1st Annual

SullivanCotter/HighRoads Survey of Employee Benefit Practices in Hospitals and Health Systems

ExEcutivE Summary

abOut The Summary

Hospitals and health systems have traditionally been incorporated into general employee benefit surveys as another industry group; oftentimes intermingled with pharmaceutical companies and health plans. And yet, hospitals and health systems are very different from other industries. They play a unique role as both the employer and provider of health care. And, in many cases, they are also the payer, through a private-label system-run health plan. Our consulting experience with this industry indicated that health care institutions want to benchmark themselves against other industry peers.
In addition, rapid change is occurring in the industry due to the Affordable Care Act (ACA). Providers are assessing the landscape to determine if changes from health care reform will result in declining revenue and pressure on already thin margins. Cost control will be more important than ever and with total compensation costs often representing half of the organizations operating costs, these expenditures will come under scrutiny. At the same time, some health systems are growing by merger and acquisition a trend that is likely to intensify in coming years. In both cases, organizations will seek ways to control costs while still attracting and retaining the workforce necessary to thrive in this unprecedented period of change. It is for these reasons that SullivanCotter and HighRoads combined their efforts to develop a pioneering survey on employee benefit practices, specifically for health systems and hospitals. The inaugural year of the survey includes 178 health systems and hospitals. This number of health care industry participants is believed to be over three times the size of any major benefit survey participant list currently available in the marketplace. The key findings from the 2012 survey, conducted from November, 2011 through January, 2012, include practices generally not found in other benefit surveys. This executive summary highlights key findings and provides highlevel comparisons to general industry benefit surveys. For the first edition, this survey will not have trend information, which we expect to publish in future years. T h e 17 8 p a r T i c i p a n T s include : 126 Health Systems; 63% Secular Organizations; 95% Not-for-Profit Organizations; Average Revenue Range of $751M to $2.4B; and Average Employee Range of 3,000 to 9,500

Health System and Hospital Practices

To help evaluate the pace of change expected in the health care industry, we asked about the impact of ACA on an organizations revenue. Among those surveyed, 55% anticipate a drop in revenue with only 12% anticipating an increase in revenue. More telltale of the volatile nature the industry faces is that 28% dont know the impact that ACA will have on revenues.
Impact to Organization Revenue Potentially decrease (e.g., changes in reimbursement rates or employer design reaction may decrease revenue) Potentially increase (e.g., more covered individuals may yield higher revenue) Little impact, if any, on revenue Don't know Percentage 55% 12% 5% 28%

If we consider that, on average, total compensation (salaries and benefits) make up 50% of total operating expenses and that benefits make up 30% of total compensation, then benefits make up 15% of total operating expenses. With the financial health of health systems and hospitals becoming more challenging in light of revenue projections, the ability to maintain or lower benefit costs will be significant. Even so, few health system and hospital organizations expect to discontinue health care coverage in the future. Of those surveyed, 70% were committed to providing coverage in the long term, while 17% plan to reevaluate the issue in the near future. Only 13% were in a wait and see mode, with no one having an eventual plan or plan currently to discontinue coverage.
Discontinue Health Care Coverage in the Future? Remain fully committed to providing coverage in the long term Expect to continue providing coverage in the long-term, but plan to re-evaluate in the near future In a wait and see mode, and will continually evaluate own strategy as additional changes from health care reform emerge Expect to eventually discontinue coverage as the exchanges mature Have a plan in place to discontinue coverage in the near term Percentage 70% 17% 13% 0% 0%

Among those surveyed, 42% plan to become an accountable care organization (ACO) and 18% plan to structure their employee health plan as an ACO-like program. Of those organizations, 82% will share savings between providers and the plan. Surprisingly, only 54% of respondents shared that they have a documented benefits strategy or philosophy. When benchmarking benefits, 82% prefer to compare their programs to other health system and hospital organizations within a particular region, while 14% compare themselves nationally. Few compare themselves with other industries.

SullivanCotter/HighRoads, 2012 Summary of Findings

When asked how they position benefits, 98% targeted and perceived their programs to be at or above the median. However, they perceived that only 89% of employees would agree that they were at or above median, demonstrating some gap between employer and employee perceptions.

Market Positioning of Benefits Below Median (not a key consideration in attraction/retention) Median (not a differentiator, but not a detractor) Above Median (significant attraction/retention tool)

Percentage 2% 55% 43%

t y p i c a l b e n e f i t s pac k ag e Irrespective of a benefit philosophy, 95% of organizations offer a comprehensive benefits package, which includes medical, dental, vision, defined contribution retirement, paid time off (PTO)/vacation, long term disability, basic life, supplemental/ voluntary life and dependent life. 85% also offer short-term disability benefits. Retiree health care is far less common, with less than one-third offering some form of coverage (often, access only). For part-time employees, the most prevalent plans offered are medical, dental, vision, defined contribution retirement and PTO/vacation. Executives and employed physicians tend to be offered the same basic and ancillary benefits as regular employees. However, income replacement benefits such as life insurance, disability and retirement plans tend to differ. As more organizations employ physicians, they will need to evaluate their benefit strategies in light of the unique needs of this segment of the workforce. In terms of eligibility for medical benefits, 44% allow domestic partners to enroll as qualified dependents. Of those surveyed, 54% allow same-sex domestic partners and 34% allow opposite-sex domestic partners. Among religious organizations, 30% allow same-sex domestic partners and 17% allow opposite-sex domestic partners. Medical and prescription drugs 80% of organizations offer two or more medical plans. The most common plan, both in terms of frequency of offering and employee enrollment is a PPO with plan design incentives to seek domestic care.

The majority of those surveyed, 48%, use commercial carriers to administer medical benefits, with Blue Cross Blue Shield (BCBS) being used 52% of the time. Of note, 18% own their own health plan/third-party administrator (TPA), which in turn administers the plan with another 21% using local or regional TPAs. A unique feature to health systems and hospitals, as both an employer and a provider of care, is their ability to offer their own providers as a smaller network among the providers from which an employee can select; we refer to this as a domestic network. The premise is, a hospital would rather pay itself for delivering care to its employees than to pay a competitor.

SullivanCotter/HighRoads, 2012 Summary of Findings

However, we learned that the manner in which these costs are reflected internally differs fairly significantly from one organization to another. There was a wide spectrum of responses ranging from applying no discount (13% of respondents) to a 100% discount (14% of respondents). The most common answer was to use the standard carrier negotiated discount, although many organizations are using a deeper discount in one form or another. Organizations with a conservative approach to the accounting treatment of domestic claims may trigger the excise tax under ACA earlier than necessary.

Health systems and hospitals are employers and providers which often times offer their network providers as part of their own benefit plan.
Domestic Claims Accounting Domestic claims are paid at the carrier negotiated discount Domestic claims are entirely discounted, excluded from plan payments or written off Domestic claims are not discounted Domestic claims are discounted to a level that accounts for cost to charge ratio Domestic claims are discounted at rates deeper than the standard carrier negotiated rate Domestic claims are discounted to a level that accounts for marginal cost only Other Percentage 30% 15% 13% 13% 13% 5% 12%

Of interest to many, are expected medical premium trend rates from 2011 to 2012 reported by survey respondents. The increase for the most prevalent non-bargained plan, by plan type, on average, ranges from 5% to 7%, after changes in plan design. If these increases hold true, then health systems and hospitals can expect medical benefit costs (currently 15% of total operating expenses) to be trending upward when revenue is declining or flat, creating additional cost pressures.
2011 to 2012 Trend Rate PPO/POS HMO/EPO CDHP/HDHP 25th Percentile 3.0% 2.0% 1.2% Median Average 75th Percentile 6.7% 9.0% 5.1% 6.7% 7.2% 9.5% Responses 130 62 48

5.2% 5.0% 6.0%

Unique to health systems and hospitals is the availability of the on-site pharmacy. Here, 70% of survey respondents allow their employees to fill prescriptions at an on-site pharmacy. Among those with on-site pharmacies, 87% are hospital owned and 70% offer preferred pricing for use of the on-site pharmacy. Among those who responded, 63% utilize a pharmacy benefit manager to administer the employee plan, with 35% using the same organization that administers the health plan.

SullivanCotter/HighRoads, 2012 Summary of Findings

In addition, the 340B Drug Pricing Program helps to limit the cost of covered outpatient drugs to qualified entities, sometimes saving as much as 20% to 50% of the cost of pharmaceuticals. Participation in the program is afforded to safety-net providers to enable these entities to stretch scarce federal resources. Nearly one out of every three organizations surveyed indicated that they meet the qualifications to participate in the program, but only 51% of those who qualify actually use the program for employees. Nearly 40% of organizations do not know if they qualify. H e a lt H i M p r o v e M e n t Health systems and hospitals have long been a leader in providing wellness and health improvement programs, often as part of expanded service offerings to the communities they serve. We found that 80% of survey respondents offer a wide array of wellness programs, including health risk assessments. However, only half report that the programs are coordinated and integrated.

While 80% of respondents offer a health risk assessment to employees only two-thirds (of those offering) provide incentives for completion. Of those who offer incentives, roughly two-thirds do so in the form of reduced payroll deductions for health care benefits. The amount of incentive varies widely among organizations as do the results. Only 21% of those responding indicate that more than 75% of employees complete a health risk questionnaire.

In a recent study, Thomson Reuters estimates that a hospital with 16,000 employees could save about $1.5 million each year in medical and pharmaceutical costs for each 1% reduction in health risk.
SullivanCotter/HighRoads, 2012 Summary of Findings

retireMent pl ans Nearly all health systems and hospitals offer qualified retirement plans, with defined contribution plans being the most prevalent. Among those with qualified plans, 61% have both a defined contribution and defined benefit plan, with 39% having a defined contribution plan only.

Of those with defined benefit plans, the status varies from ongoing to fully frozen. Of the 61% who still have some defined benefit plan, 47% are ongoing plans, which continue to be offered to the workforce. The remaining 53% are entirely or partially frozen plans. As more organizations merge or are acquired, we would expect to see the further deterioration of defined benefit programs within health systems and hospitals.

The most prevalent defined contribution approach is the 403(b) tax sheltered annuity. Respondents do offer more than one option at times.

SullivanCotter/HighRoads, 2012 Summary of Findings

Employer contribution approaches vary, with matching contributions being the more prevalent, offered by 79% of those responding. The average maximum employer-matching contribution is 3.4%. There are 47% of survey respondents offering a 50% match up to a defined limit, the most prevalent matching approach.

COMPARISONS TO GENERAL INDUSTRY

Health care is often compared to general industry as being irrational and unlike any other industry, and yet much can be learned by understanding how general industry compares to health systems and hospitals, especially when there is a credible benchmark from which to compare. While surveys differ from one survey to another, we can infer some comparisons based on the general nature in which questions are asked, and the general manner to which they are responded. In this section, we reviewed the results from several national benefit surveys to compare to results of similar questions that were asked in at least one other survey. Medical pl an t ype When it comes to the type of medical plans with the most prevalent enrollment, health systems and hospitals have, on average, 66% of employees enrolled in a preferred provider organization (PPO)/point of service (POS) plan compared to general industry, which has 62% and health care general industry which has 52%. When it comes to health maintenance organizations (HMO)/ exclusive provider organizations (EPO), health systems and hospitals average 25% enrollment, whereas general industry averages 19% and health care general industry 37%. The most striking deviation was enrollment in consumer-directed health plans (CDHP)/high-deductible health plans (HDHP), where health systems and hospitals average enrollment of 9%, whereas general industry averages 15%. Also, among the Fortune 100, 59% offer CDHP/HDHP plans, whereas health systems and hospitals only offer CDHP/HDHP 33%of the time. Medical pl an costs A Thomson Reuters study, as referenced earlier, noted that hospital workers spend more time and money on health care than other American workers. In addition, they noted that, the gap (health care costs) between hospital employees and the rest of the American workforce widens when the data includes employee families. When comparing the cost of a PPO/POS plan for health system and hospital employees to general industry costs for a similar plan type, we noted that premiums were 13% higher for single coverage and 17% higher for family coverage, further supporting the Thomson Reuters study results. The average annual PPO/POS premium for single coverage for health systems and hospitals was $6,708, compared to general industry of $5,919. The average annual PPO/POS premium for family coverage for health systems and hospitals was $19,032, compared to general industry of $16,328. When it comes to employee contributions for single coverage, health systems and hospitals average 19%, compared to general industry of 23% of a lower total premium. When it comes to employee contributions for family coverage, health systems and hospitals average 23%, compared to general industry of 30% of a lower total premium as well. It is interesting to note that while 81% of health systems and hospitals encourage employees to use their own facilities or providers, costs are not necessarily less than general industry. This in part could be due to the wide variation in which domestic claims are accounted for within the medical plan. Finally, in a recent general industry benefit survey, employers were expecting costs to increase by 5.9% in 2012. This compares to an average of 6.7% within health systems and hospitals offering PPO/POS/CDHP/HDHP plan types, and 5.1% for those offering HMO/EPO plan types. All this may point to another Thomson Reuters study comment as quoted in a Modern Healthcare article, which is, the average healthcare worker, the average nurse or doctor, when given the choice between taking care of somebody or family, sometimes they feel compelled because of their commitment to their profession to take care of their patients first.

SullivanCotter/HighRoads, 2012 Summary of Findings

defined contribution ( dc ) pl an eligibilit y One of the more significant differences we found between health systems and hospitals and general industry was in the area of DC retirement plan eligibility. Health systems and hospitals, general industry, and health care general industry, all tend to have eligibility immediately upon hire on average 60% to 65% of the time. More interesting were the differences when that was not the case; health systems and hospitals on average have a service-only requirement among 17% of respondents or an age and service requirement among 17% of respondents, whereas general industry respondents were on average 13.2% service only and 8.1% age and service, with another 9.5% age only. Health care general industry respondents were, on average, 7.4% service only and 6.3% age and service, with another 10.5% age only. While we have not had the opportunity to go through each and every difference between general industry surveys and health care general industry survey results, we do believe the unique nature of the health care business (employer, provider, and payer), not-for-profit tax status, workforce differences and the increasing challenges faced by health systems and hospitals will point to an increasing need for more industry-specific information to truly inform the unique characteristics of health systems and hospitals.

CONCLUSION
We are extraordinarily pleased and grateful for the interest and participation of the 178 organizations that responded to this inaugural survey. As with any survey, it is the respondents who create the value and, we hope, most benefit from the value. As we look to ensure repeat participation, as well as expanding the participation to enhance the credibility of the information, participant feedback will be much appreciated. Thanks again to the many who contributed and we hope you find the information as valuable as we did in collecting, normalizing, analyzing and reporting the information. Each step of the process brought a newfound appreciation for the unique nature of health systems and hospitals. Mike Gaal Sullivan, Cotter and Associates, Inc. mikegaal@sullivancotter.com Maureen Cotter HighRoads, Inc. mcotter@highroads.com

To purchase the 2012 SullivanCotter/HighRoads Survey of Employee Benefits Practices in Hospitals and Health Systems report, or to pre-register to participate in the 2013 survey, go to http://www.sullivancotter.com/benefits-survey.

2012 SullivanCotter/HighRoads Survey of Employee Benefit Practices in Hospitals and Health Systems Sullivan, Cotter and Associates, Inc. and HighRoads

SullivanCotter/HighRoads, 2012 Summary of Findings