October Newsletter

Commentary,

"What happens if healthcare reform is repealed?" This question continues to dominate the
news, this week being no exception, with the elimination of the CLASS Act (Community Living
Assistance Service and Support Act). Although this portion of PPACA seemed underfunded
and doomed from the beginning, the action indicates doubt as to the outcome of healthcare
reform. The question is valid but repeal seems a bit out of reach. However, employers need
to know for business planning sessions. The reality is, until the Supreme Court decision on the
individual mandate (which could impact pre-existing condition and guaranteed issue reform)
and then the next election, we still won't really know. And even then, so much of the law has
already been engaged that the best analogy I heard to describe the situation was "it would be
like putting toothpaste back in the tube."

Some components that have taken root and already appeal to many include: The elimination
of pre-existing conditions for children under age 19 and coverage for dependents to age 26
(this has added over one million to the insured roles). Young adults were one of the larger
uninsured populations. Expanded preventive care coverage also makes sense. Minimum loss
ratios restrict insurance company profit and the State review of insurance carrier increases
above 10% on small group both have favorable impacts on pricing. In 2014, Health Benefit
Exchanges are scheduled to open, initially for individuals and small businesses, and propose
to offer more competition to current monopolistic markets. This also appears to make sense
but we have yet to know exactly what carriers and plan options will be offered, and their cost,
although we assume (hope) it will be cheaper than today. It is proposed that after the law is
fully engaged, 30 million people (1.5 million in Illinois) will have insurance that don't have it
today - which is also a good thing. We have yet to understand the impacts and how it will all
be paid for.

As you may know, I served on a stakeholder working group for the Independent Agents in
Illinois and a task force in Washington D.C., both positions is meant to provide information on
market impacts back to those sitting at the table.

Last month I testified in Springfield regarding the Health Benefit Exchange being developed in
Illinois. A similar discussion took place as to whether the entire healthcare reform law could be
repealed based on the Supreme Court decision regarding the individual mandate. States are
concerned as federal funds are currently provided to develop and operate the exchange for the
first year. If the federal law is repealed and state legislation had been passed to develop an
ph: (708) 845-3126 • mike.wojcik@thehortongroup.com

exchange, without proper language, the state would be required to continue without federal
funding. The idea could still make sense but the current price tag for start up costs in Illinois is
projected to be $92 million between now and 2014. Operating costs from there are projected
at $39 million in 2014 and $73 million in 2015 for moderate enrollment and $46.7 million in
2014 and $88.6 million in 2015 for high enrollment. In 2016, by design of PPACA, the Health
Benefit Exchange is to be fully self-sustaining. There have been several consulting groups on
this project including Health Management Associates, Wakely Consulting Group and Deloitte.

Although much good has come out of healthcare reform, there have also been many
unintended negative consequences. I guess that comes with change of this
magnitude. However, the unanswered questions need to be addressed quickly for all
employers, governmental and private, to get back to business.

I hope you find this month's newsletter helpful in staying abreast of legislative updates, market
tends, new technologies and strategies that will enhance your organization's financial
wellbeing. Our mission is to offer solutions that will control healthcare costs, increase the
perceived value of our benefit programs and improve the health, safety and productivity of your
employees.

Mike


Market Trends, Surveys and Strategies
Behind the numbers, Medical cost trends for
2012 PriceWaterhouseCoopers (PwC)
Numerous market surveys have been published in the past few months raising the awareness
and anxiety associated with rising healthcare costs and insurance premiums. They project
medical trend from as low as 5.4% to a high of 11.7%. I particularly like
the PriceWaterHouseCoopers Health Research Institute (PwC) survey for their incredible track
record and supporting data written in simple common sense terms.

The study projects medical cost trend to be 8.5% in 2012, up from 8% in 2011. Plan design
change is projected to bring pricing down to 7%. The recession that caused a slowing effect
on utilization the past few years will now lift 2012 beyond what it normally would have
been. To clarify, medical cost trend is the projected increase in the costs of medical services
assumed in setting premiums for health insurance plans. When discussed, it is often confused
with premium increases. Another study, written on historical data by Kaiser Health Research
and Educational Trust typically reports premium increases (next article). PwC projects three
factors that will inflate cost in 2012 which include:

1. Provider consolidation. Many hospitals and doctor groups are merging to create
efficiencies. Although positive results were experienced so far, payers (insurers) worry
the consolidation can lead to higher payment rates.
2. Cost shifting from Medicare and Medicaid increases. This has taken place for many
years. As we look at cuts to providers in these markets, and increased enrollment to
Medicaid due to healthcare reform, look for the private sector to pick up the tab.
3. Post recession stress effect on workers. We already see it in prescription claims.

PwC projects three factors that will deflate cost in 2012 include:

1. Cost sharing continues to increase. High-deductible plans were the fastest growing
plan designs in 2011.
2. Many high-use brand-name drugs come off patent. In 2012, the cumulative sales of
drugs going off patent will be the largest in history.


3. Tiering on out-of-network providers will increase. Employers are increasing the out-of-
network deductibles or co-shares to steer usage in network to capture higher discounts.

PwC projects the Affordable Care Act will have minimal direct impact in 2012. Cost shifting
from provider rate cuts, increased dependent population of those under age 26 and expanded
coverage definitions will slowly start affecting rates. However, increased accountability and
performance requirements of insurers, drug makers and providers will provide an offset for
now. For a copy of the PwC survey, click here. For a list of prescriptions due to come off
patent in the next 3 years, click here.

Kaiser Survey
The 2011 Kaiser Family Foundation and the Health Research & Educational Trust Survey of
2,088 employers nationwide found that premiums for family coverage increased an average of
9% to $15,073 and 8% for single coverage to $5,429 per year. This is compared with an
average increase of just 3% for family in 2010. Since 2001, average premiums for family
coverage increased 113%.

The survey also found covered workers contribute on average 18% of the premium for single
coverage and 28% of the premium for family coverage. This is similar to the percentages they
contributed in 2010.

Overall, PPOs are by far the most common plan type with CDHP/SOs (Consumer Driven
Health Plans with Savings Options) gaining ground and HMOs losing ground. Also worth
noting, 31% of all covered workers are in a plan with a deductible of at least $1,000 for single
coverage; this is up significantly compared to 22% in 2009. At small firms, one in four covered
workers now face annual deductibles of $2,000 or more.

The survey takes a deeper dive charting some data of employer group, location and
industry. To review the full 225 page report, click here. For an executive summary, click here.


Public Sector News
Health and OPEB Funding Strategies
2011 National Survey of Local Governments
by Cobalt Community Research

According to a national study of over 1,690 local governments across the country, about 42% of the nation's
cities, counties and townships expect their revenue to fall again in 2012. Health costs will play a major part in
balancing the budget.

"In a very real way, local governments must choose if they will pay for police, potholes, or pills." said William
SaintAmour, Executive Director of Cobalt Community Research, a nonprofit research coalition that conducted the
national study.

This 2011 report provides detailed insight into how local governments provide health care benefits to their active
and retired employees and what they are doing to help control rising health care costs.

The report also discusses the OPEB (other postemployment benefits) liability established by GASB45. The
awareness of this liability and the requirement to disclose has created heightened concerns with the affordability
of public-sector health care.

The most frequently cited strategies for controlling health care costs were:

Increasing deductible and copays
Increasing the employee's share of premium costs
Implementing wellness programs
Expanding use of generic drugs
Implementing HSAs and HRAs
Negotiating lower costs with current carriers
Educating employees/retirees to make better health care decisions
Rebidding health care coverage
For governments that provide retiree health care, using a Medicare wraparound plan is
an emerging approach

For a copy of the report, click here.


Cadillac Coverage
The High Cost of Public Employee Health Benefits
Published by Manhattan Institute

An interesting study was published in July by the Manhattan Institute exploring reasons why government-
employee benefits cost more than private sector benefits. Recommendations and examples are provided on how
to bring the two closer together.

Several reasons identified for the cost difference included:

Public employees contribute less to their premiums - an average of about 15 percent of the overall
premium compared with about 25 percent in the private sector
Public employee plans offer more generous benefits, including lower deductibles and lower co-pays
Governments require shorter enrollment waiting periods for new employees than in the private sector
Public employees have higher opt-in rates for employer-provided coverage; 26 percent of private-sector
workers choose not to participate in available employer health plans while just 16 percent of government
workers choose not to.

There is not an easy answer, the study points out realigning government employee contributions to match those
of the private sector could save money; however, the simple approach does not bend the cost curve over
time. Benefits will still continue to grow. Instead governments need to work to reduce their spending on health
benefits.

The report provides a case study on how the State of Indiana has achieved significant savings since changing to
consumer-directed health plans (CDHP) in 2006. CDHPs are designed so that, except for catastrophic expenses,
and preventive coverage, employees bear the responsibility of paying their own health-care costs up to a
maximum, and they therefore consume care more judiciously.

Characteristics of successful consumer-directed health plans include:

A generous Health Savings Account (HSA) funded by the employer and employee, which is used to pay
day-to-day medical expenses and which can be rolled over into future years and even drawn on for other
expenses after retirement.
A high-deductible, low premium catastrophic insurance policy to cover large expenses.

A Mercer consulting study examined Indiana's reform and found consumerism reduced claims by 10.7 percent
saving the state $17 - $23 million each year and employees $7 - $8 million due to lower utilization. When
designed properly, CDHP saves employers and employees alike.

For a more complete review of the study, click here.


Legislative Updates and Impacts
Institute of Medicine issues Essential Health Benefits
Recommendation...
On October 7, 2011, the Institute of Medicine (IOM) publicly issued its anticipated "essential
health benefits" (EHB) policy principles in a 297 page report to the Department of Health and
Human Services (HHS). As part of the PPACA law, EHBs were to cover a package of
diagnostic, preventive and therapeutic services and products that were medically
effective, affordable to purchasers and have been defined as essential by the Department of
Health and Humana Services with guidance from the Institute of Medicine.

The report outlined a "process" for determining the EHB package, allowing flexibility for state
needs and updating this once a year starting in 2016. Click here for a summary.

Existing plans have adopted interim steps to address essential health benefits and limits on
them. As a reminder, beginning January 1, 2014, lifetime and annual dollar limits on the dollar
amount of essential health benefits are prohibited for all employer plans, including
grandfathered and all new individual policies. This prohibition does not apply to grandfathered
individual plans. Self-funded plans must also remove annual limits or lifetime maximums on
essential health benefits if they are covered.

What remains unclear is when HHS will release the corresponding rule detailing exactly how
the IOM's recommendations will have to be utilized by employers and individual and small
group health plans. Two prevailing rumors are: either it will be released soon or delayed until
after the 2012 election.

IRS Guidance Helps Employers Estimate Play or Pay Penalty
The IRS recently released clarifying guidance that should make it easier for employers to
control health care costs and determine strategies to address the "Play or Pay" mandates
starting in 2014.

A helpful summary written by Seyfarth Shaw, LLP is available by clicking here.

It states the new proposed regulations provide a favorable, less complicated safe harbor
interpretation of the affordability test. Under the anticipated safe harbor, an employer will not


be subject to the play or pay penalty if it offers its full-time employees (and their dependents)
the opportunity to enroll in MEC (minimum essential coverage) and the employee portion of the
self-only premium for the employer's lowest-cost coverage does not exceed 9.5% of the
employee's W-2 wages, as opposed to the employee's household income. Employers who
follow this safe harbor will not be assessed a penalty, even if an employee receives a subsidy
through the exchange.

What Employers Pay a Penalty? Flow Chart
One provision of the health care reform legislation requires that certain employers offer health
care coverage to their employees or pay a penalty. The linked flow chart summarizes which
employers will be required to pay a penalty when the provision goes into effect in 2014.

Michigan Governor signs health care claims tax into law...
A follow up to last months' Business Insurance article- "Michigan Lawmakers Approve 1% Tax
on Health Care Claims." Michigan Governor Rick Snyder DID sign into law S.B. 348 that will
impose a new 1% tax on paid health care claims. The tax, intended to help fund the state's
Medicaid programs, would be paid quarterly starting April 30, 2012.

The tax would apply to fully-insured and self-funded plans however exempt Medicare
Advantage plans, Medicare prescription drug plans and plans covering federal employees. In
addition, the tax would not be assessed on services provided in Michigan to non-Michigan
residents.

The tax is expected to generate $400 million annually. Any amount over that would be
credited to the plans' assessments the following year.


Insurance Carriers and Healthcare Providers In The News

HEALTHCARE 2020
Medco 2011 Drug Trend Report
The Medco 2011 Drug Trend Report highlights 2010 data reflecting trends across their base of
clients. As one of the largest pharmacy benefit managers (and soon to be the largest if the
proposed Express Scripts merger goes through), Medco's report provides future insight to help
understand the impacts on overall healthcare costs in the future.

Even though our general market celebrates some short term reduction in pharmacy trend, we
need to understand what is around the corner. Medco's Chairman David B. Snow, Jr. states it
well. "Consider the power of just one trend: New and existing specialty medications will
account for two-thirds of drug trend over the next 3 years. So while overall trend should be
almost flat for non-specialty drugs - aided by a historic wave of first-time generics - payers will
face dramatic challenges in managing specialty costs."

Other Medco insights included:

Overall drug trend in 2010 remained low at 3.7%
2010 spending on specialty drugs accounted for 16.3% of plan costs but was
responsible for a remarkable 70.1% of drug trend
At 16.7% diabetes was the therapeutic category that contributed most to trend
The cost of cancer care is projected to rise from $124.5 billion to as much as $207
billion by 2020 (according to the report there are 907 cancer drugs alone in
development)
Overall generic dispensing rate rose to 71% from 67.5% in 2009

The report is an excellent guide to provide insight into trend projections, key developments and
key recommendations to look ahead to 2020 and adapt benefit strategies accordingly. For a
copy of the report, click here.


Human Resource Center
One Million Young Americans

Young adults have become the fastest growing segment of the population to get healthcare
coverage due to the early provision in the Affordable Care Act allowing parents to cover their
adult children as dependents on family policies.

Three new surveys show that adults under 26 made significant gains in insurance coverage
since last year adding close to one million to the insured role. A Gallup survey found that the
share of adults 18 to 25 years old without health coverage dropped from 28 percent last fall to
24.2 percent by this summer, also citing they did not see a drop-off in any other age group.

The American Health Insurance Plans (AHIP) was quoted as being concerned about the
additional costs being incurred by plans as a result, especially if adverse selection occurs,
meaning that only people who need health care services choose to enroll in their parents' plan.

To see more stats from the Department of Health and Human Services click here.

Wellness Initiatives
Breast Cancer Awareness. See excerpt from Horton Health Initiatives Newsletter (click
here)

Workforce Wellness Fact File
Thompson Reuters recently published a summary of several Health Index outcomes. The U.S.
workforce is nowhere near a perfect 100 index score, but has been in the mid-80s for a few
years. There are signs of improvement with some risk factors such as cholesterol levels and
tobacco use, but the numbers are not good for risk factors that have the greatest impact on
costs, BMI and glucose.

Comparing two Indexes between 2005 and 2009, the results showed the U.S. Workforce
Wellness Index worsened, declining from 86.4 to 84.4, while the MarketScan sample increased
from 84.1 to 86.2. Health risks considered are BMI, blood pressure, cholesterol, glucose,
tobacco use and alcohol use.


The U.S. Workforce Wellness Index compares the workforce as a whole, while MarketScan is
a proprietary database of employers who measure and submit health risk assessment
information and have programs in place to promote workforce wellness. Demographics are
adjusted to match for a fair comparison.

Research indicated that in 2009, approximately 14% of incremental direct healthcare cost in
the employed, privately insured workforce was attributable to the six behavioral risk factors
listed. According to the Thomson Reuters Healthcare Spending Index for Private Insurance,
this represented $670 in incremental healthcare costs annually per worker.

The good news from the study shows that worksite wellness efforts are paying off and gives
several behavioral risk factors to target. To see more of the study, click here.

Horton Webinars & Seminars (Reminders)
Health Reform - Employer Impact Analysis - October 27, 2011
Attached is the latest Webinar & Workshop schedule through January 2012. To register for a
webinar or workshop, please click the link below.

http://www.thehortongroup.com/Insurance_Workshops/


October Newsletter

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