1. Consumerism and Actuarial Science in A 21 st Century Intelligent Health System Healthcare Visions, Inc. Creating the Possible… Ronald E. Bachman FSA. MAAA President & CEO Healthcare Visions, Inc. 404-697-7376 ronbachman@healthcarevisions.net www.healthcarevisions.net Sr. Fellow - Center for Health Transformation Sr. Fellow - Georgia Public Policy Foundation Fellow - Wye River Group on Health

2. What Is a 21 st Century Intelligent Health System? In a 21 st Century Intelligent Health System, the individual has: –Accurate, timely knowledge of personal health needs, –Access to the best information about how to maintain personal health, –Knowledge of whom to see and where to go for health services, –And confidence that health providers are practicing medicine using best practices based on the most up-to-date understanding of outcomes-based medicine. In a 21 st Century Intelligent Health System, the individual has the right to know the price and quality information about health services in the most accurate, least expensive, and most convenient manner possible. In a 21 st Century Intelligent Health System, the individual is the center of knowledge and decision-making and has responsibility for his or her own health.

3. Consumer-directed or Consumerism? Consumer-directed health plans (CDHPs) utilizing an HRA or HSA are the newest weapon in the arsenal to reduce healthcare cost. But will this approach really lower your cost? CDHPs are a good start and can developing experience shows they can lower costs. CDHPs are a good 1 st generation attempt. The market is moving rapidly to 2 nd generation and beyond. The transformation is NOT to CDHP but to Consumerism. Actuaries must go beyond traditional models to reflect the behavioral change component of a consumerism design.

4. Healthcare Consumerism Healthcare Consumerism is about transforming a health benefit plan into one that puts economic purchasing power—and decision-making—in the hands of participants. It’s about supplying the information and decision support tools they need, along with financial incentives, rewards, and other benefits that encourage personal involvement in altering health and healthcare purchasing behaviors.

5. Elements of Healthcare Consumerism 1. Budgeting – monthly versus annual 2. Risk Sharing – pooled claims for large groups 3. Savings – NEW with advent of HRAs and HSAs

6. The Core of Consumerism The Unifying Theme for a Health and Healthcare Strategy is: “Implement only if it supports behavioral change consistent with the strategy” Behavioral Change

7. Two Basic Principles for Successful Consumerism 1.Must work for the Sickest Members, as well as the healthy 2. Must work for those not wanting to get involved in decision-making, as well as the “techies”

8. Mega Trends 1.Personal Responsibility 2.Self-Help, Self-Care 3.Individual Ownership 4.Portability 5.Transparency (the Right to Know) 6.Consumerism (Empowerment)

9. The Evolution of Healthcare and Consumerism Future Generations of Consumer Directed Healthcare Behavioral Change and Cost Management Potential Low Impact ---- ---- ---- ---- ---- ---- ---- ---- ---- High Impact Traditional Plans with Consumer Information 2 nd Generation CDHC Focus on Behavior Changes Traditional Plans 3 rd Generation CDHC Integrated Health & Performance 1 st Generation CDHC Focus on Discretionary Spending 4 th Generation CDHC Personalized Health & Healthcare

10. Major Building Blocks of Consumerism Personal Accounts Personal Accounts Incentives & Rewards Incentives & Rewards Wellness/Prevention Wellness/Prevention Early Intervention Early Intervention Disease Management Disease Management Information Information Decision Support Decision Support It is the creative development, efficient delivery, efficacy, and successful integration of these elements that will prove the success or failure of consumerism.

11. 2 nd Generation CDHC Focus on Behavior Changes 3 rd Generation CDHC Integrated Health & Performance 1 st Generation CDHC Focus on Discretionary Spending 4 th Generation CDHC Personalized Health & Healthcare Personal Accounts Personal Accounts Incentives & Rewards Incentives & Rewards Wellness/Prevention Wellness/Prevention Early Intervention Early Intervention Disease Management Disease Management Information Information Decision Support Decision Support Initial Account Only Activity & Compliance Rewards Indiv. & Group Corporate Metric Rewards Specialized Accts, Matching HRAs, Expanded QME 100% Basic Preventive Care Web-based behavior change support programs Worksite wellness, safety, stress & error reduction Genomics, predictive modeling push technology Information, health coach Compliance Awards, disease specific allowances Population Mgmt, IHM, Integrated Back-to-Work Wireless cyber – support, cultural DM, Holistic care Passive Info Discretionary Expenses Personal health mgmt, info with incentives to access Health & performance info, integrated health work data Arrive in time info and services, information therapy Cash, tickets, Trinkets Zero balance acct, activity based incentives Non-health corporate metric driven incentives Personal development plan incentives, health status related Summary – A peek into the future of Consumerism

12. Using Information & Incentives To Change Behaviors Low UsersMedium Users High Users Very High Users No Claims Generally Healthy Acute Episodic Conditions O/P, Low In/P, High Maternity Chronic & Persistent. Conditions. O/P, Low In/P, High Catastrophic % Mem 15% 48% 14% 3% 12%4%1% % Dollars 0% 12% 15% 12% 5% 21% 20% 15% % Mem 63% 32% 17% % Dollars 12% 32%56% Prevention Wellness - Lifestyle Minimize Early Intervention Wellness - Clinical Maximize Minimize Maximize Wellness - Lifestyle Wellness - Clinical

13. Low UsersMedium UsersHigh Users Very High Users No Claim s Genera lly Health y Acute Episodic Conditions Chronic & Persistent Conditions Catastrop hic O/P, Low In/P, High Mater nity O/P, Low In/P, High % Ee % Dollars % Ee % Dollars Patient Safety Centers of Excellence Patient Advocacy/ Case Management Pre-Natal Care Reduce Variation in Evidence-Based Medicine Disease Management Reduce Variation in Evidence-Based Medicine Discretionary Expenses Psycho-Social Factors / Integrated Absence Management Personal Health Management Decision Support & Information

14. Health Promotion Health Risk Management Chronic Disease Management High Cost Case Management Website Health Risk Assessment Patient Identification and enrollment Targeted Behavior Modification Care Coordination Practice Guidelines HealthyLifestyle Promotion Physical Activity Campaign Address Comorbid Conditions Integrated Services, Communications, Measurement and Evaluation Care Continuum and Tools for Changing Behaviors Acute Conditions e.g., Infections, Respiratory, Lacerations Navigational Support Patient Advocacy Care Coordination Address Comorbid Conditions At Risk e.g., Inactivity, High Stress, Overweight, High Blood Pressure Chronic Conditions e.g., Depression, Heart Disease Catastrophic Conditions e.g., Cancer, Hepatitis C Well e.g., Low Risk, Good Nutrition, Active Lifestyle

15. Wellness Communication Acute Case Mgmt Utilization and Case Management NETWORK A / TPA ANETWORK B / TPA B Education Prevention Demand Management Disease Mgmt Programs Integrated Absence Mgmt The secret is cooperation and synergy between components supporting the corporate strategies Integrated Health Management Program An Implementation Option for Multiple Generations General Manager Personal Care Accts. FSAs, HRAs, HSAs Process Integration & Disciplined Improvement Company Data Warehouse & Metrics

16. Potential Savings from Full Implementation of Consumerism Achievement of savings and improved outcomes is dependent upon both the Type and Effectiveness of the programs implemented. Gross* Savings as % of Total Plan Costs (Programs Applicable to All Members) Effective Programs Implemented Traditional plans Consumerism Plans Passive1 st Generation2 nd Generation3 rd Gen & Future Basic2%3%7%10% Expanded3-4%5-8%12-15.0%20.0+% Complete4%7%17%25% Comprehensive (Future)5%10%20%30% *Excludes Carry-over HRAs/HSAs and any added Administrative Costs of Specialized Programs

17. Major Actuarial Issues Anti-selection, Value of wellness, Disease management ROI, Actuarial credits for behavioral change

18. Moderate Adverse Selection High Adverse Selection High Positive Selection Moderate Positive Selection Low Benefit High Benefit Higher Cost Lower Cost e.g., Core Plan e.g., Age-Rated HMO e.g., PPO or POS e.g., Not typically seen Moderate Adverse Selection High Adverse Selection High Positive Selection Moderate Positive Selection Low Benefit High Benefit Higher Cost Lower Cost e.g., Core Plan e.g., Age-Rated HMO e.g., PPO or POS e.g., Not typically seen Moderate Adverse Selection High Adverse Selection High Positive Selection Moderate Positive Selection Low Benefit High Benefit Higher Cost Lower Cost e.g., Core Plan e.g., Age-Rated HMO e.g., PPO or POS e.g., Not typically seen Understanding Risk Selection and Anti-selection The primary drivers of risk selection are employee cost and the relative benefit richness of the competing options. Employees will tend to choose the option expected to provide the best economic benefit for their situation. For healthy individuals the selection is usually low cost/low benefit options. For less healthy individuals the selection is usually high cost/high benefit options. Selection effect is at least directionally predictable in most cases. Mitigating factors tend to reduce the magnitude of selection. Health care costs are not fully predictable. Plan choices are usually made at a family unit level versus the individual level..

19. Potential Anti-Selection from CDHC on an Optional Basis Introduction of CDHC on an optional basis will limit the cost reduction because fewer members will be impacted and because the members that do select CDHC are likely to have an existing favorable health status (anti-selection). Adopting companies and its members can benefit most by introducing consumerism with both a CDHC option and consumerism for all other plans. Example - Selection in An Option Environment OPTION # 1 – Current PlanOPTION # 2 - CDHC % Members Participating Clms/Part.Mbr. Vs Clms/All Mbrs. Remaining Members Clms/Part.Mbr. Vs Clms/All Mbrs. 90%101%10%87% 70%103%30%92% 50%103%50%97%

20. Consumerism Choices involve Options for Behavioral Change rather than Optional Plan Designs Consumerism Choices: Wellness Preventive care Early Intervention Lifestyle Options (diet, exercise, smoking, safety) Self-help, self care Discretionary Expenses (e.g. OV, ER, Rx) Value purchasing (e.g. DXL, o/p vs. in/p) Participation in Disease Management Programs Compliance with Evidence Based Medicine Treatment Plans

21. Survey Results Wellness Assessment Risk Factors

22. Value of Wellness – What is it? How Much Physical Activity Do the Experts Recommend? 30? 60? 90? Minutes of What? The Centers for Disease Control and Prevention and the American College of Sports Medicine recommend the following: 20 minutes of vigorous-intensity physical activity 3 times a week or 30 minutes of moderate-intensity physical activity 5 or more times a week. What is moderate-intensity physical activity? Any activity that burns 3.5 to 7 calories per minute (e.g., walking briskly). What is vigorous-intensity physical activity? Any activity that burns 7 or more calories per minute (e.g., climbing up and down stairs).

23. National Business Group on Health Comments on Wellness Recent studies indicate that moderate increases in employees’ physical activity levels can result in significant decreases in company costs. Although existing research is limited, employers may use calculation tools and internal data to calculate the potential savings of an effective physical activity promotion program. To reach a rough estimate of the cost of its employees’ physical inactivity, a company could turn to www.activelivingleadership.org for a new online tool. This Physical Inactivity Cost Calculator was developed by, among others, the Active Living Leadership Initiative, Fifty Plus Lifelong Fitness and the National Coalition for Promoting Physical Activity and Health.

24. Examples of Corporate Wellness & ROI Motorola’s wellness programs which saves the company $3.93 for every $1 invested. Northeast Utilities WellAware Program which in its first 24 months reduced lifestyle and behavioral claims by $1,400,000. Caterpillar’s Healthy Balance program which is projected to result in long term savings of $700 million by 2015. Johnson & Johnson’s Health and Wellness Program which has produced average annual health care savings of $224.66 per employee.

25. Wellness ROI Studies Many studies have focused specifically on the return on investment (ROI) from worksite health promotion and disease prevention programs. Findings on the return on investment for health promotion and disease management programs were reported for nine employers: Canada & North America Life; Chevron.; City of Mesa, AZ; General Mills; General Motors; Johnson & Johnson; Pacific Bell; Procter & Gamble; and Tenneco. These programs provide health education to their employees to promote behaviors that will improve health or prevent disease, and typically include exercise programs, health-risk appraisal, weight control, nutrition information, stress management, disease screening, and smoking cessation. The review found significant return on investment for the programs provided by these nine employers, with the range of benefit-to-cost ratios, ranging from $1.49 to $4.91 in benefits per dollar spent on the program, and a median of $3.14.

26. Savings from National Wellness Program Savings estimates revealed that participation in the National Wellness Program was associated with significant savings in dollars per employee from 1991 to 1995, with the highest dollar savings achieved in 1995 ($16 per employee per month). Evaluation of the program showed that health risk assessment was associated with significant and substantial reductions in healthcare costs. Employees who completed one, two, or three health risk assessments on average had lower 1997 health care costs of $112.89, $134.22, and $152.29, respectively. Employees who had completed at least one health risk assessment and participated in an additional wellness activity had an average cost savings of $200.35 per year.

27. CIGNA Wellness Savings The Working Well Moms Program has decreased pharmacy costs – 62% fewer prescriptions for breast-fed children. The program has also contributed to decreased medical costs – a savings of $240,000 in healthcare expenses. In addition, program participants have 74 fewer absences per 100 mothers, a savings of $60,000 in lost time annually. The Working Well Triumph Program has resulted in healthcare costs savings of more than $900 per program participant. The Working Well Flu Shots Program participants have 29% less absenteeism as compared to employees not getting a shot. This produced a savings of $33 per employee participant. The overall return on investment for the program was 3 to 1. CIGNA’s smoking cessation program helped 67 percent of its participants quit smoking after 12 months, a quit rate up to three times higher than comparable smoking cessation programs. CIGNA estimates saving $949 in health care costs for each successful participant, a return on investment of 9.5 to 1.

28. Disease Management for Chronic and Persistent Conditions The Agriculture and Health and Human Services Departments’ Dietary Guidelines for Americans 2005 recommend the following: To reduce the risk of chronic disease—at least 30 minutes of moderate-intensity physical activity on most, preferably all days of the week; To prevent the gradual accumulation of excess weight in adulthood, up to 30 additional minutes per day may be required over the 30 minutes for reduction of chronic disease risk and other health benefits; and To sustain weight loss for previously overweight/obese people, about 60 to 90 minutes of moderate-intensity physical activity per day is recommended.

29. Disease Management Program ROI

30. Medical Claims% Change 2003 Study (13.5K members) 3.7% increase in medical cost 2004 Study (9 mos.) (49K members) Early indicators 6% increase in medical cost over 2003 Continuously Enrolled Members: Allowed claims Change in Utilization (# of Units) 2003 Study (12 months of data) 2004 Study (9 months of data) Inpatient Admissions-5.2%-6.7% ER Visits-2.6%-15.9% Outpatient Events-14.4%-4.6% ALL Office Visits-3.3%-3.4% PCP Visits-10.9%-12.3% Specialists visits+3.4%+3.6% First Year Aetna HealthFund Members 2004 results (9 mos.) show low medical cost increase Note: 12 month continuously enrolled results due in August

31. What Happens in the Second Year to Allowed Claims? 1Q ’032Q ’033Q ’034Q ’031Q ’042Q ‘043Q ’044Q ’04 AHF ** PPO * Allowed Claims are total claims, eligible for payment before benefit plan is applied ** Based on all AHF members from 18 of 19 plan sponsors in 2003 study; one plan sponsor removed due to large increase in AHF enrollment. Allowed Claims PMPM $140 $160 $180 $200 $220 $240 $260 +10.3% +8.7% Utilization in AHF increased at a lower rate than PPO, based on allowed* claims Reinforces assumption that AHF trend will be 1% below PPO Studies will continue to evaluate AHF trend into the third year

32. Highlights of the 2003 Aetna HealthFund 12-Month Study Lower medical cost increase, applicable to first-year AHF members - 3.7 % compared to double digit PPO plans Diabetics continue to seek necessary care, relative to comparative populations Increases in certain preventive care services Reduction in pharmacy scripts and increased generic usage Increased use of online tools, information, and satisfied members

33. 2004 United Health Plan Experience The iPlan study found: A drop in the number of claims per 1,000 enrollees compared to the year before enrollment; A decrease in total emergency room visits, illustrating more selective, responsible use of emergency services; Significantly less-than-expected medical cost trends (per member/per month) than for traditional health plans; when iPlan was the only option, the annual cost trend was less than 1 percent; Reductions in specialist visits, outpatient surgeries and radiology and lab services; and Higher utilization of preventive services among iPlan participants.

34. 15% reduction in pharmacy costs 92% generic substitution rate (open formulary, 100% of rebates go back to employer) 5% increase in preventive care expenditures 18% reduction in outpatient visits 85% graduation rate (Health Coach Program) 42% HRA completion with incentive; 28% opt-in to Health Coach 60% of clients offer integrated health improvement incentives. Lumenos Key Results – Utilization Impact

35. Are HSAs the right vehicle for large employer groups? Yes, If……….. Or No, Because……. Need to Understand the Consumer Movement & the Transformation that is Underway

36. HSAs and HRAs Very Different HSA – A law, with specific requirements and benefit design requirements. Most TAX ADVANTAGED vehicle ever created ******************************************************* HRAs – No Law, this is a regulatory creation based upon an IRS ruling. Most FLEXIBLE vehicle ever created

37. Incentive Awards - Three Very Different Personal Care Accounts FSAs – Traditional Group Plans Health Reimbursements Arrangements (HRAs) – Employers’ choice for cash flow flexible incentive based medical plan benefit designs (best suited for self-insured groups) Health Savings Accounts (HSAs) – Employees’ choice for funded portable triple tax advantaged with “High Deductible Health Plans” (best suited for individuals and small groups) Combination Accounts – creative but confusing

38. Important Differences between Use of HRAs and HSAs for Supporting Behavioral Change Generation 1 Initial Account Only Generation 2 Activity & Compliance Rewards Generation 3 Indiv. & Group Corporate Metric Rewards Generation 4 Specialized Accts, Matching HRAs, Expanded QME 1. Any Amount 2. Notional Acct 3. Employer Determined 4. Employer Only Contributions 1. Flexible Activity & Compliance Rewards 2. Employer Determined 3. Can not be cashed out 4. Must be used for healthcare 1. Flexible Indiv & Group Rewards 2. Employer Determined 3. Can not be cashed out 4. Must be used for healthcare 1. Specialized Notional Accts, 2. Can terminate by employer rules 3. Potential IRS Expanded QME Health Savings Accounts 1. Amounts Set by law 2. Real Dollars in Acct 3. Er or Ee Contrib 4. Contributions up to plan deductible of $1000-2650 Single $2000-5250 Family 1. Ltd Potential 2. Must give Cash Option 3. Awards must be same $ amt or same % of deductible 3. HSA can be used (with 10% penalty) for non- healthcare expenses 1. Ltd Potential 2. All participants must receive same amount or same % of deductible 3. Difficult to use for Group Incentives 1. Ltd Potential 2. 100% Vested & Portable 3. Can use matching HRAs, 4. Potential IRS Expanded QME Health Reimbursement Arrangements Personal Care Accounts

39. The Evolution of Personal Care Accounts Current State HRAs HSAs Employer- based Healthcare with Individual Accountability Individual-based Healthcare Employer-based Defined Contribution Developments FSAs Employer-based Healthcare Traditional (Use it or Lose it) Special Purpose Non-Plan Combination Accounts Employer- based healthcare Special Purpose Accounts Incentive Matching

40. Are HSAs the Wave of the Future? Which Point of View Direction will We Take? Yes, if…. 1. we recognize the HSA legislation and regulations as a good start and another building block for consumerism and behavioral change. 2. there is additional legislation/regulation to support large Er interests in providing HSAs (use for healthcare only, Rx coverage problem, combination accounts). 3. there is legislative support for the common use of FSAs for targeted needs, HSAs as “Health Savings Accounts” and HRAs as “Health Reimbursement Arrangements. No, because…. 1. they were not legislated/regulated with large employers in mind. 2. of a desire to promote individual insurance over individual ownership (under employer and individual policies) 3. they are just a tool to cost shift to employees, they can not reward behavior change 4. they are only desirable to the young, healthy, and wealthy

41. Are HSAs the right vehicle for large employer groups? Yes, If……….. Or No, Because……. Need to Understand the Consumer Movement & the Transformation that is Underway

42. The Fundamental Policy Question Will Legislation/Regulation Use HSAs to: … mainly promote portable Individual & Small Group Insurance, OR … expand Personal Care Account ownership through in both an employer-based and individual-based healthcare system thru HSAs, HRAs, and FSAs.

43. Growth of Personal Care Accounts HRAs HSAs 2000* None None 2001* 19,000 None 2002* 53,000 None 2003*394,000 None 2004(est) 1-1.5M400,000 2005(est) 3.2 M 1.0M+ 2006(est) 6.0+M ??? 2007(est) 12-15M ??? * Deliotte Consulting

44. The Answer – Flexible Health Savings Accounts (FHSAs) FHSAs would have the tax advantages of HSAs and the key flexibilities of HRAs. Basic Principles: 1. Retain personal responsibility goal of HSA/HDHPs 2. Focus on Behavior Change 3. Recognize value of Pay for Compliance as a driver for behavior change and shared savings with personal responsibility 4. Expand adoption and funding of HSAs by large employers

45. Flexible Health Savings Accounts (FHSAs) The Next Generation Four needs that would allow FHSAs the flexibility to: 1. Provide financial Rewards and Incentives for Behavioral Change. 2. Encourage Employer/Carrier FHSA contributions towards healthcare 3. Be provided with plan designs other than HDHPs 4. Address FHSA/HSA Technical Issues

46. FHSA Flexibilty to Provide Financial Rewards and Incentives for Behavioral Change 1. Allow for compliance incentives under disease management programs (e.g. diabetes, asthma, CHF) and wellness initiatives (e.g. wellness assessments, smoking cessation, etc.). 2. Change Comparability Rule to mean all members under a given program of care or treatment, such as, a disease management or wellness program. 3. Rewards and/or incentives should not be limited by the deductible limit, but should be consistent with expected savings from programs for which participation is being rewarded.

47. FHSA Flexibility to Encourage Employer Contributions to Healthcare 1.Allow employers/carriers to voluntarily contract with employees to require employer/carrier funded FHSAs to be used only for healthcare expenses while employed and covered under the plan. 2. Remove cap on employer/carrier funded FHSA contributions or expand to at least the plan’s Maximum Out-Of-Pocket total exposure in a given calendar year.

48. FHSAs Flexibility to be Provided with Plan Designs Other than HDHPs 1. Preventive drugs include maintenance drugs. Drugs now defined as preventive by the Treasury Dept. can be covered below the deductible, while the cost of maintenance drugs is now included in the deductible. 2. Allow Rx to exist as carve out benefits at least for prescription drugs associated with chronic and persistent disease states 3. Allow “incentive only based” FHSAs for employer/carrier only funding under non-HDHPs (i.e. no initial FHSA funding or employee funding) 4. Allow some mental health and substance abuse benefits (besides EAPs) to be included under preventive care.

49. FHSA Flexibility - Technical Issues 1. Allow FHSA/HSAs to go into effect on the first day of coverage is effective. 2. Allow FHSA/HSA contributions for a full calendar year regardless of when a plan is effective. 3. Allow FHSA/HSAs to be used to pay for health coverage premiums (other than current limited use for (1) Premiums for coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), and (2) premiums for HDHP coverage for those who receive federal or state unemployment compensation). 4. Allow Flexibility to "post-date" the FHSA/HSA effective date so that FHSA/HSA dollars can cover expenses incurred before the account was established. Allow the account to be opened under a "provisional status" until the necessary paperwork is filed, at which time the account becomes active.

50. The Ultimate Successful Implementation of Consumerism It’s about moving from a “benefit” to an “accumulating asset.”