Health Savings Accounts and Trends in Employee Health Benefits

1. Health Savings AccountsandTrends in Employee Health Benefits January 27, 2005 National Academy of Social Insurance Charles H. Klippel Senior Vice President and Deputy General Counsel Aetna Inc.

2. The Emergence and Future of Consumerism • Drivers of change in plan design • Changes in preferences/ market forces • The role of a deductible • Tax policy • Impact of change • Findings from Aetna’s experience • Future directions • Further evolution in plan design • Employer disengagement • Other considerations

3. Policy follows the market • HSAs are a consequence, not a cause, of change • Consumerism did not start in Washington • Not a “red” or “blue” idea • Not driven by health industry • Started with employers • Not radical thinking • Role of deductible in health coverage • Response to employee concerns • Cost pressures • Preserving tax preference of benefit dollars

4. Deductibles in health plans • Deductibles have always been a part of health insurance • Standard in almost all other forms of insurance • Historically plans without a deductible are the anomaly • Health Maintenance Organizations • Selected provider network • Care managed to protocols • = Different benefit structure

5. The Role of a Deductible Classic role of a deductible in insurance • Reduce “moral hazard” • Avoid high processing costs of smaller claims • Additional consideration in health • Increasing choice in treatment • Differing perceptions of value • Significant cost differences • Efficacy may not correlate with cost Example:Pharmaceuticals

6. Supporting choice/ subsidizing risk Options for the plan sponsor • Manage selection directly or in benefit design • Pay everything regardless of choice • Deductible (with financial assistance) Focus defined benefit dollars on shared, unanticipated risks • Benefits typically a trade-off for wages • “Regressive” (in tax terms) • An inherent cross-subsidy related to use, not need

7. Health Reimbursement Accounts HRA • A portion of benefits structured as “fund” • Unused dollars roll over for future years • Sanctioned by Treasury in June 2002 • Must be employer dollars • No employee contributions • Employer defines rules • Money is not portable • HRAs in practice • Typically self-funded plans • Accounts generally “first dollar” • May continue for retirees, otherwise lost when employment ends

8. Health Savings Accounts HSA • Part of MMA in December 2003 • Greater flexibility • Permits employee funding • Consumer protections • All money belongs to employee • Employer can’t restrict use • Fully portable • HDPH specifies minimum deductible and maximum out-of-pocket (i.e., plans can be too rich or too limited to qualify)

9. Alternatives to fund structure • Additional wages • Less tax efficient • Does not encourage savings • Lower deductible, eliminate “fund” • “Doughnut-hole” argument • Less consumer risk (?)

10. Doughnut-hole Paradox Source: Medical Expenditure Panel Survey (2002) $300 Plan with $1000 deductible and $500 “fund” • Would save employer $220 over 1st dollar plan • Savings equivalent to a $300 deductible

11. Doughnut-hole Paradox

12. Impact of plan design • Aetna Health Fund® • HRA plan enrollees in 2003 • 13,500 members enrolled in other Aetna plans in the 2002 • One full-replacement plan • Full-year 2002 to 2003 comparison • Also compared to 300,000 cohort-matched individuals enrolled in other Aetna plans in 2003

13. Aetna Health Fund Study2002-2003 AHF • Overall year-over-year trend: 3.7% • Full replacement customer trend: -11% • Specific utilization • Primary visits (non-preventive): -11% • Specialist visits: +3% • Emergency room visits: -3% • Inpatient admissions: -5% • Preventive services: • Preventive visits: +23% (+8%)* • Gynecological visits: +4% (+4%) • Child preventive exams • 4-6 year olds: +4% (+5%) • 6-8 year olds: +8% (+6%) *Comparison with cohort-matched population of 338,000 Aetna members

14. Aetna Health Fund StudyImpact on Pharmacy Costs AHF Full-year study results: • Overall pharmacy cost trend: -5.5% • Number of prescriptions: -13% • Generic Utilization: + 7% Full replacement customer (2600 lives)* • Overall Rx trend: - 6.5% • Number of scripts: -11.1% • Generic utilization: + 29% *Nine months 1/03-9-03

15. Aetna Health Fund StudyOther Findings AHF • Nearly 100% increase in use of on-line information tools • Comparable or better results on HEDIS measures (Diabetics) • At least one glycated hemoglobin test: +6% • At least one micro ablumin: +4% • Lipid screening: comparable to prior year • Retinal eye exams: comparable to prior year • Member satisfaction • 9 out of 10 satisfied or very satisfied with plan • Similar number indicating that they will re-enroll

16. Looking forward Where is plan design going from here?

17. Interest in consumer-directed plans(CDHP) = 60% CDHP health account + high deductible HRAs for other benefits Customized design Select (Narrow) networks Multi-tier networks Defined contribution = 59% Currently in use Adopting in 2004 Considering for a future date Hewitt Associates. Survey Findings, Health Care Expectations: Future Strategy and Direction, 2004

18. Estimated CDHP adoption POS PPO HMO Conventional Consumer-directed health plans (percentages may not total 100 because of rounding) Forrester Research, Inc., 2003

19. Other considerations • Protecting vulnerable populations • Preventive benefits • Chronic disease coverage • Contribution strategies • Higher contributions for lower-paid • Anticipating retirement • Employee choice • Retaining traditional plan options • Member-selectable benefits • Buy-up options • Trade-offs • Salary, bonus, severance, other benefits

20. Further change is needed • Fully engaging consumers • Better cost and quality information • Reliable, trusted information on optimal treatments • Consumer-relevant pricing models; simplicity and disclosure • Targeted clinical support and financial risk protection • New value options in care (e.g., Minute Clinics, lower-cost pharmaceuticals) • Greater long-term savings … and still some challenging social choices