themselves, while a third-party administrator administers the health plan. Companies assume the risk for their own claims usually up to a specific stop loss amount. While self-funding is a riskier option, employers can save if their employees claims are lower than expected. Furthermore, employers gain access to the claim history for their group. Level funding sets a fixed monthly amount to cover the costs of administration, stop-loss, and claims funding. Each month, the employer knows exactly what they have to pay like a fully insured premium contract. However, at the end of the plan year, if there is any overage in the amount paid throughout the year and the cost of the claims, it is returned to the employer. Many of these plans will go down to as little as 25 lives. In addition to the potential savings that these plans offer, employers receive company-specific reports to help them understand where health care dollars are being spent and the impact of their wellness programs. It gives more information into the hands of the people doing the spending the employer and their employees. Heffernan Benefit Advisory Services: 2014 Trend Report 10

Conclusion In 2015, the Employer Mandate provision of the ACA will be in effect for employers with 100 or more employees. The Employer Mandate has been revised and delayed multiple times since the law was originally passed; 2015 is the year that large employers will have to decide to offer coverage to their full-time employees or pay a penalty. Despite the confusion and uncertainty that these numerous delays have caused, most large employers plan on continuing (or extending coverage of) their employer sponsored health plans. While projected trend estimates for 2015 remain lower than they had been at the beginning of the decade, the increased fees and costs as well as the increased participation in employer sponsored health plans means that employers may yet again face high renewal increases. Large employers that decide to Play and continue to offer employer sponsored benefits will need to come up with a longterm strategy to control costs while maintaining employee satisfaction. Capitalizing on programs that offer transparency and encourage consumerism appear to offer the most cost-effective solution for employers. These plans however will only be successful if employees and employers actively participate and educate themselves on health care costs. There is no immediate solution to lowering premiums; employers need to develop a long-term solution to strategically manage their health plans. Health plans that HIB surveyed include: Aetna, AmeriHealth, Ameritas, Anthem, Anthem BC/BS, Assurant, Blue Shield, Cigna, Dearborn National, Delta Dental, Emblem Health, Empire, EyeMed, Guardian, HealthNet of California, HealthNet of Oregon, Healthplex, HIP, Humana, Kaiser, Kaiser of Oregon, LifeWise, Lincoln, MES, MetLife, Moda Health, Mutual of Omaha, ODS Health Plans, Oxford Healthplans, PacificSource, Premier Access, Principal, Providence Health Plan, Prudential, Regence BlueCross Blue Shield of Oregon, Reliance, Sun Life, Superior Vision, The Standard, UHC, United Concordia, United HealthCare, Unum, VSP Footnotes: 1. Amelia Haviland, et al, Growth of consumer directed health plans to one-half of all employer-sponsored insurance could save $57 billion annually, Health Affairs. 31 no 5 (May 2012): 1009-1015 2. Zywave 2014 Survey Results: Affordable Care Act 3. PwC 2014 Touchstone Survey 4. 2014 Segal Health Plan Cost Trend Survey Heffernan Benefit Advisory Services: 2014 Trend Report 11