RichBaileyFSA MAAA FCARichmond VA IsitTimeforEmployerstoMoveAwayFromtheTraditionalWaysofProvidingEmployeeBenefits November3 2004 1 Agenda TheEnvironmentTheCatch 22PathsAwayfromTraditionalDelivery TwoCampsOpportunitiesAlongPath2TheAnswerAdditionalTopics 2 Agenda TheEnvironmentMedicalTrendsLegislationMarketplaceChangesPopulationDemographicsEmployerOutlookTheCatch 22PathsAwayfromTraditionalDelivery TwoCampsOpportunitiesAlongPath2TheAnswerAdditionalTopics 3 Double DigitIncreaseforSecondYearinaRowPeremployeecostsinexcessof 5 600peryear 4 AnnualCPITrendU S healthcarecostsrise despitecontinuingeconomicrecession ThegapbetweenCPI Uandmedicalcarecomponentisincreasing 5 ComparisonofOverallGrowthCumulativemedicalcareCPI89 greaterthanoverallCPIsince1967 DatabasedonJanuary1CPIvalues 6 Employers CostIncreasesOut PaceOtherIndicatorsLargestincreasesince1990 allemployers 7 AggregateHealthCareSpending 1980 2010 Governmentportionofpaymentsincreasing totalprojectedtobeover 2trillionby2009 Source CMS 8 MedicalTrends PopQuizHowmanyyearswillittakegrossmedicalcoststodouble assumingnospecificemployerinterventionsornationalhealthcare 10ormore98765orfewer 9 MedicalTrendsResponsesfromagroupof25actuarieswhohadtimetogettheircalculators 10 Legislation MedicarePrescriptionDrugsIfmadeintolaw willhavemajorimpactonretireebenefitsandstrategiesInitialconfusionaside shouldhavepositiveimpactonretireeplansExpectcostshiftingtonegativelyimpactactiveplansEEOCProposedchangesinADEAregulationsClinevs GeneralDynamicsWellsFargocaseAppearstoallowpre funding andtax deductibility ofentireretireeliabilityanILPapproachwon tbeexactlysamenumberasFASliabilityfundinginyears2 wouldbelimitedtoservicecostIRSweighingitsoptions 11 ProposalstoIncreaseCoverageAmongEarlyRetireesFewgovernmentprogramsexceptforfinanciallyindigent COBRAextensionsand orMedicarebuy insProhibitionsonpost retirementbenefitreductionsExpandedpre fundingforretireemedical Stillfewviableproductsforpre 65inindividualmarketthatovercomeaccessandaffordabilityissues 12 ADEAIssuesImpactonretireemedicalcoverage AgeDiscriminationinEmploymentAct ADEA prohibitsdiscriminationagainstpersonsage40orolderintermsandconditionsofemploymentAge baseddistinctionsinemployeebenefitplansarepermissibleonlyif Aspecificstatutoryexceptionapplies orEqualbenefit equalcosttestissatisfiedPlanmustprovideequalbenefitsforolderandyoungerworkers orPlanmustincurequalcostsforolderandyoungerworkersThirdandSixthCircuitCourtsreachdifferentconclusionsEEOCreviewingADEAregulations 13 MarketplaceChangesConsolidationofMajorHealthCareCarriersEmployeroptionsaregreatlyreduced carriershavemoreclout 14 MarketplaceChangesPBMconsolidationcontinues threemajornationalPBMsremain 15 PopulationTrendsAgingbabyboomerswillincreasetheelderlyandnearelderlypopulations 16 NegativeTidalWaveofAvailableTalentPoolof primeworkers willbedecreasing 17 ImpactofDemographicsonHealthCareCostCostincreaseswithage 18 HealthDeteriorationAcauseandaconsequence Weeattoomuch 64 5 ofadultsoverweight Populationwithdiabetesincreasedover50 inlastdecade Overweightisroughly10to30poundsoveranidealweight Obesityisroughly30poundsoveranidealweightSource NationalHealthandNutritionExaminationSurvey 45 0 47 0 47 0 56 0 64 5 19 IssuesFacingBusinessesTheperfectstorm Lowambientinflation highmedicalinflationAdvancesinmedicaltechnologylikelytoleadtohighercosts difficultdecisionsLegislativeuncertaintyConsolidatingmedicaldeliveryandfinancingsystemAnagingworkforceIncreasedlongevitySlowingeconomyDisappearingover fundedpensionplansFew ifany obviousandeasyalternativestomanaginghealthcarecosts 20 EmployerOutlook EnvironmentaloutlookspurringemployeractionEmployersacutelyawareoftrendsHeightenedinterestincostsavingstrategies activeandretiree Greateremphasisonlongertermcostprojectionsandonthe bottomline Projectionresultshaveinduced fightorflight responses 21 RetireeMedicalCoverageEmployerscontinuetodropretireemedicalcoverage 22 Agenda TheEnvironmentTheCatch 22PathsAwayfromTraditionalDelivery TwoCampsOpportunitiesAlongPath2TheAnswerAdditionalTopics 23 TheCatch 22 Reducingemployercosttypicallyimpliesincreasingemployee retireecostEventuallyrunsagainstemployer ssensibilitiesregardingfairness paternalism ifpresent andtheconceptofbenefitsgenerallyExample FAS106 Lowermyliabilitiessignificantlybutdon tdoanythingharshtoourretirees theywon tacceptit Totheextentthatretireesrepresentthebulkoftheliability thisisaverydifficultpropositionOpportunitiesexisttochangeeligibility design etc forfutureretireesIfwedon ttakecostoutofthesystem eithertheemployerortheemployees retireeswillpaytheincreases 24 Agenda TheEnvironmentTheCatch 22PathsAwayfromTraditionalDelivery TwoCampsOpportunitiesAlongPath2TheAnswerAdditionalTopics 25 PathsAwayfromTraditionalDelivery TwoCamps EmployersthatbecomemoreinvolvedinChangingemployeebehaviorChangingproviderbehaviorChangingprovidersthattheyworkwithChangingthelawsEmployersthatreducetheirinvolvementbyIncreasingemployeeresponsibilityLimitingemployercostLimitingemployerrisk 26 EmployersBecomingMoreInvolved C