Topic 3 - EE Benefit Strategy

Question 1

Definition of EE Benefits

Answer 1

Broad Definition - Includes virtually any form of compensation other than direct wages, including:

1. The ER’s share of legally-required payments (such as social security)
2. Payments for time not worked (such as paid sick leave, paid vacations, and holidays)
3. The employer’s share of medical and medically-related payments
4. The employer’s share of retirement and savings plan payments
5. Miscellaneous benefits (such as EE discounts, severance pay, and educational expenditures)

More limited definition - excludes legally-mandated benefits

Rosenbloom Chapter 1, Page 4

Question 2

Reasons for the growth of EE benefit plans

Answer 2

1. Business Reasons - good benefit plans help the ER attract and retain capable EEs, and can improve EE morale and productivity
2. Collective Bargaining - The Taft-Hartley Act requires good-faith collective bargaining over conditions of employment (including benefit plans)
3. Favorable tax legislation - many plans are designed to maximize available tax benefits
4. Efficiency of the EE benefits approach - marketing of benefits through the employer is a cost-effective and administratively efficient distribution channel
5. Wage increase limits - wage increase limits during World War II and the Korean War led to an expansion of EE benefits as a way in which ERs would increase the EEs total level of compensation
6. Legislative actions - government has encouraged EE benefit plans through various legislative actions

Rosenbloom Chapter 1, Page 5

Question 3

Characteristics of the group technique of providing EE benefits

Answer 3

(all but the last one are meant to minimize adverse selection)

1. Only certain groups are eligible - groups formed solely for the purpose of obtaining insurance should not be offered coverage
2. Steady flow of lives through the group - to maintain a fairly health group
3. Minimum number of persons in a group - to prevent less-healthy lives from being a major part of the group
4. A minimum portion of the group must participate - such as 75% of EEs must be covered in plans where the EE must pay a portion of the premium
5. Eligibility requirements and waiting periods are imposed
6. Maximum limits for any one person - to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual
7. Automatic determination of benefits - some benefits may be determined based on a formula (such as multiple of salary) to prevent unhealthy lives from obtaining large benefit amounts
8. A central and efficient administrative agency - to minimize expenses and handle the mechanics of the benefit plan

Rosenbloom Chapter 1, Page 8

Question 4

Questions to ask in evaluating EE benefit plans

Answer 4

1. What are the objective of the ER and EE?
2. What benefits should be provided?
3. Who should be covered under the benefit plan? - Retirees, dependents?
4. Should employees have benefit options?
5. How should benefit plan be financed?
6. How should benefit plan be administered? By ER, Insurer, TPA?
7. How should the benefit plan be communicated?

Rosenbloom Chapter 1, Page 10

Question 5

Reasons for using the functional approach for designing and evaluating EE benefits

Answer 5

1. Benefits must be organized to be as effective as possible in meeting EE (N)eeds
2. Avoiding (W)aste in benefits can be an important cost-control measure for ERs
3. It is important to analyze where current benefits may (O)verlap and costs may be saved
4. A systematic approach is needed to keep benefits (C)urrent, cost effective, and in compliance with regulations
5. A systematic approach is needed to ensure that the various benefits can be (I)ntegrated with each other

Mnemonic- NOW C I (NOW Current and Integrated)

Rosenbloom Chapter 2, Page 14

Question 6

Steps in applying the functional approach for EE benefit plan design and evaluation

Answer 6

1. Classify Employee and dependent needs or objective into logical functional categories (separate list of common exposures)
2. Classify the categories of persons the ER may want/need to protect (separate list)
3. Analyze current health benefits with respect to EE needs and the categories of covered persons (separate list)
4. Determine any gaps in benefits or overlapping benefits in the current plan
5. Consider recommendations for plan changes to meet any gaps in benefits and to correct any overlapping benefits
6. Estimate the cost or savings from each of the recommendations made
7. Evaluate alternative methods of financing or securing the benefits
8. Consider other cost-saving or cost-containment techniques ofr both current and recommended benefits
9. Decide upon the appropriate benefits, methods of financing, and sources of benefits, by using the preceding analysis
10. Implement the changes
11. Communicate benefit changes to EEs
12. Periodically reevaluate the EE benefit plan

Rosenbloom Chapter 2, Page 19

Question 7

Common loss exposures covered by EE benefit plans

Answer 7

1. Medical expenses for EEs (active and retired) and their dependents
2. Losses due to EEs’ disability (short-term and long-term)
3. Losses due to the death of active EEs, their dependents, and retired EEs
4. Retirement needs of EEs and their dependents
5. Capital accumulation needs or goals
6. Needs arising from the unemployment or from temporary termination or suspension of employment
7. Needs for financial counseling, retirement counseling, and other counseling services
8. , Losses resulting from property and liability exposures
9. Needs for dependent care assistance (e.g., child-care or elder-care services
10. Needs for educational assistance for EEs and their dependents
11. Needs for LTC for EEs (active and retired) and their dependents
12. Other EE benefit needs or goals (such as incentive programs)

Rosenbloom Chapter 2, Page 20

Question 8

Categories of persons the ER may want to or be required to provide Benefits for

Answer 8

1. Active full-time EEs
2. Dependents of active full-time EEs
3. Retired former EEs
4. Dependents of retired former EEs
5. Disabled EEs and their dependents
6. Surviving dependents of deceased EEs
7. Terminated EEs and their dependents
8. EEs (and dependents) on temporary leave of absence (such as for military duty)
9. Active EEs who are not full time (such as part-time EEs and directors)

Rosenbloom Chapter 2, Page 25

Question 9

Considerations for analyzing current benefits in the EE benefit plan

Answer 9

1. Types of benefits - a common approach is to prepare an outline or table showing how the different types of benefits meet the various EE needs
2. Levels of benefits - the analysis should also show the amount of those benefits that is currently provided under various scenarios
3. Probationary periods - analyze any periods during which newly hired EEs are not yet eligible to receive benefits, to determine whether they are appropriate
4. Eligibility requirements - various requirements should be analyzed. For example, should survivors of deceased EEs continue to be covered, for what benefits, and for how long?
5. EE contribution requirements - determine how much EEs will be required to contribute to the cost, and whether the plans will be mandatory or voluntary
6. Flexibility available to EEs - determine the choices that will be given to EEs in selecting their benefits
7. Actual EE participation in benefit plans - determine what percentage of EEs enroll in each benefit, which may indicate whether the benefit meets EE needs.

Rosenbloom Chapter 2, Page 27

Question 10

Advantages of Voluntary Benefits

Answer 10

Voluntary benefits are offered by the ER but EEs purchase them on their own

ER Advantages:

1. More benefits can be offered without significant added cost
2. Can supplement or replace ER-sponsored benefits that have been reduced or eliminated
3. Can act as an EE recruitment or retention tool
4. Can offer to EEs that meet performance targets

EE advantages:

1. Can get the ER’s group discount
2. In some cases, can purchase with pretax dollars
3. Convenience of obtaining benefits through the workplace (not having to shop around) and during work time
4. They are often portable (EEs can keep them upon changing jobs)

Rosenbloom Chapter 18, Page 491

Question 11

Types of Voluntary Benefits

Answer 11

1. Group term life
2. Dependent life insurance
3. Supplemental life insurance
4. Long-term and/or short-term disability income insurance
5. Dental insurance
6. LTC coverage
7. Adoption assistance
8. Accidental death and dismemberment insurance (AD&D)
9. , Automobile insurance
10. Homeowners insurance
11. Benefits under a legal services plan
12. Vision benefits coverage
13. Critical care insurance
14. Cancer insurance
15. Group homeowners and automobile insurance
16. Hospital indemnity insurance
17. Travel accident insurance
18. Student medical insurance

Rosenbloom Chapter 18, Page 492

Question 12

Common functions for administering EE benefits (Strategic Plan Management)

Answer 12

1. Benefit (p)lan design - Create a benefit program that addresses the needs of the organization and can be effectively administered and communicated
2. Benefits plan (D)elivery - involves serving plan participants through various activities (separate list). Must meet legal standards for quality service (e.g., complying with ERISA and COBRA standards)
3. Benefits policy (F)ormulation - management must make decisions on questions and issues that arise. These decisions must be codified into policies
4. (C)ommunications - must effectively communicate plan benefit programs and plan provisions, which is challenging due to workforce diversity, regulatory requirements, and plan complexity. Legal standards require certain communications (e.g., summary plan descriptions, benefit statement, and statement of COBRA rights).
5. Applying T()echnology - involves setting up a database containing information on all ER’s different plan benefits. This information should be secure and easily accessible to the ER and its EEs
6. Cost management and (R)esource controls - benefits directors must evaluate proposals from insurers and develop the firm’s risk-management approach
7. Management (R)eporting - information systems are needed to monitor financial results, utilization, and compliance. Reports are needed in order to:
   a) Compare to the competition (separate list)
   b) Measure achievement of HR objectives (Industry surveys, EE surveys, focus groups)
   c) Assess and manage program risks
8. (L)egal and regulatory compliance - must comply with fiduciary, funding, and other requirements as prescribed by law. Many standards were codified as part of ERISA.
9. Monitoring the external (E)nvirnoment - involves monitoring various factors that impact benefit management activities (separate list)

Mnemonic - P DRCTR L F E (Plan DiReCToR For Employees)

Rosenbloom Chapter 24, Page 636

Question 13

Activities required for serving plan participants (Strategic Plan Management)

Answer 13

1. (N)ew EE benefits Orientation
2. Policy (C)larification on benefits eligibility, coverage, and applicability of plan provisions
3. Dealing with (E)xceptional circumstances and unusual cases
4. (C)ollection and processing of enrollment data, claims information, and requests for plan distributions
5. Benefits (C)ounseling and responses to EE inquiries for active EEs
6. Benefits counseling for EEs who are terminating, retiring, disabled, or on leave

Mnemonic - Counsel ONCE?

Rosenbloom Chapter 24, Page 639

Question 14

Technological tools used by benefits directors to support customer-driven processes

Answer 14

1. (E)xecutive information systems - provide management information in summary format. Helps identify utilization patterns and cost factors.
2. Imaging and (o)ptical storage - eliminates paper records and allows sharing of documents over a network
3. Access to information over the (I)nternet - facilitates paper-less communication from the plan sponsor to insurance carriers, investment custodians, and third-party administrators
4. (C)lient-server technology - integrates networked applications with desktop and mobile tools, allowing decentralized management and supporting self-sufficient plan participants
5. EE (S)elf-service - allows customer-drive benefits modeling, retirement planning, and updating of personal data

Mnemonic - O S ICE (Outer Server ICE)

Rosenbloom Chapter 24, Page 650

Question 15

Methods for comparing benefit programs to the competitors

Answer 15

1. Compare the benefits payable to representative EEs under different circumstances
2. Compare actual costs to the ER for different benefit plans
3. Calculate relative values of the different benefits based on uniform actuarial methods and assumptions
4. Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain EE groups

Rosenbloom Chapter 24, Page 655

Question 16

External factors that impact benefit management activities

Answer 16

1. B - General business and competitive conditions - benefit programs are increasingly important for attracting and retaining employees. There is at rend towards benefits outsourcing
2. L - Government policy - requires monitoring laws and subsequent regulations, as well as proposed legislation
3. D - Workforce demographic shifts - greater diversity has led to flexible benefit plan offerings. The aging of the workforce ha created greater interest in retirement programs
4. I - New product development - must develop a means to evaluate new products and services, and to integrate them into existing plan offerings
5. S - New organizational structures - must redesign plans to fit the new structures and remain compliant
6. E - Technological enhancement and innovation - must keep abreast of technological changes and proactively plan the introduction of new technologies

Mnemonic - SLIDE B (might SLIDE Back if not monitoring external)

Rosenbloom Chapter 24, Page 659

Question 17

Reasons plans are outsourcing benefits administration

Answer 17

1. Complexity of administering benefits
2. Efficiencies of specialized service providers
3. Abilities of specialized providers to obtain favorable pricing because of their business volume
4. Ability of service providers to more readily implement technology and monitor regulations and market trends

Rosenbloom Chapter 24, Page 667

Question 18

Cafeteria plan advantages and disadvantages to the EE

Answer 18

Advantages

1. EEs can pay for benefit expenses on a tax-favored basis
2. EEs can have more control over their health spending

Disadvantages

1. Benefit elections must be made prior to the beginning of the year, and election is irrevocable (with limited exceptions)
2. For FSAs, the use-it-or-lose-it rule means benefit dollars unused at the end of the year are forfeited
3. Since there is no FICA tax, participants may see a slight reduction in social security benefits

Rosenbloom Chapter 25, Page 673

Question 19

Cafeteria plan advantages and disadvantages to the ER

Answer 19

Advantages

1. The ER does not have to pay FICA or FUTA (federal unemployment tax act) taxes on contributions
2. Deferred amounts do not count when determining workers’ compensation premiums
3. Creates increased awareness of the overall cost and value of EE benefits
4. Helps to contain health care costs and prevent wasting benefit dollars on duplicate or unneeded benefits

Disadvantages

1. Large cost of administration and operation of a cafeteria plan
2. If a medical reimbursement account is included in the plan, the total amount of the EE’s account must be available at any time in the year
3. Adverse selection can result in increased costs
4. Plans are subject to complex coverage and nondiscrimination testing

Rosenbloom Chapter 25, Page 674

Question 20

Types of cafeteria plans in the US

Answer 20

1. Premium conversion plans - there are no ER contributions. The plan is offered so that EEs can pay for their EE-paid insurance costs on a tax-favored basis
2. FSAs - these accounts are permitted for medical reimbursements, dependent care, and adoption
3. Full flex plans - participants can select from a wide range of benefits. The ER selections an amount to give for benefits, which is put towards the cafeteria plan or into an account

Rosenbloom Chapter 25, Page 676

Question 21

Benefits that can be offered in a cafeteria plan

Answer 21

Qualified benefits (can be offered on a pre-tax basis)

1. ER-provided accident or health coverage (including Medical, Dental, Vision, Disability, AD&D, business travel/accident, Hospital indemnity, cancer policies, Medicare Supp, and reimbursements for FSAs
2. Individually-owned accident or health policies
3. ER-provided group term life insurance coverage (only the first $50,000 is non-taxable)
4. ER-provided dependent care assistance
5. ER-provided adoption assistance
6. Contributions to 401(k) plan
7. Contributions to HSA

Permissible benefits (these can be offered, but are taxed)

1. Cash
2. Paid vacation days
3. Group term life insurance in excess of $50,000

Rosenbloom Chapter 25, Page 688

Question 22

Benefits that cannot be offered in a cafeteria plan

Answer 22

1. Contributions to medical savings accounts
2. Qualified scholarships and education assistance programs
3. Certain fringe benefits
4. Qualified LTC insurance (although an HSA fund can be used to pay for LTC)
5. Athletic facilities
6. De minimus benefits
7. Dependent life insurance
8. EE discounts
9. Lodging on business premises
10. Meals
11. Moving expense reimbursements
12. No-additional-cost services
13. Parking and mass transit reimbursement
14. Contributions to a college savings account
15. Legal or financial assistance
16. 403(b) plans

Rosenbloom Chapter 25, Page 689

Question 23

Challenging for Small Companies offering group medical plans

Answer 23

1. Because small companies are most often fully insured, they are subject to state-mandated benefits
2. Because EEs are usually in a relatively small geographic area, plans must be designed using options available in that area
3. Small companies may have to provide additional documentation so that insurers can verify the existence of the company
4. Most states do not allow companies to join forces to form larger purchasing pools in order to get group discounts

Rosenbloom Chapter 32, Page 870

Question 24

Reasons a small company should require EE contributions for medical insurance

Answer 24

1. Most EEs are accustomed to paying some level of contributions
2. Requiring a contribution motivates EEs who have other coverage options to use those options
3. It is easier to require contributions beginning at the plan’s inception than it is to start requiring contributions at a later date
4. Requiring a contribution can help avoid legal problems since the contribution makes it clear who is covered by the plan versus who opted out

Rosenbloom Chapter 32, Page 874

Question 25

Considerations when setting EE contribution levels for an ER health plan

Answer 25

1. Total compensation philosophy - this includes how compensation is divided between salary and benefits. Some employers allocate a larger portion of total compensation towards benefits
2. Benefits Budget - Many ER budgets are not keeping pace with increases in the cost of health care, so a greater portion of costs must be paid by EEs
3. Benefit competitiveness - ERs must consider the total benefit structure compared to other ERs with whom they compete for talent
4. Collective Bargaining - this leads to union groups often having better health coverage and subsidization than non-union groups at the same company
5. Legislative and regulatory issues - new laws may cause ERs to change benefits or EE contribution levels. For example, ACA affordability threshold (contributions being no more than 9.5% of household income) resulted in some ERs reducing required contributions.

GHDP-106-16: HealthPlan Contribution Strats/Dev for ERs, Page 1

Question 26

Approaches for setting ER contribution levels for an ER health plan

Answer 26

Two Basic Approaches:

1. Defined Benefit - such as setting the EE’s contribution equal to a specified % of premium
2. Defined Contribution - the ER provides a defined dollar subsidy regardless of plan choice

Other levers (or strategies) the ER may use:

1. Income-based contributions - require a greater level of contribution from higher-paid EEs
2. Dependent subsidy or spousal surcharge - require a greater level of contribution to cover dependents
3. Health incentives - implement wellness incentive programs where EEs receive a premium education for health behaviors, such as completing a health risk assessment or receiving preventive services

GHDP-106-16: HealthPlan Contribution Strats/Dev for ERs, Page 3

Question 27

Types of group purchasing arrangements

Answer 27

1. Association Health Plans - Health coverage is sold to ER members of an association, such as a professional or trade association
2. Multiple ER welfare arrangements - established by two or more ERs or self-employed individuals in order to offer health coverage
3. Professional ER organizations - these provide various ER functions, in some cases taking on the administrative role of acquiring and obtaining health insurance for a group of ERs
4. Group Captives - multiple ERs form an insurance company to underwrite their own insurance, rather than buy insurance from a separate insurer.

GHDP-108-17: SG ACA Trends, Page 3

Question 28

ACA reforms that address the adequacy of coverage

Answer 28

1. Plans in the exchanges must cover EHBs
2. Standardized tiers of coverage based on relative cost-sharing
   a) 90% - Platinum
   b) 80% - gold
   c) 70% - SIlver
   d) 60% - Bronze
3. Insurers must provide first-dollar coverage of approved preventive services
4. Plans may not impose pre-existing condition exclusions
5. There is a cap on enrollees’ annual OOP liability

GHDP-108-17: SG ACA Trends, Page 5

Question 29

Alternative coverage options for low-risk small ER groups to remain outside the fully-insured market

Answer 29

These allow health groups to reduce costs by avoiding being part of the ACA single risk pool for small groups

1. Continue in plans that are exempt from many ACA reforms:
   a) Grandfathered plans - plans that existed before the ACA and are allowed to continue indefinitely as long as their benefits and cost-sharing structure do not change significantly
   b) Grandmothered/Transitional plans - plans that renewed in 2013 before the ACA’s primary benefit and rating reforms went into effect, and which most states allow to continue through 2017
2. Set up a self-funding arrangement - these often include stop-loss insurance with very low attachment point. So they mimic traditional insurance, but are exempt from most of the ACA’s market reforms.
3. Obtain coverage through group purchasing arrangements (separate list) - these lower costs by self insuring and pooling admin functions. They may also claim large employer status to avoid small group reforms.
4. Drop coverage entirely - the ER mandate does not apply to ERs with fewer than 50 EEs, and the ACA guarantees coverage to the EEs who are dropped (separate list for reasons why SGs do not drop coverage)

GHDP-108-17: SG ACA Trends, Page 6

Question 30

Reasons why more small employers have not dropped group health coverage

Answer 30

1. Small group premiums generally remained stable
2. The rollout of the individual marketplace was rocky, and there is uncertainty about the individual market
3. Offering ER-sponsored insurance continues to be an expectation as part of the business culture or necessary to compete for talent

GHDP-108-17: SG ACA Trends, Page 9

Question 31

The elements of a data collection request to an ER in order to advise on Health & Welfare benefits (EE Benefit Strategy)

Answer 31

1. Summary Plan Description (SPD) which includes EE eligibility and plan design details for the various benefits available to EEs
2. Documents detailing the cost for each benefit, splitting out the ER and EE portions
3. Contacts for medical, dental, vision, life, and disability providers to request detailed claims and enrollment data for the various programs
4. A census file, including demographic data (Age, gender, salary, years of service, etc.) as well as plan election information (medical, dental, vision plan elections and coverage tier)

GHDP-130-19: EE Benefit Strategy, Page 1

Question 32

Examples of overarching philosophy, guiding principles, and objectives developed average merging two ER groups (EE Benefit Strategy)

Answer 32

1. Provide tools and resources to encourage EEs to become better healthcare consumers
2. promote accountability for lifestyle and healthcare choices
3. Ensure affordable payroll contributions for lower paid workers
4. Minimize barriers to seeking appropriate healthcare which may be caused by high OOP costs
5. Utilize best-in-class and industry-leading solutions to maximize financial efficiency
6. Limit year-over-year volatility for EEs
   a) Minimize increase in payroll contributions
   b) Minimize disruption of existing patient/provider relationships, particularly primary care physicians (PCPs)
7. Maximize financial efficiency by offering high performance networks
8. Optimize EE health and well-being and productivity through effective care coordination and healthy lifestyles programs

GHDP-130-19: EE Benefit Strategy, Page 2 and 5

Question 33

Examples of objectives for a new benefits structure after merging two ER groups (ER Benefit Strategy)

Answer 33

These are actionable items that should follow the guiding principles:

1. New medical benefit structure should be close to cost neutral to the current separate programs
   a) Limit year-over-year trend in ER cost share for medical benefits to X%
   b) Limit total benefits spend to a given cost on a per EE basis
2. Maintain current competitive position to comparator groups with respect to overall company subsidy for medical benefits
3. Offer medical benefits that cover the same % of charges as local ERs along with similar payroll contributions
4. Minimize provider disruption, particularly disruption of member relationships with their PCP
5. Retain the parent companies salary banded contribution structure to increase affordability for lower paid EEs
6. Phase out old plan designs that are less prevalent
7. Retain a highly efficient staff model HMO plan (considered best-in-class)
8. Complete a vendor selection process to identify the best-in-class medical carrier with the lowest cost of care for the combined population
9. Minimize the number of EEs who would be negatively impacted by benefits changes
10. Manage the impact of adverse selection
11. Implement medical plan designs that foster participation in HSAs

GHDP-130-19: EE Benefit Strategy, Page 2 and 5

Question 34

Key terms needed to discuss the ER Shared Responsibility (ESR) - (ER Benefit Strategy)

Answer 34

1. Minimize Essential Coverage (MEC) - MEC plans cover all essential benefits, including hospitalization, outpatient and physician services, and prescription drugs
2. Full-Time EE (FTE) - is an EE who works an average of 30+ hours / wk, measured monthly (130 hours is a monthly equivalent of at least 30 / wk
3. “Affordable” coverage is if the FTE required contribution for self-only coverage under the medical plan does not exceed 9.5% of their household income for the taxable year
4. Minimum actuarial value (MV) - plan must pay at least 60% of covered services
5. Federal or State Insurance Exchange - an online marketplace where consumers may shop for qualified insurance coverage and request a federal subsidy

GHDP-130-19: EE Benefit Strategy, Page 3

Question 35

Penalties that apply if the ACA enacted ESR rules are not met (ER Benefit Strategy)

Answer 35

1. U.S. Code Section 4980H(a): Penalties may apply if an ER:
   a) Does not offer MEC to at least 95% of its full-time EEs (and their eligible spouse dependents) and at least one FTE enrolls in an exchange (state or federal) plan and receives a federal subsidy to assist with payment of the monthly insurance premium
   b) The penalty is $2,000 per year for each FTE (less 30 EEs). The fee is nondeductible for income tax purposes and the ER pays regardless of whether some EEs elected ER provided coverage. The fee is increased annually after 2014
   c) The penalties do not apply to ERS with fewer than 50 FTE in the prior year
2. U.S. Code Section 4980H(b): Penalties apply if an ER:
   a) Offers MEC for at least 95% of its FT EEs, but coverage is either “unaffordable,” or does not provide MV
   b) The penalty is $3,000 per year for each FTE who enrolls in an exchange plan and receives a federal subsidy. The fee is nondeductible for income tax purposes and is increased annually after 2014
3. The ER must do some reporting to show compliance with MEC
   a) IRC Section 6055 reporting focuses on enrollment in MEC
   b) IRC Section 6056 reporting focuses on the offer of MEC to FTE’s

GHDP-130-19: EE Benefit Strategy, Page 3

Question 36

Steps to understand how benefit designs impact the company financials after merging two employer groups (EE Benefit Strategy)

Answer 36

1. Determine “total cost rates”, which represent the average expected cost PEPM paid by the plan (claims and administrative expenses)
   a) These rates are also often referred to as premium equivalent rate
   b) The rates will vary by coverage tier (EE only, EE+SP, etc)
2. Determine the enrollment distribution. Use current enrollment by plan and coverage tier and make “migration” assumptions about which plans EEs will choose once the merger is complete
3. Determine EE contributions (can vary by salary and coverage tier)
4. The “company subsidy” is the difference between the total cost rates and the EE contribution
5. The total company cost is determined by cross-multiplying the company subsidy with the enrollment for each group of EEs form whom the subsidy varies

GHDP-130-19: EE Benefit Strategy, Page 6

Question 37

Make up of an HDHP

Answer 37

1. HDHP has a specific meaning under the IRS code to be accompanied with an HSA
2. An eligible plan has cost share limits with minimum deductibles and caps on OOP Max (OOPM)
   a) In 2019, self only coverage has a min. ded of $1350 and OOPM Cap of $6750
3. The plan must have limited first dollar coverage
   a) The deductible must be met before any other cost sharing can be applied, except for preventative care
4. For self only coverage, an embedded deductible is used while for family coverage the deductible is aggregate
   a) If the individual deductible is less than the minimum deductible for family coverage, then the family deductible is required to be administered an aggregate deductible basis

Consumers to the Rescue?, Page 2

Question 38

Make up of an HSA

Answer 38

1. The Savings Account is owned by the individual EE
2. Either an ER or an EE can contribute to the account
3. The account can be used to pay the cost share of the HDHP or other qualifying expenses
4. Account contributions are exempt from personal income tax
5. Contributions are limited to a specific amount no matter if an ER, individual, or both are contributing to the account
6. The account also acts like tax-advantaged retirement account since amounts can be invested and accumulate interest free over time
7. As long as funds in the HSA are used for eligible medical expenses, they remain tax-free at the time of withdrawal

Consumers to the Rescue?, Page 2

Question 39

Comparison of Key Features of Health Care Accounts

Answer 39

1. Who Owns the Account?
   HSA: EE/Ind
   HRA: ER
   FSA: ER
2. Who can Contribute?
   HSA: EE/IND and ER
   HRA: ER
   FSA: EE and ER
3. Tax Ded Contributions?
   HSA: Yes
   HRA: Yes (ER Contributions ded from gross income)
   FSA: Yes, except LTC contributions made by the ER
4. Contribution Limits
   HSA: $3,500 / $7,000 (2019)
   HRA: Unlimited, except small ERs
   FSA: $2,700 (2019)
5. Rollover Funds?
   HSA: Yes
   HRA: Yes, but not required
   FSA: Small amount allowed; Most don’t
6. Distributions Tax Free?
   HSA: Med, Rx, Dent, Vision, LTC Prem, MediCare Prem
   HRA: Med, Rx, Dent, Vision, Health Prem, LTC Prem, and Limited Expenses
   FSA: Med, Rx, Dent, Vision (only ones listed)
7. ineligible Distributions
   HSA: Amounts covered under other plans (Penalties)
   HRA: Amounts covered under other plans
   FSA: Health Prem, LTC Prem/expenses, and amounts covered under other plans
8. HDHP Required?
   HSA: Yes
   HRA: No, but can be used with one
   FSA: No, but can be used with one

Consumers to the Rescue?, Page 4

Question 40

Consumer Choice and Empowerment that is encouraged through the use of HDHPs

Answer 40

1. Saving for health care services: Account fund ownership encourages regular deposits
2. Selecting appropriate treatment venues: For example, using urgent care instead of the emergency room
3. Avoiding unnecessary care and/or avoiding those treatments that have marginal benefit
4. Brand to Generic drug substitution: generic drugs have lower costs and lower cost trends
5. Comparing quality ratings of providers: using online tools
6. Negotiating prices with providers, particularly for costs under the deductible
7. Improving their own health and taking other illness avoidance measures: financial incentives are aligned with health improvement

Consumers to the Rescue?, Page 4

Question 41

Situations where consumer engagement is less likely to have an impact even under a HDHP

Answer 41

1. Urgent care needs without time to engage in proactive consumer behavior
2. Individuals with higher cost chronic care needs are more likely to hit their own out-of-pocket limit

Consumers to the Rescue?, Page 5

Question 42

Important Impacts of HDHPs

Answer 42

1. The probability that a given market average risk member will exceed a given deductible
   a) For $1,350 and $3,000 deductibles there is a 48% and 32% chance respectively
2. As most members have access to account funds to help pay for point of service claims less than the deductible, it will erode the impact of the HDHP
   (First impact is plan design, second is the account fund)
   a) $1,350 -> 00% Coins -> +4.0% Impact -> 1% - 4% Impact
   b) $3,000 -> 20% Coins -> -7.0% Impact -> 2% - 6% Impact
   b) $6,000 -> 40% Coins -> -15% Impact -> 1% - 7% Impact
3. The account funding in the above table is assumed to be half the deductible
4. The Impact of the account funding is likely to be on the lower side of the cited ranges if the EE owns the account (HSA), but on the higher side if an ER owned account such as an HRA or FSA is used

Consumers to the Rescue?, Page 6

Question 43

On a raw level, factors that primarily drive HDHP cost savings

Answer 43

1. Relative health of individuals selecting the different plans
2. The utilization impact arising strictly from plan design and funding
3. Cost savings resulting from increased consumer engagement
4. Note that HDHPs have not shown a clear ability to end the cost curve beyond initial impact

Consumers to the Rescue?, Page 7

Question 44

Factors that could make HDHPs more effective

Answer 44

1. Cost transparency: Price shopping in this market is still difficult
   a) Prices can be different based on network discounts
   b) Many providers don’t even know the costs of their own procedures
   c) Claims costs may differ because of factors that are not known before a procedure
2. Discussions between providers and patients particularly in:
   a) Value based care arrangements
   b) “reference based” Plans
3. Pre funding of HSAs at the beginning of the calendar year
4. Allowing more first dollar coverage to curb the fear of members forgoing necessary care
5. Lengthened consumerism: Allow more design flexibility, allow a longer coinsurance period (lower deductible paired with a higher out-of-pocket max)

Consumers to the Rescue?, Page 7

Question 45

Categories of regulatory guidance that have been proposed to change HSAs

Answer 45

1. Expansion of plans that can be paired with HSAs
2. Expansion of contributions made to HSAs
3. Expansion of major medical use of HSA funds to a broader variety of expenses
4. Expansion of non-major medical use of HSA funds

Consumers to the Rescue?, Page 9

Question 46

Types of Flexible accounts in Canada

Answer 46

1. Health spending account (non taxable if requirements are met) - May cover any health care expenses that would be tax deductible under the Income Tax Act, as long as they are not covered by the provincial plan or other private insurance
2. Personal account (taxable) - may cover a wide range of benefits, at the ER’s discretion, such as child care, financial counseling, ore even sports equipment or gym memberships
3. Executive perquisite account (taxation depends on the taxability of covered expense) - normally administered separately from the flexible plan

GHDP-132-19 Chapter 7, Page 153

Question 47

Advantages to the ER of offering flexible accounts (Canadian Flexible Accounts)

Answer 47

1. Expand the types of benefits offered with little or no additional ER cost
2. Add a new benefit without subsidizing an expensive area of coverage
3. Offer a benefit that might appeal to only a small segment of the EE population
4. Contain costs (by setting a defined contribution) while providing EEs with flexibility over how funds are spent
5. Test the appeal of flexible benefits without committing to a full-choice program

GHDP-132-19 Chapter 7, Page 154

Question 48

Additional advantages of health spending accounts (Canadian Flexible Accounts)

Answer 48

(in addition to the advantages of flexible accounts)
1 . Deliver compensation tax effectively
2. Encourage EEs to self-insure predictable and budgetable expenses (dental and vision, for ex.)
3. Soften the impact of higher EE cost sharing
4. Replace existing coverage, allowing the ER to gain control of future cost increases
5. Obtain the maximum value from health benefits under the Quebec tax system

GHDP-132-19 Chapter 7, Page 154

Question 49

Requirements for Canadian health spending account reimbursements to be tax-free

Answer 49

1. An EEs election to allocate fund to the account must be made in advance of the plan year and must be irrevocable. An exception is allowed for family status changes.
2. The plan must require forfeiture of any unused account balances, using one of the following methods:
   a) One year rollover of unused balances - funds allocated to the account can be used to reimburse current year expenses or rolled over to next year’s account. Unused amounts are forfeited at the end of the second year.
   b) One year rollover of unpaid claims - roll over unpaid claims from the prior year to be paid by this year’s account balance. Funds remaining at the end of the year are forfeited

GHDP-132-19 Chapter 7, Page 156

Question 50

Sources of funds for health spending accounts (Canadian Flexible Accounts)

Answer 50

1. New contributions by the ER
2. ER savings from reducing medical plan costs
3. EEs directing employer-provided flexible credits to the account
4. EEs allocating a part of annual bonuses or company savings plan matches to the account

GHDP-132-19 Chapter 7, Page 166

Question 51

Considerations for designing flexible accounts (Canadian flexible accounts)

Answer 51

1. Type of approach - decide whether to introduce a flexible account and which types of accounts to offer
2. How will the presence of the account impact other benefit choices?
3. Funding considerations - for example, decide if contributions to the accounts will be monthly or annually
4. Should there be limits on how much the EE can allocate to the flexible account?
5. How will mid-year benefit changes be handled? - this will vary by account type and the reason for the change (family status change, termination, retirement, death)
6. Disposition of funds at year end - funds are forfeited, rolled over, or (for personal or perquisite accounts) paid in cash

GHDP-132-19 Chapter 7, Page 167

Question 52

Advantages and disadvantages of health spending accounts replacing health and dental plans

Answer 52

Advantages to the ER

1. Fixed contribution (gives ER control over benefit cost increases)
2. Contributions to the account are tax deductible
3. The accounts are easy to administer and communicate

Advantages to the EE

1. Accounts provide flexibility as to how the money is spent
2. Benefits are non-taxable to the EE
3. Can be used to buy insurance
4. EE can decide what expenses are covered

Disadvantages

1. Benefits are inadequate since there is no insurance
2. Inequities
   a) Flat contribution per EE means families receive relatively less protection than singles
   b) % of pay contribution means lower-paid EEs receive less protection than higher-paid EEs
3. Inflation is borne by EEs

Question 53

Plan design approaches for controlling adverse deviation

Answer 53

(first letter spells out the mnemonic PD Controll)
1. Parallel design should be maintained - e.e.g, include vision and ortho at the same coverage in all plains
2. Delay full payment - have lower benefits during a waiting period of 6 to 12 months
3. Certain coverages can be grouped together - predictable expenses (such as supplemental medical)
4. Offer a health spending account instead of insurance - useful for vision and dental
5. Not allow a large spread between options - could be done by requiring a core coverage level
6. Test The program with EEs - to bring to light potential design weaknesses
7. Require proof of insurability for increases in coverage
8. Only allow mid-cycle changes if a life-changing event occurs
9. Limit the frequency of choice - allow benefit changes only every 2-3 years, instead of annually
10 Limit the degree of change - restrict changes to one level of coverage per year (staircase rule)

Mnemonic (PD Controll)

GHDP-132-19 Chapter 16, Page 339

Question 54

Pricing Strategies for controlling adverse selection

Answer 54

1. Risk-based pricing - price options in a way that reflects the expected cost of the benefit (e.g., vary rates by age, gender, and smoker status)
2. ER Subsidization - subsidize prices to encourage broad participation, which will cause a better spread of risk

GHDP-132-19 Chapter 16, Page 341

Question 55

Options for spreading the cost of adverse selection

Answer 55

1. Load the prices of the lesser-valued options - reduces the reward for opting down
2. Load the prices of the highest-valued options - this may cause more EEs to opt down
3. Spread the cost of averse selection over the price of all options

GHDP-132-19 Chapter 16, Page 343

Question 56

Comparison of the Core Attributes of public and Private Exchanges

Answer 56

Who Sponsors?
Public - Govt
Private - ER

Who Enrolls?
Public - Individuals and SG
Private - EEs and Retirees

Types of coverage Available
Public - Medical and Prescription drug
Private - Medical, prescription drug, dental, vision, voluntary

Plan Designs available
Public - AV of 90%/80%/70%/60%
Private - Exchange operator and ER defines the plan designs

Who pays?
Public - Individual and SG. IND subsidies and small business tax credits exist
Private - ERs provide a subsidy and members pay the rest

Practical Guide to private exchanges, page 12

Question 57

Common elements of private exchanges

Answer 57

1. EE choice - Private exchanges offer more plan design options than traditional ER-sponsored plans
2. ER Subsidies - The ER typically makes a defined contribution
3. Ancillary product offerings - products such as dental and vision are often offered alongside medical and pharmacy benefits
4. Online enrollment and decision-making tools - these tools allow members to evaluate their health care needs, understand their ER’s subsidy, and elect benefits that meet their needs
5. Benefits administration - most private exchanges offer end-to-end benefits administration, including enrollment, eligibility, customer service, and billing

Practical Guide to private exchanges, page 12

Question 58

Advantages and disadvantages of private exchanges

Answer 58

Advantages

1. Increased EE choice
2. Cost-savings potential from increased competition across carriers and best-in-class carrier pricing
3. Increased consumerism from members buying-down benefits as a result of a transparent defined-contribution approach
4. Robust online decision-support tools and customer service
5. Benefits administration simplification
6. Shift of financial and regulatory risks (for fully-insured models)
7. Cost predictability (for fully-insured models)
8. Improved cost transparency

Disadvantages:

1. Additional expenses for exchange operator financing
2. Less control over plans design, clinical management, and member outreach
3. The need for the ER to increase the defined-contribution amount over time
4. Other member concerns, such as loss of plan-sponsor support and less generous benefits

Practical Guide to private exchanges, page 13

Question 59

Considerations for determining the ER’s optional defined-contribution amount for a private exchange

Answer 59

1. Current funding approach - what is the employer’s current philosophy around subsidies and how does it compare to a defined-contribution approach?
2. Variations by coverage tier - does the ER want to subsidize dependents at a different level than the EE?
3. Member impact - how does this impact the member payroll contributions and what sort of dissatisfaction could arise?
4. Financial goals - does this change meet the ER’s financial goals?
5. Competitive pressures - how does the subsidy compare to the benefits provided by other organizations that compete for similar talent

Practical Guide to private exchanges, page 15