Professor Thomas E. Murphy

The Blog also includes some discussion of HRM and Global Management course topics that I have taught at Miami University and various business schools in Europe.

Okay, where do we go from here?

(1) ERISA and the SPD - U.S. Supreme Court

On May 16, 2011, the U.S. Supreme Court held that where the Employer’s SPD provided a more generous interpretation of retirement benefits that conflicted with those in the Plan Document, the Courts cannot hold that such miscommunications in the SPD constitute enforceable “terms of the plan.” A suit for compensatory damages by the misinformed Plan participants is not supported by Section 502 of ERISA. CIGNA v. AMARA. Another door for relief, however, was opened. The Court did, however, indicate that there could be “equitable” remedies available to the plaintiffs under ERISA. These could involve instances where there is injurious reliance by the participants on a miscommunication of Plan terms by the employer sponsor. In such instances, a Court can consider injunctive and other equitable remedies such as “estoppel,” “surcharge,” (monetary remedy for breach of fiduciary duty) or “reformation” of the Plan. The case was remanded to the original trial court for consideration of its findings. The Case will put new pressure on employer sponsors, their outsourced call centers handling employee request for Plan information, and TPAs to make sure that SPDs and other forms of participant communications conform to the terms of the Plan document. The case is expected to open new avenue of litigation where similar facts are present.

(2) OBAMA CARE (The Patient Protection and Affordable Care Act)

There are now several diverse opinions from the US Courts of Appeals concerning the Constitutionality of the Patient Protection and Affordable Care Act (PPACA) of 2010. On November 14, 2011, the Supreme Court agreed to review the constitutionality of the Act in March, 2012. A decision can be expected in the late spring. Here are some of the decisions that have created a conflict in the Circuits.

First, the US Court of Appeals for the Eleventh Circuit (Atlanta, Georgia) in State of Florida et. al. v. US Department of Health and Human Services ruled that the individual mandate included in the PPACA went beyond Congressional legislative authority under the Commerce Clause of the US Constitution. The mandate requires a fine in some instances for those who do not obtain insurance. The Court applied its ruling only to the individual mandate provisions of the Act. The litigation involved 26 States that sued the Secretary of Health and Human Services and others contesting the Constitutionality of the Statue; it was decided on August 12, 2011.

The opinion is in direct conflict with decisions by the US Courts of Appeals for the 6th Circuit (Cincinnati, Ohio) and the 4th Circuit (Richmond, Virginia.) The 6th Circuit held in a case titled Thomas More Law Center v. Obama, (June 29, 2011) that the law, in particular the individual mandate to acquire health insurance meets US Constitutional standards and does not go beyond Congress’ authority to regulate commerce under the Constitution’s Commerce Clause.

In September of 2011, the Court of Appeals for the 4th Circuit (State of Virginia v. Sebelius) reversed a decision by the District Court in Virginia that held the law’s individual mandate went beyond Congress’ power to regulate commerce and, therefore was unconstitutional (see analysis below). The 4th Circuit decision was based upon a procedural issue, namely that the Attorney General of Virginia did not have “standing” to challenge the law. It also ruled on a related case brought by Liberty University that its injunctive challenge to the “tax” (i.e. the non-compliance fines) portions of the law violated an anti-injunction statute which provide that the tax must be imposed before it is challenged. Since the fines for failure to acquire health insurance do not become effective until 2014, the challenge was nullified.

In November, 2011, the DC Circuit Court of Appeals upheld the individual mandate as a lawful exercise of Congressional power under the Commerce Clause and also not violative of the petitioner’s Constitutionally based religious freedoms. See: Susan Sky v. Holder.

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Here is some background on the theories of the PPACA cases involving its constitutionality:

(a) The rationale for the mandate was to mitigate cost shifting arising when persons receiving medical treatment but are without insurance do not pay their medical providers. This results in uncompensated care delivered by providers who then shift these costs in the form of higher reimbursements to the insured. The government notes that cost shifting affects the overall costs of the health care market and that virtually everyone in the US participates in this market. So, the interests of Congress in making insurance more accessible is dependent upon affordability and is clear and is authorized by the Commerce Clause. The supporters of the law argue that the anit-cost shifting policy behind the PPACA does have a “substantial effect on commerce.” The Government also argues that the fines imposed on those who defy the mandate will help finance the other protections of the law such as the prohibition against the use of restrictive pre-existing exclusions.

(b) The theory challenging the constitutionality of the individual mandate is that Congress is not authorized by the Commerce Clause of the US Constitution; it goes beyond their authority to legislate.  The challengers argue that the decision not to purchase health insurance is not an economic activity that is subject to regulation by the Commerce Clause of the US Constitution, and thus the law is an exercise of “prohibited police power to compel individuals to enter into private commercial transactions.”

Note: An issue for class discussion could be: can the PPACA of 2010 effectively survive without the individual mandate or is §1501 of the Act an integral and essential design feature which, if nullified, would make the entire Act unworkable?

Finally, the Health and Human Services Department decided that the long-term care provisions of the Act (CLASS) will not be enforced.  CLASS was intended to provide long term care benefits to those individuals who voluntarily enrolled and agreed to pay the premiums. HHS, however, this month (October 2011) concluded that it was not financially sustainable and will not be implemented.

Last Revised: November 14, 2011

Homework

(1) Medicare Reform - Which way is best?

For your homework, write a memo concerning the future of Medicare in the U.S. This should include a detailed analysis of its current fiscal state, its expected trends for the next 10 to 20 years, and an in-depth description and evaluation of the alternative solutions that will enable a continuation of some form of meaningful, government supported health care for the elderly.

Your paper should be more than a recitation and description of the issues and alternatives. It should include the supporting economic and social rationale for the various “solutions,” and original research sources, such as the Medicare Actuarial reports, Society of Actuary reports, reports from Congress, the President’s National Commission on Fiscal Responsibility and Reform, and other organizations that study and recommend public policies. Your memo should also contain a comprehensive analysis of the potential efficacy of each approach. The current Medicare Reform debate has been fueled by House Representative Ryan’s proposal on Deficit Reform and the 2012 Budget. Ryan’s proposed budget includes a dramatic new approach to Medicare. There is some reasonable expectation that as a result of the Congressional compromise and accompanying legislation pertaining to the increase in the debt limit and deficit reduction, that the select 12 Member Congressional Committee will look closely at both Medicare and Social Security reform. Thus, this homework becomes very relevant and timely.

Careful attention should be paid to the quantitative and qualitative impact the “solutions” will have on the problems and challenges of Medicare. It is important that the memo include your thinking, your ideas, and your analysis as well as that of the “experts.”  I should note that in Chapter 12 of the text, I describe how Medicare works, and more importantly, from page 375 through 384, I discuss several approaches to Medicare Reform.

Your homework will be graded based upon the quality of your research, the comprehensiveness of your discussion, the relevance of your analysis, and the clarity and organization of your writing. You should write the paper so as to provide the reader with an in-depth and clear understanding of all of the challenges and purported solutions relating to the continuation of a government supported health care plan for the aged. Where information is obtained from other various sources you should provide end notes identifying the sources.

(2) The Fail to Plan, Plan to Fail Imperative — Employer’s Strategy with Respect to Health Care Reform (PPACA of 2010)

You are the Finance/HRM executive of an employer with 100 employees. You currently offer a typical HDHCP (PPO) with an HSA to your employees. The Plan was initiated before March 2010. Employees pay tiered premiums, and when considering all health cost sharing features, a total of about 35% of the cost of the plan. You contribute $20 per month to each HSA and have a Wellness Program with cash incentives that are deposited in the HSA account.  After reviewing the essential features and issues pertaining to the new law, which are included in a Post below, as well as other independent research you might peruse, prepare and submit for your CEO a “discussion memo” that will facilitate the development of a comprehensive, step by step health care insurance strategy and plan for each of the 4 years after passage of the PPACA. The memo can be written in outline form and should be designed to educate the CEO as to what you as an employer must do in each year up to and including 2014, the relevant issues and alternative choices that your company might make, additional data or information you might need, a reference(s) to the provisions of the PPACA applicable to your company, and, appropriate recommended actions the employer should take.

Note: your discussion memo will evaluated based upon the comprehensiveness of the issues discussed, the clarity of the writing, the quality of the analysis, and the practical value to a CEO who is responsible for compliance with the new law. See: the June 14, 2010 U.S. Interim Final Rules on Grandfathered Status.

Other Question for Discussion:NOTE: the Deparments of Health and Human Services, Labor, are now issuing some permanent rules and regulations on several aspects of the Affordable Care Act. These include new rules on the requirement for preventive care insurance plans, new Medicare payment procedures for providers, and others. In order to know the latest, check these sites.

What is the fate of the remaining 7-10% of the citizens and residents who will not be covered by health insurance after 2014?

How would you characterize and briefly describe the main objectives of the Act? What design features of the Act are intended to effect these objectives?

How does the Act purport to reduce the cost of health care for employees, employers, individuals, and taxpayers?

Suppose a plan drops certain medical coverages or significantly raises deductibles. Would these steps result in a loss of “grandfather” status?

What if a plan sponsor of a “grandfathered plan” increased the employee share of co-insurance, such as changing from an 80/20 Plan to a 70/30?

Under what circumstances would an employer-sponsor intentionally give up its “grandfather” status? See the article: “Grandfather Regulations Under Reform,” July 6, 2010, and also Stuart, A., CFO Forum,“Health Plan Headaches,” September 2, 2010

Are the Interim Final Rules on Lifetime and Annual Limits (See Post on Chapter 8, Exercise No. 7) applicable to “grandfathered plans?” Must such plans eliminate lifetime maximums, ban pre-existing conditions, extend family coverage for children up to age 26?

The Act also requires limits on cost sharing for preventive care. The new Interim Final Rules on Preventive Care published on July 19, 2010 restrict cost sharing for preventive care. Do these rules apply to Grandfathered Plans?  See: The Interim Final Rules on Preventive Care).

Refer also to Exercise No. 7, end of Chapter 8. What types of preventive care fit under the “no cost-sharing” category? What is the policy underlying this provision and the Rules interpreting it? What impact both positive and negative is the provision likely to have?

Is there a possibility that over the years, many employers will allow their workers to migrate to the Insurance Exchanges and employer sponsored health care will disappear? Is this a positive or negative result? What factors would be relevant to answering that question?

What new markets, services, or other business opportunities might be created to maximize entrepreneurial opportunities due to the new law?

What will be the fate of PPO, POS, HMO, HDHCP, and Wellness Plans? Some argue that more employers will now choose HDHCPs. What are the limitations here now that the PP&ACA has passed. Are there new limitations on deductible amounts? Premium and other cost sharing?

Would the account balances of HSAs be considered as part of the “value” of the plan and possibly subject it to the excise tax that goes into effect in 2018? (See: Huff, C., “Reform could accelerate shift to HDHCPs,” August 3, 2010 at www.workforce.com. See also, an August 2010 Survey Results by the National Business Group on Health, “Large Employers 2011 Health Plan Changes.”

Is direct contracting between employers and providers still possible? Under what circumstances? What would be the advantage of such an arrangement?

What do you think will be the fate of retail “mini” clinics, staffed by Nurse Practitioners that are now found in supermarkets and drug stores? Explain.

When critics of the law say that it eliminates insurance underwriting and makes insurance companies “public utilities” what do they mean? Is this accurate?

What will be the consequences of the provision of the law that requires insurance companies with “excessive overhead” (measured in terms of medical loss ratios) to rebate their enrollees? The targeted MLR is 80%. Critics argue that in 2008 at least five companies in the small-group market in Minnesota had MLRs below 80%, with the lowest being 66%. From 2003-2006 in Texas, the average MLR in the small-group market was 72%, with some companies going as low as 22%. An 80% MLR would effectively terminate the marketplace in large segments of the country. See Hogberg, D., Investors.com (Investors Business Daily) August 19, 2010, What is the MLR (”overhead”) spent on? Insurance companies point out that they form provider networks, set treatment protocols, police for waste, process provider reimbursements, and provide customer service to the insured. What happens when the government arbitrarily sets limits on such expenses?

Some argue this MLR provision will eventually lead to a single payer, public option program.  How might this occur? Do you agree or disagree? Explain.

The Congressional Budget Office predicts the Act will cover about 25-30 million newly insured persons. Do we know how many of these persons were previously eligible for Medicaid and did not enroll?  Also do we know how many of the newly insured were covered by an employer sponsored health care plan, and although they could afford to pay the premiums chose not to?

Try to visualize how the Act will be administered and enforced? What has to be done and who will do it? What will be the basic government “overhead” components of the Act? Who must do what and how many do we need to do it?

What is the “health economics” rationale for Insurance Exchanges?

If the Exchanges do offer lower cost health care, how will this most likely be achieved? Are there any potential adverse, unintended consequences that might result?

What possible elements of the Act could lead to higher health care premiums in the private health care market?

What is the purpose and likely impact of the various new taxes (industry and high earners) that are part of the financing feature of the Act?

Will there be opportunities for cost shifting under the Act? Explain.

What is the likelihood of effective enforcement of the individual mandates?

Some economists have called the Act, “Access Reform” and not “health care reform.”  What do you think is meant by this distinction?

Would a “public option” have been a better choice for reform? Explain?

Check Chapter 13 of Benefits and Beyond, and determine which European country has a public health care plan most similar to this one?

How does the Act mitigate, if at all, the fiscal difficulties of Medicare and Medicaid?

Will provider reimbursements determined by the state and federal government agencies ultimately lead to delays in health care delivery or even rationing? Explain.

What impact do you think the law will have on COBRA? HIPAA? Are they dead? Explain.

Can a young person who takes advantage of continued coverage under his parent’s dependent health care coverage but who now reaches age 26 continue coverage under the COBRA provisions of his parent’s plan?

How will the provision requiring employers to provide time and space for breast feeding work? Think about it. What are the issues here? See: Fact Sheet No. 22: U.S. Department of Labor, Wage and Hour Division, July 10, 2010.

Are HIPAA and COBRA essentially dead? What impact will the law have on the pre-existing conditions exclusions provisions of HIPAA? Who will need to extend coverage when a COBRA “life event” occurs after 2014?

Does the Act advance the idea of creating a quality- based market among health care providers that would ultimately reduce the overall costs of health care and make more affordable and accessible?

Some argue that the Act will increase or sustain the current rate of unemployment. What is the basis for this point and how would you argue against it?

How will the government control premium rates and rate increases among the insurance companies participating in the Insurance Exchanges? What are the likely consequences of this?

What will be the likely impact on pharmaceutical companies, device makers, insurance companies, and tanning salons? Will this impact affect consumers? How?

The Act requires that a Plan that makes dependent coverage available to the children of its covered participants, must continue coverage of such dependent children up to age 26. The Act also eliminates any imputed tax consequences to the employee under such coverage circumstances. The question is: what is a dependent child? The Act says one thing, but there is a move afoot to enlarge the definition. Does it include custodial arrangements, grandchildren living with grandparents, other shared domicile settings, or financial dependency of a pre-age 26 upon a covered worker? The American Benefits Council and the HR Policy Association have raised these question with the D.O.L. in a letter dated August 11, 2010 (RIN 1210-AB41).

Will there be sufficient primary care providers to service the newly covered insured? If not, what is likely to happen? What should be done from a policy standpoint?

The Health Reform legislation includes a provision concerning a new government-sponsored Long Term Care (aka the “CLASS” program) Insurance plan. Employers can offer the plan to their employees and employees can authorize payroll deductions to participate. Check the article, “U.S. to sell long-term care,” in the July 16, 2010 edition of Retirement Weekly, vol. 8, No. 29. Answer the following questions: will the plan be totally voluntary? How will it be financed? Who will administer it? What is the underlying policy the law is designed to effect. Who will be eligible and what will be the benefits? Is the Law financially sustainable? What do you think?

Last revised: August 13, 2011

If you’re interested in “lighter” treatment of the new Act, you might want to watch a Video made by the Kaiser Family Foundation that was just published on November 17, 2010.

In addition you can access my Power Points for the following Posts: “My View,” Chapter 8 (Improving Access to Quality Health Care - Do We Need Reform), as well as Chapters 4 (Retirement Plans-Evolution and Design), 5 (Retirement Plans for Small Employer and Retirement Planning), and 9 (Benefit Legal Compliance). These can be found in the respective Posts for the Chapters. More Power Points for other Chapters will be posted soon.

The Posts on Health Care Reform are related to Chapters 6, 7, and 8 of the book, Benefits and Beyond.

This Post includes a description of the major points of the recently passed health care reform legislation. My purpose is to describe and explain these features for teaching purposes - not to provide a loose leaf benefit publishing service for benefit professionals. Also included will be some discussion points that Benefit teachers can raise in class after the students have read the Chapters and the relevant blog posts.

President Obama pushes health care reform in Congress

Patient Protection and Affordable Care Act of 2010

(Last revised: September 24, 2010)

Thomas E. Murphy

Highlights

This recently passed Act is intended to reduce the number of uninsured. The Act includes prohibitions against policy rescissions, having lifetime limits on health care spending, excluding any health related reasons for denying coverage (”guaranteed issue”), and denying or delaying coverage of pre-existing conditions. It also requires individual mandates to buy insurance and employer mandates to offer it. It creates state-based Insurance Exchanges where individuals and certain sponsoring employers can purchase health insurance presumably at lower costs. The major features do not go into effect until January 1, 2014.

The Congressional Budget Office estimates that 24 million persons will be enrolled in the Exchanges by 2019.  The Act prescribes the essential design features (called an “Essential Health Benefit Plan” or “Essential Coverage“) and benefits that health care plans must provide. Individuals who cannot afford to purchase health care will be subsidized while certain small employers who wish to offer it may also receive tax credits. Persons who work for companies that offer health care but require cost sharing by participants that exceed government prescribed thresholds, may opt out of the employer plan and obtain insurance through an Exchange. Their employers must provide financial support for this coverage.

Medicaid eligibility is changed to accommodate more participants. The subsidies and increased access to health care will be financed by increases in payroll taxes for Medicare, taxes on certain industries, changes in several health care tax deductions, excise taxes on “Cadillac” health care plans, and fines paid by non-complying employers and individuals. The Act calls for major reductions in Medicare spending including provider reimbursements.

Here are some specifics. Not all of the provisions of the Act are included.

Individual Mandate

Effective January 1, 2014, citizens and legal residents must obtain an essential health care benefit (or, more specifically, “Essential Health Benefit Plan.”) Failure to do so will result in fines described below.

Employer Mandate

Employers with more than 50 employees that do not offer coverage and have at least one full-time employee who receives a premium tax credit from the government to buy his own insurance will be assessed a fine of $2000 per full-time employee, excluding the first 30 employees. (Effective January 1, 2014)

Employers with more than 50 employees who provide health care coverage but who have at least one employee who receives a premium tax credit from the government, must pay a fine of $3000 for each employee receiving such credit, or $2000 for all full-time employees. (Effective January 1, 2014)

Employers with fewer than 50 employees are exempt from penalties. (Effective January 1, 2014)

Employers who offer essential coverage must also offer each employee with income below 400% of the Federal Poverty Level (FLP) and whose share of the premium is more than 8% but less than 9.8% of their annual income, the opportunity to opt out of the employer’s plan.  In such case, the employer must provide a free choice voucher that can be used to offset the premium required in an Insurance Exchange. The amount of the voucher shall be no more that the employer’s cost of its sponsored health plan. Employers who offer vouchers are not subject to fines. (Effective January 1, 2014)

Employers with more than 200 employees must auto-enroll its employees in their health care plan. Employees can opt out of coverage if the plan’s actuarial value (the average percentage of health care costs paid by the plan sponsor) is less than 60%.  (Effective January 1, 2014). In such cases the employer must provide a free choice voucher.

Employees and Individual Subsidies

Employees whose employers offer coverage are not eligible for premium credits unless the actuarial value of the employer’s plan is less than 60% or if the premiums required to be paid by employees is greater than 9.5% of the employee’s annual income.

For those whose annual income is between 133% and 400% of the FPL, the amount of the premium credits shall be based upon a formula whereby low income persons (e.g. 133%) will be expected to pay 2% of their annual income in premiums while those in the higher FPL levels will be expected to pay 9.5% of their annual income in health premiums. The contributions will be based upon the second level “silver plan” available in the Exchanges. Premium credits and cost sharing subsidies will be available only to U.S. citizens and legal immigrants.

Cost sharing subsidies for eligible individuals are intended to have the effect of increasing the actuarial value of the plan up to 94% for those whose income is between 100 to 150% of the FPL, 85% for those earning between 150% -200% of the FPL, 73% for those between 200% and 250%, and 70% for those between 250% and 400% of FPL. (Effective January 1, 2014)

Medicaid Coverage

Medicaid will be expanded to cover individuals with incomes up to 133% of FPL based upon modified adjusted gross income. All newly eligible will be guaranteed the essential coverage of health care benefits.  The federal government will finance this expansion of coverage by 100% from 2014-2016, by 90% in 2020 and thereafter.  Primary Care provider reimbursement rates will be 100% of those offered by Medicare rates for 2013-2014. (Effective January 1, 2014)

Abortion

There can be no premium or cost sharing subsidies used to purchase any health insurance plan that covers abortion except in those cases where the procedure is used to save the life of the mother or in cases of rape or incest. Where a plan covers general abortion procedures, the individual must pay that portion of the premium attributable to such coverage separately.

Insurance Reform

Lifetime maximums, pre-exiting condition exclusions for children under age 19, and rescissions based upon health status are prohibited not later than 6 months from the effective date of the Act. By 2014, insurance companies can no longer apply pre-existing exclusions to anyone, must guarantee issue of a health policy regardless of health condition, must minimize their costs of administration (”medical loss ratios”), must provide the prescribed essential benefits in their plans, must limit cost sharing so as to provide a minimum 60% actuarial value. All new plans must provide “first dollar coverage” - no cost sharing - for preventive care. Finally, insurance companies will be required to submit premium increase proposals to a joint state and federal review group for approval.

Small Business Credits

Those small employers who offer health care and have no more than 25 employees whose average annual employee wage are less than $50,000 per can receive a tax credit of up to 35% of the employer’s cost of the plan, provided this cost represents at least 50% of the total or 50% of the benchmark premium. (Effective: 2010-13).

A 100% tax credit will be available for those employers with 10 or fewer employees whose annual average wages are less than $25,000.

After 2014, certain small businesses as defined by the law will be eligible to receive tax credits from 50% to 100% of the premium paid to an Insurance Exchange on behalf of their employees.

Reinsurance and Early Retirees

For those employers who provide health care to retired employees age 55 or above, but who are not eligible for Medicare, the Act provides for a reinsurance program reimbursing such employers in the amount of 80% of claims above $15,000 up to $90,000. The reimbursement must be used to lower the costs of enrollees in the program. This program runs from the date of enactment until January 1, 2014

Financing

The Medicare payroll tax for individuals will increase from 1.45% to 2.35% on earnings over $200,000 (single), $250,000 (married couples).  There will also be a new 3.8% tax on unearned income for higher income tax payers. (Effective: January 1, 2013)

The law will increase the threshold for deductible medical expenses from 7.5% of adjusted gross income to 10%; the increase not applicable to individuals over 65 for tax years 2013-2016. (Effective: January 1, 2013)

Flexible spending account (FSAs) contributions cannot exceed $2500 annually and must apply to prescribed medicines and treatments, not over-the-counter items.

The excise tax on non-medical distributions from HSAs will increase from 10% to 20%. (Effective January 1, 2013)

There will be a tax on individuals without qualifying health care coverage of $695 (the maximum) or 2.5% of household income. This will be phased in beginning 2014 with an initial annual fine of $95. .

An excise tax of 40% on the amount of a health care plan that exceeds $10,200 (single) or $27,500 (family) in aggregate value will be levied on either the company that insures or the employer who sponsors such a plan. This is often called the “Cadillac Plan tax.” Adjustments of the above amounts can be made for plans covering higher risk employees. (Effective January 1, 2018)

The ability of employers to take a tax deduction for the $1300 Medicare Part D subsidies received from the government in exchange for continuing to offer retiree health care will be eliminated effective January 1, 2013.

Special taxes on the pharmaceutical industry sector will be levied in aggregate amounts of $2.8 billion in 2012, to $4 billion in 2017, and $2.8 billion in 2019.

Similarly the insurance sector will pay aggregate additional taxes of $8 billion in 2014 to 14.3 billion in 2018. Future special taxes will be based on premium growth. There are special exceptions for non-profit insurance companies.

There will be a 2.3% excise tax on the sale of any taxable medical devices. Effective: December 31, 2012.

There will be a special excise tax of 10% on tanning studio services.

Annual compensation for executives of health insurance providers in excess of $500,000 per year will have limited deductibility. (Effective: January 1, 2009)

While not a “financing source” the sponsors of the Act have included provisions that will reduce the annual cost of Medicare by approximately $500 billion through the elimination of fraud and waste, changes in reimbursements to medical providers, and other cost cutting measures.

Two Types of Exchanges Created

The Act requires the creation of state-based Exchanges for individuals (The American Health Benefit Exchanges) and small employers (The Small Business Health Options Program). Qualifying individuals and employers with fewer than 100 employees can acquire health insurance in their respective Exchanges. Beginning in 2017, employers with more than 100 employees can also obtain insurance in the Small Business exchanges. Multi-state and regional Exchanges can be created, and each Exchange must include one non-profit insurance plan must and one must offer abortions within the boundaries of federal law.

Co-Op Plans and Compacts

The creation of consumer operated health plans that are non-profit and member run shall be encouraged and funding will be available to encourage their creation.  (July 1, 2013)

Interstate Insurance Competition

Starting in 2016, states may enter into Compacts that permit the purchase of health insurance plans across state lines.

Plan’s to be offered by the Exchanges

There shall be several types of plans offered: (1) Bronze - this will offer essential health benefits and cover 60% of the benefit costs with out-of-pocket maximums of $5950 (single) and $11,900 (families). (2) Silver will provide 70% benefit cost coverage with the same out-of-pocket maximums. (3) Gold will cover 80%, and (4) Platinum, 90%, and, (5) catastrophic plans will be available to those up to 30 years of age. These plans can use the current high deductibles found in HSA plans. Such plans, however, must not apply the deductible to preventive care or three annual primary care visits. This plan is only available in the individual market..

The same out-of-pocket maximums apply to all plans except they will be proportionately lower for individuals whose income ranges from 100% to 400% of the FPL.

Health insurance plans participating in the Exchanges must guarantee issue and renewability and adjust rates based only on specified criteria. There are other administrative requirements for plans that include reporting and disclosure, marketing, providing call centers, and simplified forms.

States can elect to provide Basic Health Plans for their citizens and residents whose income is between 133% and 200% of the FPL, provided the plans conform to the Act’s requirements.

Until 2017, only small employers with fewer than 100 employees may elect to participate in Exchange Plans.

Health and Human Services shall establish criteria for participation in Exchanges and shall certify an Exchange to offer health benefits under the Act.

Plan Design

The Act defines an Essential Health Benefit Plan as one that provides comprehensive benefits, that has not less than 60% actuarial value, and one where the deductibles do not exceed those of the current HSA plans. The required design features include ambulatory care, emergency care, hospitalization, lab service, obstetrics, gynecology, pediatric care, rehab, wellness, oral and vision care. Preventive care will not be subject to deductibles and co-pays. Effective Date: January 1, 2014.

Grandfathered Plans

Grandfathered individual and employer-sponsored plans are exempted from offering the Essential Health Benefit Plan. They are defined as a group health plan in effect on March 23, 2010 and apply to current participants and future enrollees. They are considered under the law to be Minimum Essential Coverage (or, an Essential Health Benefit Plan).

Grandfathered plans, within 6 months of enactment, must provide dependent coverage for children up to age 26, prohibit rescissions for health conditions, and eliminate waiting periods for coverage in excess of 90 days. By 2014, grandfathered plans must also prohibit the pre-existing condition exclusions for children under age 19, and lifetime and certain annual maximum coverage limits.

On June 14, 2010, the Department of Labor (DOL), Department of Health and Human Services, (HHS), and the Internal Revenue Service issued an Interim Final Rule relating to Grandfathered Plans. The Rule lists a number of plan changes that could result in the loss of grandfathered status. Most items on the list deal with the elimination of coverage for particular conditions, and significant increases in cost sharing for participants.

Note: the DOL, HHS, and IRS recently published additional Rules pertaining to pre-exisiting condition exclusions, lifetime and annual limits, rescissions, and other patient protections, as well as interim final rules on internal and external appeals of adverse health care decisions. You can see the Interim Final Rules at: DOL, Employee Benefits, Interim Final Rules. Query: do any of these apply to Grandfathered Plans? Query: how will these rules affect the underwriting of health plans?

Medicare Changes and Pilot Studies

There are numerous provisions dealing with pilot studies for Medicare, reducing and re-aligning payments for providers, requiring hospitals to disclose their charges, encouraging the idea of quality outcome analyses, continuing to study the Value Based Purchasing Program that would require Medicare to withhold a portion hospital reimbursements depending upon the hospital’s quality performance, and requiring reductions of payments to hospitals for conditions caused by the hospitalization.

The Act provides for graduated subsidies beginning in 2011 for drug costs that are within the interim deductible (”the donut hole”) for Medicare Part D. This “donut hole” will eventually be eliminated leaving only the standard (currently $250) deductible for Part D.

Medicare Advantage Plans, that have been running at costs above traditional Medicare per patient rates, will sustain a reduction in revenue from Medicare of about $130 billion over 10 years. Eventually, the amount paid to Advantage Plans will be in parity with the average costs per beneficiary under Medicare.

Wellness, Tort Reform, and Long-term care

There are also pilot study funds for Wellness Programs in Medicare and an analysis of tort reform approaches.

Starting in 2011, health insurers must pay rebates to participants if the company’s medical loss ratios are lower than specified levels. The MLR simply calculates the percentage of an insurance company’s costs paid to reimburse providers divided by the total operating and overhead costs.

Note: This Provision will not be administratively enforced; HHS has concluded it is not financially sustainable. Also, beginning in 2011, employers must offer their employees the opportunity to make payroll deductions to purchase government sponsored long-term care insurance. This is called the “Class Act” - The Community Living Assistance Services and Supports Act).

For some helpful sources of information on the Patient Protection and Affordable Health Act (PPACA) see:

1. Text of Public Law 111- 148 (March 2010. See: full text of Act at: http://dpc.senate.gov/dpcdoc-sen_health_care_bill.cfm/.  For compliance issues, the Kilpatrick Stockton, LLP Benefits Consulting firm has developed a list of government websites where each legislative title and agency guidance and compliance issues pertaining to PP and AHA are explained: See: http://www.kilpatrickstockton.com/

2. Summary of Employer Penalties under PPACA, Congressional Research Service, April 5, 2010 (www.crs.gov/ )

3. Health Reform for Hospitals and Health Systems, McGuire Woods, April 14, 2010 (www.mcguirewoods.com/ )

4. Health Care Reform, are you prepared  - a timeline for employers, The Littler Group, April 2010 (www.littler.com/ )

5. Focus on Health Reform, Summary of Health Reform Law, April 8, Kaiser Family Foundation (www.kff.org/ )

6. See Health and Human Services new website that covers all health care issues including the new Affordable Care Act of 2010.

The Government identifies several types of plans that must be offered in the Exchanges. See discussion below.

What About Further Reform and a Single Payer System?

While a “Single Payer” program - in essence a universal health care plan - was not included in the final bill, it might be interesting to learn more about such an approach. To hear and see more view the following PBS Bill Moyer’s Journal on health care reform featuring discussions about Single Payer. PBS on Single Payer

Last Revised: September 24, 2010

Click here to View Power Points on this Article and Chapter 8.

August 13, 2011

The PPACA is law and the relevant government Departments are issuing rules and regulations concerning the Act’s meaning and compliance. There are, of course, Court challenges to the law that are apparently headed for the US Supreme Court for final resolution. While I wrote this brief piece as an “alternative” to the “Obama approach” on reform, I believe it is still relevant as a lesson on misdirected public policy. The problem with respect to health care in the US is that it is too expensive. Lack of affordability has led, in some instances, to a lack of access. If one examines the reality and the data, any effort at reform should be directed at the issue of affordability. We have the institutions to deliver health care for the employed, the individually insured, the aged, and the poor. All of these systems are suffering from the high costs of health care. That should be the primary target for reform. It was not.  My view is that the recently passed Patient Protection Act of 2010 is not health care reform; it is “access reform.”  Our first priority should have been and still should be to make health care fundamentally more affordable; that will enable us to responsibly extend access. As one health care professional told me: “Our health care in the US is like a broken bridge - it’s much too expensive. Why would we put more cars on this bridge?” The PPACA, as can be seen in my Post “Discussion - PPACA of 2010″), is a law that is both incredibly and unnecessarily complex. It is also exceedingly off what should have been the targeted objective - affordability, and while good intentioned, it is a failure of the public policy making function. Its Constitutional foundation is also in jeopardy as a result of litigation wherein one US Court of Appeals panel called it “breathtaking in its expansive scope.” While some provisions of the PPACA do relate to cost reductions, they are mere “trimmings” that surround its core: changing eligibility standards for Medicaid, imposing mandates for individuals and some employers,  providing subsidies for those who cannot afford health insurance, reforming “insurance abuses,” requiring states to create gatherings of health insurance plans where individuals and some employers can buy insurance, and artificially reducing some health care Medicare provider reimbursements. It does not focus on the fundamental principle that competition among providers - not insurance companies - who are selected by patients and their payers based upon demonstrated efficacy, quality, and overall value of their treatments — and will inevitably lead to substantially more affordable health care.

My hope is that students can continue to debate an approach to health care reform and learn from examining the issues. I  welcome your comments. I should note that the Mayo Clinic’s Health Policy Center has produced a unique and interesting approach to health care reform. You can review it by clicking on the preceding link. TEM (4 October 2010)

Health Care Reform—Let’s Do it Right the First Time

By Thomas E. Murphy* (Cincinnati, Ohio – Originally written in October 2009 and updated August 13, 2011)

There is one instrument in the U.S. health care system that is the driving force behind our high costs - the doctor’s ordering pen! The utilization of health care resources and their respective prices escalate with every stroke of the pen. The insurance companies can wave their swords, but until the pen is controlled, our costs will not be curtailed. Costs are our real problem and we should focus on this first before we dismantle and “reform” our current system. A provider market driven by quality and value will substantially impact our costs, make health care more affordable, and significantly enhance access. Insurance companies, big business, pharmaceutical companies, and “greed” are neither the enemies nor the root causes of our health care problem. We should stop relying on false and misleading anecdotes and have an honest debate based upon information and data that can lead us to the type of reform we really need.

The bases for promoting health care reform as defined by the Democratic-led Congress and the Obama administration included the following:

(1) The U.S. has 45.7 million uninsured and we have no system to cover them. These people are treated by providers who are not reimbursed. This causes cost shifting to covered insurance plans and unnecessary expense. If we cover the uninsured we will eliminate the cost shifting.

(2) If a person is covered at work but loses his job, he has no coverage.

(3) If a person has a pre-existing condition, the insurance company can deny coverage. Also, insurance companies drop people from coverage when they are sick.

(4) European health systems do a better job of delivering universal health care, as evidenced by their lower costs and their longer life expectancies and lower infant mortality rates.

(5) Our system costs too much. By developing a government-sponsored program, where we mandate employer or individual coverage and offer a “public option” for our citizens, we can increase access to health care for all Americans and do so at a lower cost.

(6) We can finance this by increasing taxes on the wealthy, insurers, device makers, and pharmaceutical companies, reducing the cost shifting of uncompensated care, getting rid of the waste in Medicare, and fining those who do not contribute or participate.

But, there are data that contradict these conclusions:

(1) We do have a health care system that includes Medicare for the aged, Medicaid for the poor, and employer-sponsored plans that cover over 60% of those who are employed. Some choose to buy their own health insurance. According to the U.S. Census Bureau, half of the 45.7 million uninsured are either eligible for coverage under Medicaid but choose not to enroll, or earn sufficient income to pay for health care coverage with their employer or on their own but choose not to do so. Regardless, there are too many uninsured persons and we do need to take steps to responsibly enhance access. By doing this we will significantly reduce cost shifting. This cost, while substantial, does not financially justify legislating a whole new set of programs and policies that go far beyond the uninsured. The best way to get them covered is to make health care more affordable.

(2) We do have COBRA, which enables a person who loses his job to continue coverage for at least 18 months under the same health plan provided he pays 35% of the total premium.

(3) There is an existing law, HIPAA, which forbids an insurance company to deny coverage based upon a pre-existing condition for a person who recently had insurance but lost it. The law, however, has certain time limits and could be amended to include broader protection. With respect to policy cancellations by an insurance company when “someone gets sick,” rescissions do occur when there has been a misrepresentation on a health statement filed with the application for coverage. Among the millions of policies issued and continued, rescissions represent less than .005 of the total. Again, if rescissions are a problem, which does not appear to be the case, we can address this through regulatory legislation.

(4) The research by professional economists contributing to the Bureau of Economic Research have conclusively shown that lower life expectancy and higher infant mortality rates in the U.S. are not the result of our health care system, but rather a direct result of social and behavioral factors. Further, their research shows that in direct comparisons of survival rates and medical screenings with economically developed countries (OECD), the U.S. performs equally or better with respect to heart disease, cancer, and other chronic conditions.

(5) It is universally agreed in the U.S. that the cause of our problems from the uninsured to the precarious viability of our government and employer sponsored health plans is our high costs. Costs equal the rate paid for services times the utilization. The research shows our rates and in some cases our utilization are higher than OECD countries. Our physicians and hospitals are paid more, we have more technology, particularly diagnostic equipment available, and the U.S. generates about 70% of the research that leads to global medical advances. There are a number of underlying factors that lead us to higher rates and utilization: our third party payer system that removes the consumer of health care from significant financial accountability;  the tax treatment of employer sponsored health insurance that discriminates in favor of high cost plans and against insurance paid for by an individual;  and a rather distorted set of market incentives relating to how reimbursements are made.

Also, cost is the reason Medicare and Medicaid are near financial collapse and why many small employers are considering dropping health care. Other employers are shifting a larger percentage of their costs onto their participants. Can costs be controlled? Yes, but there are different approaches.

In OECD countries with government-run universal health care programs there are strict limits on reimbursement rates. Also, there are restrictions on utilization, usually in the form of wait times for elective procedures. Thus, their costs are lower than ours. A large percentage of OECD citizens covered by national health care, however, circumvent the long wait times by buying health insurance in the private market. So, there often is not equality in the access to and delivery of health care.

(6) It is difficult to believe with over 70 million baby boomers now applying for Social Security and Medicare the Administration’s assertion that the cost of Medicare can be reduced by eliminating $500 billion in “waste.” Further, the “waste” seems to involve a planned initiative to simply reduce provider reimbursements. This arbitrary step will inevitably lead to reductions in services, a refusal by providers to participate in Medicare programs, control of health care services by bureaucrats, and rationing.   Also, the proposed fines and taxes that will be imposed on individuals, employers, and industries will be passed on to consumers.

The Congressional Budget Office estimates that we will pay about $900 billion for the new program, and reduce the number of uninsured by 29 million. It will also add considerably to our deficit. We will, however, still have 25 million uninsured that includes 8 million undocumented persons. Is anyone calculating the financial returns of this proposal? We currently have over 20 million who are eligible for Medicaid but do not enroll or who can afford to buy insurance. We are going to dismantle our current system, spend hundreds of billions of dollars, and only add 29 million new enrollees? Are some of these the same 20 million those who could be covered but choose not to? That means we are spending $900 billion to add a net 9 million persons to the health insurance rolls. This does not sound like a cost-effective approach.

This health care overhaul cannot reduce health care costs unless we ration services, suppress reimbursement rates, and create new taxes to help finance it. This is not hypothesis or hyperbole. It is an inevitable economic consequence of a national health system that seeks to cover its entire population. The evidence supporting this is irrefutable.

So what is the solution? Since the real cause of the health care problem in the U.S. is cost, we should develop a surge-like assault on our health expenses. We know how to do this and it does not require an artificial, government imposed reduction in reimbursement levels or a national health care program. In fact, we may not need any significant legislation - just effective leadership that can be exercised on a state-by-state basis. What follows are a number of approaches that would significantly reduce our health care costs and enable an orderly and financially responsible expansion of coverage and access, while ensuring the continuity of our current government and employer-sponsored programs.

· Provide new incentives that would cause our hospitals and doctors to compete in a market that is based on real quality outcomes, instead of bureaucratic protocols that are ordered by the government. Competition based upon quality and value will compel our providers to operate more efficiently and with higher quality. In private industry where customers have access to data and insist on finding real value among competitors, there have been significant advances in total quality, higher efficiency, and lower costs. Providing open access to provider clinical quality outcomes data is an essential step to creating a quality and value-based market. The result will be a dramatic reduction in health care costs. This was done successfully in Cincinnati, Ohio and is now working to reduce costs in Pennsylvania.

· We must reform malpractice litigation that causes many doctors to practice unnecessary defensive medicine. This adds a tremendous and unnecessary expense to our health care. Because of Constitutional issues, however, it will probably have to be done on an individual state basis, unless a change in the tax treatment of malpractice awards and attorney fees can provide a motivation for such reform.

· We should put the doctor and the patient in charge of health care decision-making and require the patient to have some economic stake in the process. The patient should own his or her own medical records and have access to data that shows the quality-based outcomes of provider practices.

· The federal government during the Bush Administration introduced a federal program to to help finance and develop electronic medical records (EMR). The concept is that EMR will reduce medication and other errors and facilitate incentives for providers to “get their diagnosis and treatment right the first time.” Together with a new quality-based market system, EMR should provide good returns among providers seeking excellent clinical outcomes in a quality driven market. However, the patient should have access to ta public record of provider clinical outcomes so that choice of providers can be based upon real data and relevant considerations - quality and costs. Further, there should be no “firewalls” between providers that limit provider access to its patient’s EMR.

Our health insurance companies are restricted by government rules in their ability to compete among various states. Allowing such inter-state competition would have a significant effect on the quality and price of health insurance; it would also enhance the portability of health care.

· We must create incentives to streamline, simplify, and standardize the provider reimbursement process and reduce our excessive administrative costs.

· We should encourage and provide incentives to sponsors and insurance companies to offer effective wellness programs that impact unhealthy life styles which lead to chronic diseases and put an expensive strain on the utilization of health care. Our behavioral, social, and cultural impediments to healthy life styles significantly increase health care utilization and costs. Comprehensive wellness programs should be integrated into the healthcare system and be a key part of the patient-doctor relationship. They should be designed so as not to conflict with the confidentiality and premium discrimination provisions of HIPAA and not violate the genetic discrimination provisions of GINA.

The polls show that 70% of U.S. citizens are satisfied with our current health care plan, and opposed to a government take-over of health care. Rather than dismantle one of the best, if not the best, systems in the world we should closely examine the premise for change and the underlying causes of the problems apparent in our system – our high costs. By focusing on quality-based competition and other measures, we can significantly reduce our costs and preserve the current strengths of our system. The result will be to make health care more affordable and accessible for all. This is real, relevant, and responsible health care reform.

______________________________________

*Thomas E. Murphy is Executive Professor, The Farmer School of Business, Miami University of Ohio, where he teaches a variety of management topics including benefits. He is the author of a recently published book, Benefits and Beyond – a Comprehensive and Strategic Approach to Retirement, Health Care and More. (Sage Publications, Los Angeles, CA. 2009). Among a number of other topics, the book deals extensively with health care and social security reform. (Email: murphyte@muohio.edu; website: www.managementandbeyond.com/)

Last update: August 13, 2011

What is the financial return?

Benefits and the Allocation of Capital - last revised August 24, 2010

One of the unique features of Benefits and Beyond is Chapter 10 which discusses how sponsors of benefits should use data and metrics to measure the effectiveness of the various benefit plans. Should the benefit be offered? What is the optimal design? How should it be financed? Using a capital budgeting analysis, what are, for example, the financial returns of a new Wellness Program?

The analysis in Chapter 10 would apply to both discretionary and mandated benefits. How do stock options or restricted stock affect, if at all, productivity? Will the retirement plan provide adequate retirement income? Will it cause employees to stay longer? If not, what design changes might enhance these results? What impact do your benefits have on the quality of hire, retention, attendance, and productivity? How can Six Sigma be used to evaluate your benefit designs? How would you calculate the financial returns of a new company sponsored day care center?  Does your health care plan help to make employees more healthy? How would you evaluate the effectiveness of the medical providers in your networks? How could such an analysis improve the cost effectiveness of your health care plan? Using surveys, competitive data, financial measures such as Net Present Values, Return on Investment, and effectively mining your Human Resources Management Systems can provide a more objective analysis of potential benefits and their respective designs.

Using the approach and analyses in Chapter 10 puts the sponsoring department within the enterprise to capably compete for the capital needed to fund such benefits. The author has both professional and academic experience in this topic. See: Schwarz, J., & Murphy, T. (2008, April). Human capital metrics: An approach to teaching using data and metrics to design and evaluate management practices. The Journal of Management Education, 32(2), 164–182; Murphy, T., & Zandvakili, S. (2000, Spring). Data and metrics-driven approach to human resource practices: Using customers, employees, and financial metrics. Human Resource Management, 39(1), 93–105;

(Last Update on this Post, December 21, 2010)

Bear or Bull?

Capital Markets Slide and So Do Benefit Plans

As we point out in Chapters 4 and 5, capital markets play a key role in financing retirement benefits. The employer sponsoring a defined benefit plan relies on these markets to help finance retirement income for its employees. The employer-sponsor assumes the investment risk. In defined contribution plans, it is the employee who assumes this risk. In an economic recession coupled with huge losses in the capital markets, the employers’ and employees’ risks are significantly increased. Some estimate that $900 billion in pension assets were lost by employers sponsoring defined benefit plans during the recession of 2008-09. Wall Street plunged again after Standard and Poor’s downgraded US debt obligations in August 2011, creating more angst among DCP participants and DBP sponsors. It recovered within several days. In an August 11, 2010 article in Forbes.com, Kenneth Hackle predicts that a coming shortfall in pension funding, and a legal obligation to properly replenish the plans will significantly affect corporate cash flows, earnings, and credit. See: Corporate Pension Bomb Set to Explode.  There are some interesting issues that will no doubt arise in the workplace as a result of the dependency on capital markets that affect the financing of pensions and other benefits. For example, in the public employee pension arena, local and state governments are wrestling with how to avoid huge deficits that will occur when they attempt to make their DBPs financially solvent. Should they cut benefits, increase taxes, change investment strategies?

There has definitely been a flight from equity investments among many DBP sponsors. They are looking for more safe investments. As large pension funds leave equity markets and hedge funds remain with an increased share of market ownership, the result will be more volatility in the capital markets. See: Pension Funds Flee Stocks, WSJ, October 18, 2009, A-1.

How Severe were the pension losses in 2008-09? As we know, many employers have terminated their DBPs and switched to DCPs (such as 401k plans). The DCPs have suffered significant losses as a result of the slide in capital markets in 2008 and 2009. Recent data from the Employee Benefits Research Institute, however, indicates that the losses between January 2008 and June 2009 for older workers with significant service were not as serious as predicted. For example, an employee between age 55 and 64, with up to 20 years of service, lost 14% of the value of his 401(k). This is not insignificant, but perhaps it indicates this group had made some changes in their investment allocations to better protect their 401(k) savings.  There were some 25% to 47% losses among other age and service groups. Nevertheless, the 401(k) has become a dominant retirement plan for many employees and the uncertainty created by the losses of savings is creating some special challenges for employees and for sponsoring employers.  See: “The Impact of Financial Markets on 401(k) Accounts,”  EBRI, (July 2009 Chart).

Similarly, The Vanguard Group has just released its 2010 Report, “How America Saves, A Report on 2009 Vanguard Defined Contribution Plans” and concludes that many 401(k) account balances have nearly fully recovered from the 2008-09 recession, and DCPs continue to be a viable and effective source of retirement income for employees:

“Since 2007, plan participants have endured a substantial and precipitous decline in stock prices, with markets falling by more than half as a result of the global credit crisis. From its low in March 2009, the U.S. stock market gained 65%, although at the end of 2009 it remained more than a quarter below its peak of October 2007. Despite the exceptional volatility that marked the period, the saving and investment behavior of defined contribution (DC) plan participants changed only marginally. In many ways, DC plan participants’ lack of response to recent volatility is striking but, given the inertia associated with much retirement savings behavior, it is not surprising. During this interval, inertia likely benefited many participants. As we move beyond this period, the challenges remain largely the same: improving saving rates and asset allocations.”

Query: Review the executive summaries of the EBRI and Vanguard reports and identify the reasons why you think the sustained losses in 401(k) account balances were not as severe as assumed.

Some Unintended Consequences of the migration from DBPs to DCPs - What are the likely consequences of this movement away from DBPs and to DCPs on the orderly progression of retirements among older members of the workforce? With employee account balances that are subject to the volatility of the capital markets, and without a specified benefit and a prescribed normal retirement age will employers have any ability to predict the likely retirement dates of its workers? What effect will this have on staffing, succession planning, employee relations, benefit offerings, and productivity? What could an employer do to assure itself of more predictability with respect to the sequence and progression of retirements? From a public policy standpoint what are the issues and how might government help? Read this (July 2009) article from the Center for Retirement Research, Sass, S., Haverstick, K., Aubry, J., “Employers (lack of ) Response to the Retirement Income Challenge” (IB#9-13).

At page 82. add Exercise No. 9: With over 20 million baby boomers retiring over the next several years, what impact is this likely to have in capital markets? Will there be a decline in investment activity? What result will likely occur? Explain. Do most people stop investing when they retire? Will their portfolio mix change? Could other factors sustain the growth in market assets?  (See: Congressional Budget Office, “Will the Demand for Assets Fall When Baby Boomers Retire?” September 2009, Publication No. 2843; (www.cbo.gov). Also, as the heretofore tax sheltered retirement funds are withdrawn by retirees, what do you think will be the impact on U.S. and State tax revenue?

Add as new footnote to the top of page 88, “longevity risk”: There is a new idea to deal with the plan sponsor’s assumed longevity risk. The idea is called “Longevity Bond” that would be offered by the government and hedge the covered loss of certain cohorts such as persons born in a certain year who live well beyond life expectancy. See the Article by Mercado, D., in the June 8, 2010 edition of Investment News.

Add to page 119 of the text at the end of “Some Perspective:” Can we find safety in our 401(K)?

Many persons who are relying on 401(k) plans to retire have suffered losses in their accounts and are probably thinking of delaying their retirement. They are also  wondering how they might go about changing the allocation of the investments in their account, or perhaps converting some of their retirement savings to an annuity. There are calls to re-think the whole idea of employee funded retirement plans some of which are outlined below.

For example, the U.S. Department of Labor is considering plans to require employer sponsors of DCPs to offer its participants the opportunity to choose either an annuity or a lump sum distribution. How would this work? Visualize such an approach and identify the relevant issues that should be considered in making such a change. See: The Defined Contribution Institutional Investment Associations’s (DCIIA) letter or May 3, 2010 to the D.O.L.’s Employee Benefits Security Administration recommending the required inclusion of a “life time income” alternative in DCPs. DCIIA Lifetime Income RFI Comment Letter

See also, the video of a recent Senate Select Committee on Aging, “The Retirement Challenge - Making Savings Last a Lifetime.” Guaranteed life time income is one of the ideas being considered by the Committee. Do some research and answer the following questions. What risks does it seek to ameliorate? What types of products are available from insurance companies that might fulfill this purported need? What are some of the issues, such as costs, disclosure, education, and liquidity that might arise with such products? Should Congress mandate DCP sponsors to provide guaranteed income for its participants?  Listen to the speakers and be prepared to discuss these issues. See Congressional Committee Members Statements. See also an October 7, 2010 public release  by Phyllis Borzi, Assistant Secretary of Labor about some of the Department’s approaches to reform in the private pension arena that are designed to guarantee retirement income. What appears to be the Department’s position on requiring annuities in DCPs?

Better DCP Design and Administration: Meanwhile, more traditional efforts are being made to assure participants get the most out of their DCP. For example, IBM gets high marks for its 401(k) plan which features: (1) 100% up to 6% of pay; (2) auto-enrollment; (3)very low administrative fees; (4) one-on-one investment advice; (5) customized target date funds that adjust allocations based upon age; (6) Institutionally priced annuities to assure life-time retirement income; (7) auto-rebalancing of investment and auto escalation of employee contributions. How might this approach reduce the “investment” and “longevity risk?”

Auto Enrollment Growth?

Plan Sponsor reports a recent “expert analysis” that indicates 60% of DCPs provide for auto enrollment, a substantial increase in auto escalation of deferrals to over 40% of plans by 2015, and higher allowable auto enrollment limits to 12% as well. It also predicts that among the 40% of large employers who continue to offer DBPs many of those will be Cash Balance, Pension Equity Plans, or their DBPs will be frozen and participation limited to DCPs.

More for page 119: Hybrid 401(k) and Annuities

One new idea is to include an investment option for 401(k) participants that involves a switch from age related or life style funds to a pre-paid annuity. The option would be triggered at a later age, say 50. The current balance and then future deferrals and matches would be deposited into the annuity option and, at retirement, the participant would receive a guaranteed annuity instead of a lump sum. How does this approach change the allocation of our traditional risks: investment, inflation, and longevity? The new approach is called a “Hybrid 401(k).”

Add to 119: What is a DBK?

Another new idea made possible by the Pension Protection Act of 2007, is the DBk, which can be offered by employers with 500 or fewer employees after January 1, 2010. What is it? It is a minimum floor pension (DBP) of 1% of “final average pay” for each year worked up to 20 years. Then, it is combined with a auto enroll DCP of a maximum employee contribution of 4%, (unless the employee opts out or changes the contribution) combined with a compulsory employer match of 50% up to 2% of pay. ERISA reporting requirements are relaxed and the employer reports data on only “one plan.” This should generate some interest among smaller employers looking for a plan that enables them to compete in the labor market at a lower costs and less complex reporting requirements.

Add to Page 118: New Research from Wharton: Can 401(K) Plans Provide Adequate Retirement Income? Yes!

As we point out below there are a number of new approaches among retirement experts who have lost confidence in 401(k) plans as a result of the tumble in the 2008-09 stock market. Not so, Peter Brady who just completed the above titled research paper (Working Paper 2009-01) for the Wharton School’s Pension Research Council. Brady says 401(k) plans are working and that a moderate savings rate with reasonable investments can lead to adequate retirement income - 87% replacement income. With a higher risk portfolio, the replacement rate can be as high as 107%. Brady points out that a portfolio of 60% bonds and 40% stocks, the annual return on a 401(k) over the 10 period ending December 10, 2008 was 2.83%. This included a period with 2 recessions. Brady argues there is no need for Guaranteed Retirement Accounts; he demonstrates that employer sponsored 401(k) plans can work. People just need to save and contribute a moderate amount during their work career. Read the Brady paper.

Amend at page 129, Chapter 4 Exercise, Number 4 by replacing these numbers: average final pay is $200,000 and bonus is $80,000. The rest of the exercise would remain the same.

At page 131, Chapter 4 Exercise add this after the fist sentence to Number 15: What is the relevance of the following factors with respect to a waiver of the joint survivor benefit: (1) the financial risks; (2) differences in age and life expectancy; (3) allocating a portion of the higher pension amount to purchase tax deferred, income generating investments; examples? (4) Should they purchase an immediate annuity? What are the pros and cons? (5) What about life insurance? How would this help? What type?  (6) Should the couple have long term care insurance? Explain. See:  http://www.moneycouple.com.

Exercise No. 22 added at page 131. At page 112  of the text, we refer to life-cycle funds- commonly called “target-date funds” - that are being offered to 401(k) participants. Such funds gradually modify their portfolio as the participant moves toward retirement age. They are designed to maximize growth during the early years of saving, but as the participant grows older, the portfolio is automatically modified to include  more conservative investments. This is commonly called the “glide path.” There has been some controversy over such funds because many were hit hard by the recession and, in spite of similar targeted retirement dates, they have widely different glide paths. Describe how the method and timing of the distribution of retirement funds as well as the person’s age might result in some differences in glide paths among participants who have chosen the same retirement date. See: U.S. Department of Labor, June 2009 Webcast about Target-Date Funds, and also “Regulators Get an Earful about Target-Date Funds,” Retirement Weekly at Market Watch, June 19, 2009 (vol. 7, no. 25) Subscription required.

Exercise No. 23, added at page 131: How would go about benchmarking and evaluating a company’s 401(k)? What criteria would you use to determine how well it is managed? How would you compare the plan to others sponsored by employers? Reflecting on the fundamental purpose of a 401(k), how would you measure its utlimate efficacy? One small company has begun to do this work. Check out their website at: www.brightscope.com/. Examine their criteria and scoring system and critique it. Check out several companies’ results and be prepared to discuss their scores.

Add at page 131, Exercise No. 24: Look at the basic design features of a state employee pension fund. For example, you can check the Public Employees Retirement System (PERS) in Ohio. Participants in this Plan can elect to retire at a full, unreduced pension level. Then, they return to work doing the same job and receive compensation for their active work. In an expose` of this practice, which is quite common, a participant was quoted to have said: “I contributed my money to this plan and I am entitled to receive my full pension. I resent people calling this “double dipping.” Public employers argue they want to retain the experience of the retiree, and they can maintain higher productivity by asking the participant to remain at work after electing retirement. Analyze this practice, commonly called “double dipping” among public employees. Is this the retiree’s money or is it more? What are the costs to the public retirement system or the public treasury when this practice is allowed? Is it a factor in causing some public retirement systems to experience funding deficiencies? Refer to Exercise No. 8. As we ask there, how does the University of California handle this issue? Organize a discussion of the practice and its total financial implications. (See: “An Ohio Newspapers Special Report - A Double Dipping Double Standard?” by Fischer, B., The Cincinnati Enquirer, Willard, D., The Akron Beacon Journal, June 20, 2010

Chapter 5: Add to “Retirement Planning” section at page 143: Looking for Safe Retirement Investments?

Retirement Weekly at Market Watch, (May 22, 2009, Vol. 7, No. 21) outlines some interesting approaches but points out underlying hidden financial risks of what appears to be a conservative approach to saving and investing for retirement. The Weekly reviews corporate bonds, preferred stock, Treasury Inflation Protection Securities (TIPS) and others. The advice: keep commitments short, buy U.S. Treasuries, bank money market accounts and bank certificates of deposit.

Add: Exercise No. 25, at page 131: Check the interesting article from Vanguard Research about a host of new innovative products that attempt to deal with the longevity risk and retirement and the issues arising out of the disaggregation of retirement savings. For example, the paper discusses Systematic Withdrawal Plans (SWP), time horizon funds, immediate annuities, and payout funds and describes the risks and costs associated with each. See: The Retirement Income Landscape (May 2010), Vanguard Research. Check out the hypotheticals in the article and be prepared to discuss the longevity, investment, and other risks and costs associated with these new ideas.

Add at end of Chapter No. 5, at page 150:

Congress and the IRS provide relief due to the recession -2009:

In chapter 4 and 9 we discuss certain legal requirements pertaining to the employer sponsor’s obligations relating to DBPs and DCPs. Some needed to be relaxed due to the economic recession of 2008-09.  Refer to page 93 and 117 of the text and incorporate these changes into your notes.

Minimum Funding Requirements

Congress in 2006 passed the Pension Protection Act which required employers to meet more stringent funding requirements for their defined benefit plans (See also Chapter 11). Due to the recession and the losses in the stock market, Congress in December 2008 passed legislation that relaxes the funding requirements of the PPA for a temporary period. This period ends in 2011, and as referenced in the notes to Chapter 3 (above), and employers must resume their statutory obligation to properly fund their pensions. Some experts predict, that there is a “Corporate Pension Bomb About to Explode.”

Not so Required Minimum Distributions for 401(k)s

We also discussed the Required Minimum Distribution (RMD) rules for retirement savings plans. These rules require persons over age 70.5 to begin distributing the funds in their 401(k), IRA, other tax favored retirement account. The amount is based upon the value of the account ion December 31 of the previous year as well as the retiree’s life expectancy. Since the value was probably significantly higher last year than this, the required distribution could drain a disproportionate amount of funds out of the account. Congress  decided to suspend the RMD rules through 2009, but not for 2008. So, RMDs for 2008 must be made by April 2009. Should Congress have done more? We should note that President Obama had earlier suggested that any withdrawals after age 70.5 made within the RMD amount, would not be taxed. What tax changes can you think of that would help both employers and employees continue their sponsorship and participation in DBPs and DCPs during a period of economic recession? For an interesting analysis of the linkage between distributions and life expectancy see the December 2008 issue of the Journal of  Financial Planning, (Click on “current issues” and then “table of contents,” and look for the article titled “Joint Life Expectancy and the Retirement Distribution Period.”)

IRS - Distress Relief for employers sponsoring non-elective Safe-Harbor 401K) plans

On May 18, 2009, the Internal Revenue Service published proposed regulations that would provide relief to employers who sponsor a safe harbor plan providing for nonelective contributions and who incur a substantial business hardship. Provided certain conditions are met, the proposed regulations would permit such employers to reduce or suspend nonelective contributions instead of terminating their plan. See; Internal Revenue Service.

Obama Administration Pitches In

At page 135: President Obama’s IRS is adding some legitimacy and simplicity to several current pension practices by streamlining the process for auto-enrollments in DCPs including SIMPLEs, allowing unused vacation and paid leave to be contributed to a DCP, and permitting the deposit of tax refunds into IRAs and other plans. The IRS also has introduced new clarity on the rules for “rollovers,” and offers employers help on selecting the right plan. See a summary at: http://www.irs.gov/retirement/article /0,,id=212061,00.html

As you are aware the financial risk in most DCPs is on the employee-participant. Again the recession has affected the account balances of many and here are some ideas being offered that attempt to mitigate the financial impact of the recession on participants’ DCPs. Add these notes at page 118 of the text.

Some Broad Policy Issues for Page 150: Should the federal government run your 401(k)?

There is also a proposal being discussed in Congress to transfer the management and control of 401(k) accounts to a government agency that will invest the funds in government bonds and better assure preservation of the employee’s account. The idea, promoted by Professor Teresa Ghilarducci at New York’s  New School for Social Research, would also value the account at the pre-September 2008 economic downturn amount. The proposal is occasioned by the loss of value incurred by many 401(k) participants recently and seeks to minimize the investment risk that currently rests on the employee. For more information, see: http://www.sharedprosperity.org./. The Brooking Institute recently published a report recommending that lower income employees be given a tax credit to save in their 401(k). What do you think would be the advantages and disadvantages of such a policy?

What happens when all your eggs are in one basket?

What about ESOPs? What happens to employees’ retirement income when a company sponsoring an ESOP goes bankrupt or its stock tumbles in value? See: Schulz, E., (December 10, 2008) (Chicago) Tribune Filing Exposes Risks of ESOPs. The Wall Street Journal, B6. The ESOP, invented more than 50 years ago was designed to allow hourly workers to participate in the growth of the company. Leveraged ESOPs were intended as a corporate financing or corporate takeover defense. But the original and continued overall strategy is to get alignment between managers and employees and to offer the opportunity for wealth accumulation for all employees. There are 11,000 ESOPs in the U.S. today. For an interesting analysis and history of ESOPs see: “Fifty Years of Utopia: A Half-Centtury After Louis Kelso’s The Capitalist Manifest, a Look Back at the Weird History of the ESOP” by Andrew W. Stumpff, The Tax Lawyer, Vol. 62, No. 2, at 419 (2010). What’s your opinion? Are there occasions when ESOPs make sense? What are some specific circumstances when they do? What about the investment risk? What type of company would be most likely to use an ESOP? Does it serve its intended purpose using the Benefits Model as a template?

Some other 401K) Fixer Uppers

For an excellent summary of some new ideas and approaches with respect to 401(k) plans see:Tergessen, A. (December 13-14, 2008) How to Fix 401(k)s, The Wall Street Journal (R1).

A related approach is a DCP investment option called “Stable Value Funds.” These funds generate a stable return for their investors by investing in diversified bond portfolios and then contract with banks and insurance companies to mitigate major market shifts. For an excellent article on these instruments see: Laise, E., “Stable Funds in Your 401(k) May Not Be,” The Wall Street Journal, March 26, 2009, D1. The article points out that bond returns have suffered and the Stable Funds have not fulfilled their intended purpose.

Supplement to Chapter 5 Exercises at page 151-152:

No. 9 (Add to): What would be the principal reason one would want to convert a regular IRA to a Roth IRA? What are the rules for making such a conversion? See: Retirement Weekly, August 28, 2009, vol. 7, number 35, “Check your Roth Conversion,” (www.marketwatch.com/retirement)

No. 14. IRAs, 403(b)s, 401(k)s, Roth IRAs, supplemental retirement, deferred income plans, etc. etc. An idea that is being discussed among policy makers is to create one supplemental retirement account that has uniform tax rules and requirements. This will end the confusion over a variety of “IRA -type” retirement accounts that have varied deferral and contribution limits, create confusion among savers, and add expense to the private saving effort. How would you design such a proposal?  What basic rules would apply? The current administration in Washington is considering requiring all employers to offer some type of IRA based retirement account that would insure a source of retirement income in addition to Social Security. Give some thought as to how such a proposal should be designed so as to achieve concurrent goals of avoiding additional expense especially on small employers but achieving a meaningful source of retirement income.

Number 15.  Some employers offer certain higher paid management an opportunity to voluntarily defer more of their income than the 415 limits allow They are called Deferred Income Plans. If the election to defer a part or all of their bonus, for example, is made before the precise sum is known, (See footnote 24 at page 93) they can avoid income taxes until the money is distributed usually at retirement age or separation. Many typically defer 50% of their salary and 100% of their prospective bonuses. The amount deferred earns a stated interest rate. The deferral plan is not considered a tax-qualified plan and is subject to creditor claims in bankruptcy. Some preliminary data, indicates that the number of elections to defer income has declined since the 2008-09 recession. What factors do you think could be causing this decline?

Number 16. In view of the slide in capital markets and the 2008-09 recession, would this be a good time to consider moving retirement assets to a Roth IRA or Roth 401(k)? Why? Explain how these factors might affect your decision: (1) suspension of RMDs for 2009; (2) the lifting of the $100,000 income limit in 2010 for Roth IRAs. (See June 22, 2009 article on this change in the Wall Street Journal.) (3) Increased tax rates for higher income persons. (4) Capital markets will start recovering generating significant returns in the next 5-10 years. (5) If you are nearing retirement, higher earnings may lead to higher taxes on your Social Security benefit or reduce your early retirement benefit. (6) Also, the Patient Protection and Affordable Care Act imposes an extra 3.8% tax on certain net.earnings. (7) Again, for future retiree, your Medicare Part B premium will be increased based upon your annual income. (See: Retirement Weekly at Market Watch, May 22, 2009, Vol.7, No. 21; and also see: “Roth Conversion - Why Accelerate Income?” (by J. Kilroy), Retirement Weekly at Market Watch, July 9, 2010, Vo.8, No. 28.

Continuing on Number 16

A related point involves when and how to allow Roth rollovers. A new federal law will permit “in plan” assets, for example in a 401(k), to be withdrawn and placed in a Roth IRA.  Why would a participant want to do this? What are the pros and cons? Here’s how an October 2010 IRS bulletin describes the new opportunity:

The Small Business Jobs Act of 2010 permits employers to amend their §401(k) or §403(b) plans to allow participants to transfer an eligible rollover distribution (ERD) into their designated Roth account in the plan if the transfer is of an ERD:

1. made after September 27, 2010; 2. from a non-designated Roth account in the same plan; 3. because of an event that triggers an ERD from the plan; and 4. otherwise meets the rollover requirements.

The new law also permits sponsors of governmental §457(b) plans to add designated Roth accounts to their plans in taxable years beginning after 2010, and then these plans can be amended to allow in-plan ERD transfers to participants’ designated Roth accounts if the ERD meets conditions 2 through 4 above.

If a participant rolls over an ERD into a designated Roth account, he or she must include any previously untaxed portion of the ERD in gross income. However, the rolled over amount is not subject to the additional 10% early withdrawal tax.

For 2010 only, if a participant rolls over an ERD into a designated Roth account in a §401(k) or §403(b) plan, he or she can include:

1. half of the taxable amount of the rollover in 2011 gross income and half in 2012 gross income; or 2. the entire taxable amount of the rollover in 2010 gross income.

A participant that elects to include the rolled over amount in his or her 2010 gross income may not revoke that election after the due date, including extensions, of his or her 2010 federal income tax return. The participant may also owe estimated taxes on the taxable amount of the rollover for the year or years it is included in gross income or may incur an underpayment penalty.

Number 17. With respect to individual retirement planning, what impact would the fall in the price of housing and other related recession factors arising in 2008-09 have on those retirees who planned to use reverse mortgages as a source of retirement income?

Number 18. f you annuitize all typical retirement income sources at age 65, the Center for Retirement Research at Boston College estimates that with health care expenses incurred after age 65 as well as the risk of Long-term care expenses, 61 percent of U.S. retirees will be unable to maintain their standard of living in retirement. What does this mean with respect to retirement planning and the possible purchase of long-term care insurance? See: Munnell, A., Webb, A., et al (March 2009) Long-Term Care Costs and the National Retirement Risk Index. CRR (No. 9-7).

Number 19: Due to the economic recession of 2008-09 the IRS is considering lowering the 2010 Section 415 limits to properly reflect the lack of inflation during this period. The revised limits are indexed to inflation. Is this a good idea? Develop a list of potential (intended and unintended) consequences this change might have on retirement. See: American Benefits Council’s Letter of September 8, 2009 to the IRS, “Effect of Potential Decline in CPI-U on the 2010 Retirement Plan Limits,” (www.americanbenefitscouncil.org/)

Number 20: Some employers have a “use it or lose it” policy with respect to Paid Time Off (PTO). A new IRS rule allows the employer to contribute unused PTO into the employee’s 401(k) account. There are specific circumstances that must be present in order to make this deferral. See the June 2010 article in Employee Benefit News that describes how this will work. What are some of the issues? For example, should the amount be considered a deferral by the employee or a “non-elective contribution” by the employer? What circumstances should control? Be prepared to discuss.

Number 21: Based upon the economic recession of 2008-09, the lack of sufficient savings by many employees, and the migration of employer sponsors from DBPs to DCPs, what percentage of the Baby Boomers are at risk of having inadequate retirement income? See: Employee Benefits Research Institute (EBRI), Issue Brief No. 344 (July 10, 2010) and No. 326, February 2010). Go to their site at: http://www.ebri.org

Number 22: The American Society of Actuaries has recently published a paper describing the “Seven Steps to a Sound Retirement” which is summarized by Market Watch in its October 11, 2010 newsletter. Also, on this site, there is an embedded video concerning some critical steps to take while disaggregating your retirement accounts after retirement. Check the Market Watch article and video, and outline a plan that you would follow with respect to your own retirement accounts or that of a family member that would better assure a “sound retirement.”

Add to Chapter 5 (Small Employers and Retirement Planning) at page 147: There is a new annuity product available that is worth mentioning - a longevity annuity. A person retires and lives off retirement income, savings, and Social Security. He is not sure, however, he will have enough to live on if he survives past age 85. So, he buys a “longevity annuity” that will commence payments at age 85, and he will comfortably live off the annuity and his other sources of retirement income until his death. Another approach is to “ladder” your annuity purchases, buying several immediate annuities over perhaps 3 years. Then you can minimize the lower interest rate that will be earned on your annuity during a bear market year. (See: www.retirementoptimizer.com/) Finally, one can buy a variable annuity that is purchased in advance of retirement and will earn a variable rate of interest depending upon the market. You can be protected on the downside and guaranteed an annuity payback of your principal investment regardless of market results. This is a guaranteed minimum benefit. This product can also include a life insurance benefit guaranteeing your beneficiaries with income when you expire. Thus, Joe Jones can buy an immediate $600,000 annuity that will pay him a life benefit of $50,000 per year. He alternatively buy a $1 million variable annuity with a 5% withdrawal guarantee, paying him at least $50,000 per year or more. For a great summary of annuities see: Tergesen, A., and Scism, L., (April 18-19, 2009), Getting Smart About Annuities, The Wall Street Journal (R1).

Last Revised: August 14, 2011

There is a new “supply side” business model spreading across American. It can be found in supermarkets, drug stores, and shopping centers. It is the mini or little clinic that serves basic health care needs at very low costs. See for example, The Little Clinic that is owned and operated by The Kroger Co.Typically staffed by Nurse Practitioners, who can make basic diagnoses, prescribe some medicines, give physicals, and provide some minor to moderate treatments, these clinics are open in the evenings and on weekends. Most services are covered by health insurance, and can provide a cost effective solution for the expected overwhelming demand on health providers that will result from the new Patient Protection and Affordable Care Act. They also provide a more convenient and rational service  than the typical emergency room where many seek costly treatment for minor ills.

Emergency Room

We have identified websites where, in most cases, the referenced article originally appeared. Often, however, the URL for the article has changed. In this case, you can use the topic or the title of the piece to search the publisher’s site for the specific article. In other cases, you might be required to copy and paste the URL on your browser window to locate the referenced article.

_______________________

Correction in Chapter 6, at page 160: change the footnote 1 in the Vignette concerning Max to read: “The assumption here is that Max would be reasonably satisfied . . .” Delete the name “Tom.”

Clarification in Chapter 6, at page 175: change the 2d last sentence of the 2d full paragraph to read, “For example, the employer may decide that employees will pay about 40% of the total health are costs.” The sentence mistakenly refers to “60%.”

Add at page 188 - Direct contracting revisited?

In this Chapter we briefly describe some early efforts among employers to engage in direct contracting with medical providers. The idea is to offer health care without an insurance company. Several companies, Intel Corp., Toyota Motor Corp., Walt Disney Co., Pitney Bowes Inc., Marriott International, Inc., are developing fully equipped on-site medical centers staffed by physicians and nurses that essentially provide full primary and preventive care. It is offered at low cost to the employees and cuts overall costs for the employers. What are some of the general health, insurance, value, and quality issues here that might be relevant to your consideration of such a plan? See: McQueen, M. (November 16, 2008), Workers Get Health Care at the Office, The Wall Street Journal.

Similarly, the PPACA provides some facilitation for new supply side provider organizations that represent the a possibility for the expansion of direct contracting - “the Coop.” Here, providers comprising both physicians and hospitals form organizations that eliminate the third party insurance company and market their services directly to plan sponsors and individuals. Provided they meet non-profit rules, the ACA will allow them to be among the offerings in State Exchanges and will provide favorable tax treatment and possibly start up funding for the Co-ops. Query: what has been the big obstacle with direct contracting? How would the ACA provisions help? For a complete guide to Co-ops and also Accountable Care Organizations (ACOs) see the AMA Guide.

Add at page 193, footnote 24: Inflation adjusted HSA Limits for 2010, and also at Table 7.3 at page 212.

The annual contribution limit for 2010, $3050 and $6150. Annual catch ups: $1000 (single), $1000 (family). It will remain the same for 2010. The Minimum Deductibles for 2010 are $1,200 and $2400 respectively. Maximum annual out-of-pockets for 2010 are $5,900 and $11,600

At page 193: HSAs are growing

Retirement Weekly reports that HSA account assets have grown 63% in 2009, and the number of accounts has grown by 31% since 2007. Most (32%) of the account holders are over 50 and appear to be using their HSA to save for medical expenses after retirement. It is estimated that a person who saves $6,000 per year in his HSA will after 15 years have a balance of $148,000. Fidelity estimates retirees will need about $225,000 to pay for health care expenses. As of August, 2009 11% of the population has an HSA. Do these fact surprise you? It has been assumed that the young and healthy are the best bet for HSAs. How do you explain this? See: Retirement Weekly, “HSAs Work Best for the Healthy and Wealthy?” August 14, 2009, vol. 7, No. 33. (www.marketwatch.com)

Add at end of Exercise Number 6, at page 210: Mental Health and new coverage requirements

Check the newly passed Mental Health Parity and Addiction Act that requires coverages for mental health illnesses to be on a par with other covered illnesses. This means co-pays, co-insurance, and other limits must be equal for both groups of conditions. What impact do you think this law will have on an employer’s health care costs? Do limits become the norm? In other words, if there is a 15 visit outpatient limit, do providers tend to prescribe 15 days? What might be some possible “returns” for the sponsoring employer of this new parity law?

Add at end of top paragraph at page 198: I am really YOUR Doctor

One of the new primary health service models that is beginning to appear is “concierge - or boutique - medicine.” Here the primary care physician requires a annual fee of anywhere from $500 to $15,000 to be  paid annually by patients. This physician in return offers same day call-backs and office visits, comprehensive annual physicals, and preventive care. Usually, the physician also reduces the number of patients he or she will treat. The annual fees are not covered by insurance, and the patient or his insurance company is responsible to reimburse the doctor for actual medical services. Another type of “concierge” service involves the doctor dropping out of health insurance, Medicare, and other third party programs. Patients pay an annual fee that covers all primary care services. What are some of the health care, insurance, financial, and risk allocation issues here?

Add to footnote 34, page 200: Some Clarity on HIPAA - higher premiums for sicker people? No! What about Wellness?

The DOL has issued some updates relating to non-discrimination among health care sponsors and TPAs that, for example, outline prohibitions against the denial of coverage based upon certain medical conditions and the charging of higher premiums for persons with certain medical conditions. The updates also describe the discrimination implications of Wellness Programs that offer incentives or special premiums for persons who participate in such programs. See: FAQs About HIPAA Non-Discrimination Regulations, February 20, 2009. (www.dol.gov/ebsa). Also, the EEOC has weighed in and has opined that the Health Risk Assessment that many employers require as a data base for participation in Wellness programs can violate the Americans with Disabilities Act or the Genetic Information Act (”GINA”) by requiring persons to reveal certain genetic traits that could be used by the employer against the employee. The EEOC has just issued some “GINA Guidelines” on the topic and here is a summary.

End of Chapter 7, Chapter Exercises at page 210, add to Number 8: Guaranteed issue of health insurance policy for very small enterprises

It is also possible for very small enterprises, with as few as 2 employees to qualify for the purchase of a group health policy. Unlike an individual policy seeker who can be denied coverage, most state laws require an insurance company to issue a policy to such a “group.” The premium quoted by the insurance company, however, will be determined by the health risks and other factors relevant to the group. See: www.statehealthfacts.org (search for “small group guaranteed issue.”). Wall Street Journal, May 27, 2009, D1

At end of Chapter 7, Add this to Number 9: Suppose also, your older brother is considering buying his own health policy. Develop a brief checklist for him to use as he considers various health policies. See: Mathews, A.,  (June 24, 2009) Going it alone when buying a health policy, The Wall Street Journal

At page 212, add the following exercise No. 16: To help soften the blow of a health care price hike, small businesses should weigh their potential cost saving strategies today. For companies with a Jan. 1 renewal date, the rest of the year is prime time to start looking for ways to cut costs. Assume you have been invited to meet with a new client seeking advice on how to reduce their costs. At this point, you do not know what type of plans they have and their costs. Prepare a discussion note listing at least 7 possible ways they could bring their health costs down. See: Ransom, D., “Seven Ways to Contain Business Health Care Costs,” Wall Street Journal, August 28, 2009 (http://online.wsj.com/article/)

At end of Chapter 7, at page 212, add a new Exercise No. 17: As we discuss in this Chapter at pages 202-204, many companies are cutting back on retiree health care which covers retirees under the age of 65, and often provides supplemental coverage for retirees over age 65 who participate in Medicare. Brainstorm what you think might be the consequences of both employer cutbacks as well as the total elimination of retiree health care as a benefit. For example, what is the likely behavioral reaction of current workers, the responses of retirees who qualify for Medicare,  the financial impact on early and age 65 retirees, as well as the possible impact on the quality of their care? See: Munnell, A., and Monk, C., The Implications of Declining Retiree Health Insurance, Center for Retirement Research, Working Paper 2009-15, August 2009 (http://www.bc.edu/crr.). What does the new Patient Protection and Affordable Care Act say about retiree health care?

Add in Chapter 7, a new Exercise No. 18, at page 212:

18. According to a recent health study, participants in consumer driven plans with high deductibles and Health Savings Accounts are growing in popularity. Additionally, when compared to others, they are more cost conscious about their health spending, more engaged in maintaining their own wellness, are less likely to be obese and to smoke, are overall more healthy, and respond more to financial incentives relating to participation in wellness programs, selection of providers, and the use of health information technology. See: Fronstin, P., Findings from the 2009 EBRI/MGA Consumer Engagement in Health Care Survey, Employee Benefit Research Institute, Issue Brief No. 337 (December 2009) (www.ebri.org). Review the article and be prepared to discuss how you, as an employer sponsor, might design your health care plan to fully leverage employee engagement in good health practices. Also, what is the future of HSAs and HDHCPs under the Patient Protection and Affordable Care Act of 2010?

Add in Chapter 7, a new Exercise No. 19, at page 212: At page 188 et.seq. we discuss direct contracting and capitation. There is a new version of this concept that can be found in some health care markets. They are called “Accountable Care Organizations,” (ACOs). The idea is to use an integrated care group comprising primary care physicians, specialists, and a hospital to provide full health care service to a given sponsor who pays a per capita annual fee. There is no billing beyond this fee for medical services. National Public Radio (NPR) (www.npr.org/) reported on this development on January 5, 2010. The broadcast was titled “Health Reform, Encouraging ACOs.” Do some research and be prepared to discuss how ACOs work, their basic design, how financial risks are allocated, and what is it about their design that purports to encourage more efficient health care services without compromising quality. See, for example, a brief article on the topic by the New America Foundation, Health Policy Program. How do such plans fit into the PP & ACA of 2010? See the 2011 AMA Guide on ACOs and other new delivery designs that describes in some detail the structure, advantages, rules, and challenges of ACOs.

Clarification in Chapter 8, page 214.

See 2d paragraph, second last line in the text. It should read: “was $81 per month (single) and $312 per month (family).

Correction in Chapter 8, page 218, footnote 6: the middle sentence should read: “Since out-of-pocket maximums (that are based upon coinsurance paid by the employee in a year . . .) Note: the out-of-pocket maximum does not include deductibles.

For Chapter 8, at page 220, 2d full paragraph: Add a footnote to the first complete sentence: We should note that not only are there cultural differences among various countries with respect to behaviors that might lead to different infant mortality rates there are significant differences in the way in which countries report infant mortality. Some do not include still born babies in their statistics, some do. Others do not include infants born at certain pre-mature intervals and weights, some do. For a review of the different reporting of infant mortality statistics, see: MacDonald,E., Health Care Myths, Fox Business News, June 23, 2009.

For Chapter 8, add at page 225, the following to footnote 52: The problem of obesity continues to worsen in the U.S. and is particularly prevalent among adults over the age of 55 many of whom are in the new “Baby Boomer” generation. Their obesity and the accompanying chronic diseases will weigh heavily on the future costs of Medicare. See: “Mississippi Tops Obesity Rankings,” Wall Street Journal, July 1, 2009.

For Chapter 8 at page 241: “Encouraging Integrated Health Care Practices” This can be an effective  means to significantly reduce health care costs and expand coverage. The New England Journal of Medicine has just published an article by what are described as “thought leaders” on health care reform: “Achieving Health Care Reform - How Physicians Can Help,” May 25, 2009 at www.nejm.org/. The authors, E. Fisher, D. Berwick, and K. Davis, argue that physicians can lead by developing true integrated health systems that will provide better care and lower per capita costs. In fact, the authors conclude that compounding these cost savings through quality health care improvements can finance an expansion of coverage among the uninsured. They point out that the savings can be accomplished without penalizing providers by imposing lower reimbursements.

Add at page 251: The Congressional Budget Office weighs in on alternatives to reducing health care costs and also estimates the cost of the Obama Plan. While the ObamaCare has become law, it is interesting to see the cost impact of some of the alternatives not considered.

A very comprehensive report analyzing the alternatives to achieve the accessibility of health care in the U.S. can be found in ”Key Issues in Analyzing Major Health Insurance Proposals,” Congressional Budget Office, December 2008 (www.cbo.gov.) Among other issues, the Report discusses whether national health care or a single payer system would reduce health care costs. It concludes that expanding health care coverage through government programs will increase, not decrease total health care costs - either with higher taxes or premiums. Read the report, review the alternative “reform” approaches, and analyze the alternatives and the CBOs rationale for its various conclusions.

Add at page 233: Electronic Medical Records - A panacea or something less?

The Bush administration worked on the idea of creating a nationwide electronic medical record (EMR) system for every U.S. patient. President Obama proposes to continue and improve on this effort. As we point out in Chapter 8, this could serve to enhance the quality of health care by reducing medical errors and inappropriate care. Some estimate that the savings for such as system could equal 25% of the current medical costs in the U.S. One major problem: most records are designed to process insurance reimbursements not provide a medical record base for the patient. Some that do include Kaiser Permanente a California TPA that provides patient access to their own records with an explanation of the data. It is called “My Health Manager.” Others are responding. Here are some websites which represent private efforts to create electronic personal health records. Wal-Mart, for example is digitizing its employee medical histories. Google, Microsoft, and Intel are getting into this business. See: www.healthvault.com, www.google.com/health, and www.dossia.org/. Milliman, in a recent report called for a convergence of quality and efficiency, which could be facilitated by introducing quality clinical practice standards and electronic health records. Together, they could significantly reduce inappropriate care which costs the U.s. $600 billion per years. See: Blumen, H. and Nemiccolo, L (Milliman, June 2009), “The Convergence of Quality and Efficiency and the Role of Information Technology in Healthcare Reform.”

There are some recent reviews of this issue, however, that contradict the idea that huge savings will result from electronic medical records (EMR). Drs. Groopman and Hartzband of Beth Israel Medical Center in Boston, writing in the Wall Street Journal on March 12, 2009, “Obama’s $80 billion Exaggeration,” at A15) indicate the famous Rand 2005 study predicting such potential savings from EMR is not supported. Recent studies, they point out, showed that the use of EMR resulted in little improvement of outcomes as compared to those cases where traditional paper records were used. An April 15, 2009 report in the New England Journal of Medicine, by Ashish, K., et al, “Use of Electronic Health Records in U.S. Hospitals,” indicates that only 1.5% of U.S. hospitals have comprehensive electronic-medical records systems. NEJM 360-16. Another recent Canadian study of patients in 7 countries showed no benefits or drawbacks arising from the use of EMR. There is some indication that EMR could provide government health care sponsors with the opportunity to mine data and draw medical conclusions concerning the efficacy of certain treatments or therapies. This could be helpful in improving treatments, but it is not the stated purpose of EMR. Do some research and determine whether a major change in the format of medical records (both traditional and electronic), which are currently done to trigger provider reimbursements, might provide a better basis to improve medical outcomes, prevent medical errors, and enhance treatments.

Add to Footnote 54 at page 225: TPA Administrative costs include more than processing claims

One of the underlying rationales for health reform, relates to dealing with the high cost of insurance company administration. In fact, the PP&ACA of 2010, places restrictions on the percentage of premiums that go to pay for such costs. Some argue, however,  that comparing the administrative costs of public to private programs should consider that the private TPAs do more than just pay claims. They build networks of providers, negotiate reimbursement rates, combat fraudulent claims, and pay marketing costs. These extra services that can mitigate overall utilization costs are investments in the better management of care. See: Weems, K. and Sasse, B. (April 14, 2009) Is Government Health Care Cheap?, Wall Street Journal, A15.

Add at Tax Changes, page 239: a little history - the Republican reform plan -using tax policy to change behavior.

On May 20, 2009, the Republican caucus offered an alternative to the Democratic health care reform proposals. The plan basically tracked that proposed by Senator McCain during the recent presidential campaign: (1) eliminate the favorable tax treatment of employer-sponsored health benefits. (See the rationale for tax change treatment at Kaiser Health News, How Congress Might Tax Your Health Benefits. (June 2009). (2) Provide an annual tax credit for the purchase of health care of $2300 (individual) and $5700 family coverage. (3) Facilitate the purchase of health care plans through multi-state insurance exchanges that allow for comparison shopping by individuals. (4) The health plan can be owned by the individual and not linked to his employment. (5) The plans would provide incentives to maximize use of preventive care. (6) If employers wish to continue sponsoring health care benefits, the costs above the tax credit amount would be ordinary income and charged to the employee. In effect, this would encourage employees to find better values either from their employer or on their own.

Chapter Exercises, p. 252 Chapter 8, Add:

Number 3:  There have been a number of “supply side” innovations appearing in health care systems that could make health care more affordable. These include the Health Care Mini Clinics, briefly discussed in Chapter 7, as well as new heavily discounted drugs being offered directly to the consumer by large retailers, such as Wal-Mart, Kroger, and Walgreens. Many of the drugs offered under these programs can be obtained by the consumer at a lower price than that available in a prescription drug insurance plan. Aligning the reimbursement of primary care physicians to proper diagnosis and treatment regimens, as opposed to payments for performing services, Six Sigma quality programs among health providers, new health care programs offered directly by hospitals, such as the University of Texas Medical Branch hospital in Galveston to small businesses at very low costs ($60.00 employee premium) per month plus co-pays), and Patient Centered Medical Homes for the comprehensive and coordinated treatment of chronic diseases which currently generate about 70% of our health care costs can all lead to more affordable health care. They focus on the supply side of health care. . Also, with respect to the University of Texas plan, for $60 per month (employee single premium) what benefits and design features comprise the plan? It covers 20 MD visits per year, maternity, visits to ER, MRI and CT imaging, and surgery. It also includes a cap on R/x of $1200 per year and a $250,000 lifetime maximum. Only network MDs and hospitals care is covered. Typically, the employer pays 1/3 ($60 per month), the employee pays the same, and NGOs and Foundations pay the rest. This form of direct contracting between providers and small employers makes possible coverage for a segment of the market - employers with fewer than 25 employees - where only 32% of employers provide health insurance. Do some research on these and other supply side innovations that are developing and prepare a some talking points for a class discussion.

Number 4 (Page 252): At page 225 in the text, we refer to the problem of obesity and its impact on the high cost of health care in the U.S. In a recent study, researchers concluded that over 30% of adults in the U.S. population was obese and 45% suffer from serious chronic diseases which have a significant impact on life expectancy and the utilization of health care resources and costs. With respect to health care reform, what steps could be included that might effectively address this problem. Explain. (See: Thorpe, K., Ogden, L., Galactionova, K. (February 2009) “Weighty Matters - How Obesity Drives Poor Health and Health Spending in the U.S.,” National Business Group on Health

Number 5, (page 252): One reform measure that is frequently raised by physicians is tort reform. (See page 240 of the text.) It is alleged that there are too many malpractice claims filed against doctors that are without merit.  With the potential multi-million dollar verdicts, however,  physicians and their insurance companies are compelled to settle out of court. This drives up insurance premiums and, moreover results in defensive and costly medical practices that are designed to avoid any chance of liability. There are several approaches to tort reform: cap punitive damages, create specialized medical tribunals to hear such complaints and get the cases away from civil juries, and design a “safe harbor” standard that would exonerate a physician who followed prescribed medical practice. There are others. Read the attached article (the “Role of Medical Liability Reform in Federal Health Care Reform” July 2, 2009) from the New England Journal of Medicine and discuss the approaches. Also, can the federal government even get involved in tort reform? How could it be done? Which approach do you favor? What are some other possibilities that would ameliorate the defensive medicine problem that is not discussed in the article? What are the potential savings that could result from Tort Reform? Explain.

Number 6: As we note in Chapter 7, there are a variety of cost sharing design features in a typical health care plan. Total cost sharing, however, is increasing each year, shifting more of the costs of health care onto the consumer. Prior to the passage of the PPACA (Health Reform of 2010), many high deductible plans were exempting certain necessary preventive care measures from cost sharing features, such as office co-pays and deductibles. In July, the government agencies responsible for the Act issued an interim final rule limiting the plan sponsor from applying certain cost sharing to preventive care. Check the rule (see some references below) and be prepared to discuss these issues: (1) how is preventive care defined? (See the Rules and also see an article of July 16, 2010 by Ken Terry of BNET titled “How an Obscure Federal Panel Limits Preventive Care.” The article describes the U. S. Preventive Services Task Force which for the past 25 years has graded the clinical value of preventive services. (2) What are the cost-sharing limits? (3) Does the rule apply to “grandfathered plans?” (4) What will be the impact on the cost of a health plan as a result of the rule? (5) What is the policy underlying the rule? See: DOL, IRS, HHS Rule on first dollar coverage and preventive care, July 2010). See also a pre PP&ACA publication on cost sharing in general: ”Hidden Costs of Health Care,” Department of Health and Human Services, July 2009.

Number 7: Professor Michael Porter, an expert on markets and competition believes that the cost of health care could be significantly reduced if competition among providers were based upon quality outcomes. Instead of paying for activities, providers would be rewarded for clinical results. We have talked about this i the text and in My View above. Assume you are working for a Congressperson and she would like to know all the pros and cons of such an approach. Make a list of discussion points for her. See: Porter’s article in the New England Journal of Medicine, A strategy for health care reform - toward a value based system, July 9, 2009

Number 8: Under the PP&ACA of 2010, certain persons and employers who qualify can buy health insurance through “insurance exchanges.” How would the issue of adverse selection relate to the design of such plans and the participation of persons in these exchanges? What might be required in order to avoid the problem of adverse selection? See: http:/industry.bnet.com/healthcare/ (”It’s time to take a closer look at Insurance Exchanges” by Ken Terry, August 23, 2009).

We note that in July 2011 the Department of Health and Human Services just issued a Preliminary Regulation on State Exchanges. See a summary of the proposed regulation published by Plan Sponsor.com.

Query: what issues do you think a proposed regulation should resolve with respect to State Exchanges? List them for class discussion.

Exercise No. 9: In 2006, Massachusetts instituted mandatory health care coverage for most employers and also required individuals to have health care insurance. It expanded Medicaid eligibility, included a public health insurance plan as an option, and created an insurance exchange for those wishing to acquire private based health coverage. To date, the plan has added 430,000 previously uninsured, and now leads the nation in the lowest percentage of uninsured - 2.9%. Do some research on this plan and see what, if any, implications it might have for a national health care reform approach. For example, what are the implications and effects of the plan on employers? What percentage of persons choose the public option? What steps is Massachusetts taking to reduce health care costs? Who comprise the 2.9%? How does the plan enforce its mandate provisions? How is the plan doing financially? See: Kaiser Family Foundation Commission on Medicaid and the Uninsured, September 2009, “Massachusetts Health Care Reform - 3 years later.” Publication Number: 777702 (www.kff.org). But see also: Dembner, A., “Health Care Costs Dominate Mass. Budget Debate,” The Boston Globe, March 26, 2008; King, S. “Mass. Health Care Reform is Failing Us,” The Boston Globe, March 2, 2009. (http://www.bostonglobe.com/)

Exercise No 10: In this Chapter we discuss using clinical outcomes data to evaluate providers and create a quality and value based health care market. To see such a program in action, check the Pennsylvania Health Care Cost Containment Council. The Council has put providers under the microscope looking at hospital readmission rates, hospital charges, lengths of stay, mortality rates of patients, and in-hospital complication rates. How are measures applied? What are the financial and quality results? How does the process account for severity and differences in patients? How have hospitals and medical staffs responded? Could this be an effective means to “reform health care?” See Burton, T., “Hospitals Find Way to Make Care Cheaper - Make it Better,” The Wall Street Journal, October 6, 2009, A-1. (See the Council’s website and reports on quality improvements at: http://www.phc4.org/

Last Revised: August 15, 2011