Implications of the Affordable Care Act Employer Impact & Changing Value Proposition for Fully-Insured Large Groups Blue Cross of Northeastern Pennsylvania Tuesday, July 23, 2013 This presentation is not intended to be a comprehensive review of the content of the legislation, nor should it be interpreted as authoritative and/or legal advice on implementation. The presentation represents our best understanding as of the date of the presentation. In the event you have questions applicable to your business or employees, we recommend you request the advice of competent legal counsel.

Key Considerations 1.Incentive to Offer Coverage 2.Regulatory Changes to Large Groups 3.Emerging Exchange Markets 4.All Aspects of Pay or Play Evaluation 5.Changing Value Proposition for Employers and Employees 1 Presentation will focus on 5 key considerations of the Affordable Care Act (ACA)

As employers develop their benefits strategies for 2014 and beyond, it is important to consider the reasons for sponsoring coverage today 2 Why employers offer coverage Financial advantages to sponsor group healthcare coverage Talent acquisition, retention and employee engagement Company culture and the nature of the social contract with employees Industry trends and competitor positioning Employee health and wellness There are many important considerations to choosing the right benefit strategy: Incentive to Offer Coverage

While all employers share similar incentives to offer coverage, there are several unique qualities pertaining to large employers 3 Unique Aspects of Large Employers Incentive to Offer Coverage Significant tax advantages to sponsoring group coverage Large employers typically have negotiating leverage to achieve better pricing than an individual would Health benefits reinforce companies’ wellness efforts Larger employers tend to reflect the culture and expectations of the local area Employer’s benefits help compete for talent between other large firms within an industry Certain industries, e.g. retail and food services, offer more limited benefits Offering health benefits is typically table stakes for most large employers 1 Many larger employers offer differentiated benefits to classes of employees 1)95.5 % of employers over 50 employees offer coverage to employees in PA (2012 Medical Expenditure Panel Survey)

Employer-Sponsored (Pre-tax) $6,000 Individual Market (Post-tax) The tax implications of Group coverage and Individual market subsidies available to employees are key economic factors to consider 4 Tax Deduction $1,500 Subsidy and Tax Implications Equivalent pre- and post-tax costs for each stakeholder Illustrative Incentive to Offer Coverage

Requirement/Expense Self-Insured Plans (ASO) Fully-Insured Large Group Plans Fully-Insured Small Group Plans Elimination of Lifetime Caps 1 Dependent Coverage to Age 26 1 Preventive Services 1 Out of Pocket Maximums Minimum Actuarial Value ACA Fees 2 Affordable Coverage Penalty Compliance with State Mandates Insurance Premium Taxes Essential Health Benefits Modified Community Rating New Requirements and Fees 5 1)In effect prior to )Reinsurance Fee, PCORI fee Changing Value Proposition ACA requirements will impact employers differently based on size and funding type

Benefit Level Benefit Flexibility Regulatory Changes Large employers will retain most of the flexibility they have today in terms of underwriting and benefit selection Individual and Small Group plans restrained by regulations Significant flexibility in underwriting and benefit levels in Large Group market Products Requirements: Metallic Levels Essential Health Benefits (EHBs) 3:1 Age Banding Community Based Rates Guaranteed Issue Actuarial Value Pricing 6 Platinum Gold Silver Bronze LG SG Ind SG Ind SG Ind SG Ind LG

Employees may seek out options on Public Exchange Traditional Group Products Private Group Exchanges ACME Inc. Employer Options 7 Post-2014 Large employers will have emerging private exchange market to enable employees to take on more responsibility of purchase decision Pre-2014 Typically shop for health benefits by comparing fairly standardized products from different carriers Cost Per Employee ConsistentCost Per Employee Differs Emerging Exchange Market 1 CARRIER 2 3 ACME Inc. Emerging exchange markets will likely provide increasing options to attain benefits for employees

Employer Incentives 8 Premium Contribution Post-reform Environment Per Employee Expense or Savings $ ACA Fees Pay or Play To make an informed financial assessment on the impact of not offering coverage, all costs should be considered

Employer Incentives 9 Employers that no longer sponsor coverage can save the funds previously allocated to premiums Premium Contribution: Employers are able to purchase group coverage with pre-tax dollars Employers that shift a large share of premiums to employees already, have less to gain from dropping coverage Underwritten group premiums will likely face premium pressure under ACA due to: –Increased product requirements –Additional taxes and fees Make Whole Payment Premium Contribution Payroll Tax Corp.Tax Ded. Penalty Expense ACA Fees Pay or Play

Employer Incentives 10 Employers that no longer sponsor coverage may also save funds set aside allocated to various new fees under the ACA ACA Fees: Patient-Centered Outcomes Research Institute (PCORI) Fee. Issuers of individual and group health insurance policies are required to pay a new fee to help fund the new organization.  $1 PMPY (‘14) / $2 PMPY (‘15) Transitional Reinsurance Program Fee. Program to help stabilize premiums for coverage in the individual market during calendar years 2014 through 2016  $63 per covered life for 2014 Make Whole Payment Payroll Tax Corp.Tax Ded. Penalty Expense ACA Fees Premium Contribution Pay or Play

Employer Incentives 11 Employers are anticipated to provide employees with additional compensation to offset costs of purchasing Individual coverage Make Whole Payment: Employees will need varying levels of make whole payments depending on the amount of subsidies available to them Employers will likely consider labor market conditions when estimating amount to make employees ‘whole’ In order for employees to be eligible for subsidies on the Individual Exchange, employers cannot provide a compensation increase through a tax exempt savings account such as an HRA Make Whole Payment Premium Contribution Payroll Tax Corp.Tax Ded. Penalty Expense ACA Fees Pay or Play

Employees with similar salaries may require vastly different make- whole payments 12 Make Whole Payment Example Employee A: Single IndividualEmployee B: Family of 2 Employee Age:5030 Employee Salary:$35,000 Spousal Salary:None$35,000 Household FPL: Estimated Premium:$4,940$9,010 Government Subsidy: $1,046None Scenarios: Employee Subsidy Eligibility in the Individual Market (2014) Estimated Cost of Coverage: $2,415 (premium cap 1 ) $9,010 (full premium) (1)Estimate of premium cap as described in ACA bill, based on Silver level plan Subsidy Eligible Non-Subsidy Eligible Pay or Play Illustrative

Employer Incentives 13 The tax implications of employer sponsored coverage make dropping coverage potentially more costly than is commonly believed Payroll Tax: Employer must take into account additional payroll taxes when making employees whole through a salary increase Corporate Tax Deduction: Will depend on tax status of employer If make whole payment is larger than previous premium contribution, employer tax deduction would increase Employer tax deduction will be based on employer’s decision to apply savings to profits or to business expense Make Whole Payment Premium Contribution Payroll Tax Corp.Tax Ded. Penalty Expense ACA Fees Pay or Play

Employer Incentives 14 As small employers are exempt, the penalty will most likely not be a factor in the decision to offer coverage Penalty Expense: Employers that have 50 or more full time equivalent employees will be evaluated against criteria for a penalty The penalty is applied to each full time employee minus the first 30 employees Penalty is assessed as an excise tax, meaning that it is levied after corporate taxes are paid Make Whole Payment Premium Contribution Payroll Tax Corp.Tax Ded. Penalty Expense 1 ACA Fees Changing Value Proposition (1)Employer Shared Responsibility Payments (ACA Penalty) delayed until 1/1/2015

Employee Employers must take into account several variables before making final benefit decisions Factors that Will Impact Employer Decisions to Sponsor Coverage Post-reform Employer Specific: Employer size Employer premiums Premium cost sharing with employees Employee participation rate Employee Specific: Distribution of employee incomes Workforce demographics (e.g. family sizes and ages) Premium contribution to group plan Market Based: Individual market premiums Exchange viability Penalties and subsidies Changing Value Proposition

Evaluating Economic Factors Changes in consumer incentives to purchase in the Individual market may change employers’ value proposition to offer coverage Post-ReformPre-Reform Changing Value Proposition Group Market Individual Market Tax Deductions Pre-tax Dollars Risk Pooling Low-Income Programs Emerging Individual Market Incentives Guaranteed Issue Age Banding Premium Subsidies Cost Share Subsidies State Exchanges

Consumer Value Proposition 17 Consumers may reassess the value of group coverage due to ACA regulations creating a more consumer-friendly individual market Changing Value Proposition Provide richer benefits at a lower cost than in Individual market Employer reduces exposure of premium cost to employee Burden of payments and product selection taken care of by employer Health insurance is differentiator to attract and retain talent Group Market Value Proposition Individual Market Value Proposition Possible increase in salary due to lack of group coverage Government reduces exposure of premium cost to employee Benefits are portable and not tied to specific employer Much broader range of potential options that fit personal needs Health insurance is not a differentiator for targeted jobs