Issues and Trends in Healthcare and Employee Benefits

Virginia Government Finance Officers’

Association

2006 Spring Conference June 4 - 6

Wachovia Employer Solutions

2 Wachovia Employer Solutions

Why are Healthcare Costs Increasing?

Increased Utilization of Services – 43%

•Shift from inpatient care to outpatient care

•Medical Liability and Defensive Medicine

•Aging population and unhealthy lifestyle

•Direct to consumer marketing, consumer demand

•Advancements in technology improve outcomes but at a greater cost

Price increases in excess of inflation – 30%

• Movement among employers towards broader-access health plans

• Consolidation by physician groups and facilities

• Cost shifting from Medicaid and the uninsured to private payers

• Advancements in technology at higher price

Kaiser/HRET Survey estimates the increase in health insurance premiums between 2004 and 2005 was 9.2%

General inflation accounts - 27%

3 Wachovia Employer Solutions

Percent Increases in Health Insurance Premiums Compared

to Other Indicators, 1996-2005

0.8

5.3

8.2

10.9

12.913.9

11.2

9.2

02468

1012141618

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Health Insurance Premiums Overall Inflation Workers' Earnings

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 1999-2005; KPMG Survey ofEmployer-Sponsored Health Benefits: 1993, 1996; The Health Insurance Association of America (HIAA):1998, 1989, 1990; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation(April to April), 1998-2005; Bureau of Labor Statistics, Seasonally Adjusted Data from the CurrentEmployment Statistics Survey (April to April), 1988-2005.

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Why are Healthcare Costs Increasing?

Other Factors

•A 2002 Juran Institute study estimated that the “cost of poor quality” in healthcare accounts for 30% of all direct healthcare spending

Going in the other direction

• Widespread adoption of multi-tiered pharmaceutical benefits and generic drugs have helped slow the rate of increase in prescription drug spending

• The number of new state and federal mandates has decreased markedly in recent years

Kaiser/HRET Survey estimates the increase in health insurance premiums between 2004 and 2005 was 9.2%

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Premium Dollars and Cost of Health Care Services

Premium Dollars:

•86% - Medical Services•5% - Consumer Services, provider support and marketing

•6% - Government payments, compliance, claim processing

•3% - Health plan profits

Medical Services:

•24% Physician services•22% Outpatient costs•18% Inpatient costs•16% prescription drugs• 6% other medical services

Kaiser/HRET Survey estimates the increase in health insurance premiums between 2004 and 2005 was 9.2%

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Percent Increases in Health Insurance Premiums

Source: PricewaterhouseCoopers estimates, December 2005

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Five Year Medical/Pharmacy Cost Model – Per Employee Per Year Costs

Five Year Cost Model – Self Funded Plan

$8,583$9,333

$10,150$11,040

$12,010

$9,608$8,832

$8,120$7,466$6,866

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2006 2007 2008 2009 2010

Total Projected Plan Cost Net ABC Costs

Note: Claims cost assumed to increase 9% annually, reinsurance fees assumed to increase 15% annually, administrative fees assumed to increase 5% annually

Note: Employee contributions assumed at 20%

2006 2007 2008 2009 2010

Medical/Prescription Drug Claims 7,726$ 8,422$ 9,180$ 10,006$ 10,906$

Reinsurance Fees 118$ 136$ 156$ 180$ 207$

Administrative Charges 738$ 775$ 814$ 855$ 897$

Total Projected Plan Costs 8,583$ 9,333$ 10,150$ 11,040$ 12,010$

Projected Increase in Plan Cost 8.7% 8.8% 8.8% 8.8%

Less: Employee Contributions 1,717$ 1,867$ 2,030$ 2,208$ 2,402$

Net ABC Costs 6,866$ 7,466$ 8,120$ 8,832$ 9,608$

Projected Increase in ABC's Cost 8.7% 8.8% 8.8% 8.8%

Note: Employee contributions assumed at 20% from 2006 to 2010Note: Claims cost assumed to increase 9% annually, reinsurance fees assumed to increase 15% annually, administrative fees assumed to increase 5%

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• Promote provider pay-for-performance• Transparency• Consumer engagement• Promoting healthy lifestyles• Measures to appropriately access the emergence of new

technologies • Public reporting of quality measures across all members of the

healthcare community would improve accountability throughout the healthcare system

• Increased enrollment in Health Savings Accounts, high-deductible health plans. AHIP reported of its member 3.2 million enrolled in January 2006 compared to 1 million in March 2005.

Current Health Plan Trends

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• eHealth – Internet education offered by most carriers• Health Risk Appraisals – with incentives to participate• Wellness Programs • Disease Management – Early detection and aggressive outreach • Predictive Modeling – Proactive Care Management • Defined Contribution/Consumer Driven Health Plans

• Incentives to increase participation

• Health Care Flexible Spending Accounts• Tiered Copay Programs – Higher deductibles at certain facilities• Pharmacy – Multi-tier Copays/Lifestyle Components - Coinsurance as

an alternative to Copays• Tools, including but not exclusively on-line, to promote consumer

awareness and informed decision making• Health coaching for high risk individuals

Consumerism Initiatives

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Workers Sweat the Big Stuff – Healthcare, Disability, Retirement – But value vacation time more than savings and income protection products

Burdened with credit card debt and short-term planning horizons, workers struggle to save and meet financial goals

Employees underestimate retirement income needs and fall far behind in long-term savings

Voluntary benefits continue to grow in popularity, especially among young workers

With workplace diversity on the rise, employee savings and benefits goals vary widely and defy traditional stereotypes

Dissatisfied and confused, workers voice strong need for benefits education and advice

Employee Benefits Trends – Major Findings

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Small businesses report higher-than-average job satisfaction and loyalty rates, but leave many workers vulnerable on retirement front

Large companies expect to be hardest hit by aging workforce

Employers cite healthcare and work-life balance as top benefits priorities, but remain on the fence about wellness and flex hours

Benefits funding: employee cost sharing is here to stay, even as company profits rebound

Employers expect a huge surge in eBenefits, with online enrollment increases of up to 50% projected over next 18 months

No growth forecast in executive and/or retiree benefits

Employee Benefits Trends – Major Findings

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Top Financial Concerns for Full-Time Employees

48%

49%

54%

54%

56%

59%

60%

61%

63%

71%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Having to work full/part time during retirement

Outliving your retirement money

Enough money for children's education

Financial security in the event of your spouse/partner'spremature death

Financial security in the event of your premature death

Appropriate health insurance

Financial security if a principal wage earner can no longer workbecause of a disability

Job security

Enough money to make ends meet

Enough money to pay bills during sudden income loss

“Extremely concerned” (“7” & “6” on 7-point scale)

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Percentage Choosing as “Most Important Benefits”*

4%

5%

8%

11%

42%

38%

42%

55%

67%

68%

92%

4%

18%

26%

31%

39%

2%

25%

24%

81%

65%

57%

50%

41%

32%

3%

4%

6%

8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Home/Renters Insurance

Banking Service

Auto Insurance

Financial Plan

Long-Term Care

Flexible Schedule

Life Insurance

Disability

Vision

DB/Pension

Sick Leave

Dental

401(k)/403(b)

Vacation

Medical

20042003

* Multiple responses – 5 of 14 items selected by each respondent

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9%

14%

15%

22%

25%

37%

36%

53%

55%

10%

12%

14%

21%

27%

38%

38%

52%

53%

0% 10% 20% 30% 40% 50% 60%

Helping employees make betterfinancial decisions

Addressing more of employees'diverse needs

Helping employees make betterbenefits decisions

Reducing HR administrativecosts

Attracting employees

Increasing employees'productivity

Increasing employees' jobsatisfaction

Retaining employees

Controlling health/welfarebenefit costs

20052004

Most Important Benefits Objectives for Employers

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19%

43%

29%

43%

81%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Long-term care

Benefits for retired employees

Workers compensation

Retirement savings accounts

Healthcare costs

Employee Benefits Issues of Most Concern to Senior-Level Management

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1. Coinsurance and deductibles replace copays

2. Revising pharmacy plans

Adding calendar year deductibles Coinsurance features Mandatory mail order

3. Consumer Driven Healthcare Plans (CDHP)

HSAs and HRAs Optional product vs. full implementation

Six Healthcare Benefit Trends to Watch in 2006

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4. Wellness programs redesigned

Health risk assessments Disease management programs Financial incentives Mandatory participation

5. Educating Consumers

Tools to help employees make informed choices Employers forcing accountability

6. Managing Retiree Healthcare

Redefining eligibility criteria Redefining contribution formulas (especially for non-Medicare eligible

retirees) Determining how to package Medicare Part D

Six Healthcare Benefit Trends to Watch in 2006