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Health Care Reform Employer Impact

Health Care Reform, as currently proposed, would expand access to health care to millions of Americans
and attempts to strengthen the health care system. However, Verizon and other large employers are
concerned about provisions that will have a negative financial impact on large employers and/or their
employees. Additionally, there are provisions that will cause additional administrative complexity and cost
and ERISA erosion. Of particular concern is that large employers, like Verizon, that offer health care
coverage would be required to be responsible for paying for the cost of general reform through increased
employer taxes and while continuing to pay for health care coverage that may go up in cost due to shifting
of increased taxes/fees from the provider and insurance industries to employers/employees.

Below is a list of the provisions that would have significant impact on employer provided health care
coverage.

Excise Tax on High Cost Health Care Coverage


• This provision would impose an excise tax of 40 percent on health plans on costs above a specified
federal threshold

- Many of characterized this tax as a 'pass through' to the consumer (in Verizon's case employees and
retirees); however, there will be significant legal and bargaining risks to overcome for this to be the
case for Verizon

- In addition to the annual cash cost, there is a one-time charge of $X


• Employers also would have the administrative burden for calculating the tax and reporting it to the health
plans

Senate-passed Bill Verizon Impact President's Proposal-Directional


Change
• Effective date 2013 • Projected excise tax of $131.3M • Effective date delayed until 2018
(cash) in 2013
• Includes the cost of medical, • Excludes the cost of dental and
prescription drugs, dental vision • 120,000 employees and retirees vision
and contributions to FSAs, HSAs in plans that would be impacted
and HRAs by this tax • Thresholds (2018)
- Actives: $10,200/$27,500
• Thresholds (2013) • The leveraging effect of medical
trend compared to general - Retirees: $11,250/$29,700
- Actives: $8,500/$23,000
inflation will result in ever
- Retirees: $9,8501$26,000 increasing taxes in later years - Higher thresholds would not
apply to 17 "high-cost" states
- Higher thresholds apply to 17
"high-cost" states • Positive directional change
primarily due to the delayed
effective date; however, potential
increased tax in 2018 resulting
from the difference in health care
trend and general inflation
- Projected excise tax of
$255.3M (cash) in 2018
- In 2018, 190,000 employees
and retirees in plans that
would be impacted by this
tax

Health Care Reform Impact 03/03/2010

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Elimination of Favorable Tax Treatment to Retiree Drug Subsidy (RDS)
• This provision would eliminate an employer's ability to deduct an amount equal to the Medicare RDS that
the employer receives for maintaining retiree prescription drug coverage that is actuarially equivalent to
coverage under Medicare Part D

• The elimination of this deduction creates a material one-time after-tax accounting loss at the moment of
enactment to Verizon of approximately $1.2B
• The RDS favorable tax treatment was initiated to provide incentives for employers to continue Medicare
prescription drug coverage after Medicare Part D was enacted

- Eliminating the deduction, coupled with the proposed change to phase out the "donut hole," will result
in lower subsidies (higher costs to employers) and lead many employers to discontinue coverage,
moving retirees to the government sponsored plan

- There will be significant legal and bargaining risks if Verizon discontinues coverage for certain groups
of retirees

Senate-passed Bill Verizon Impact President's Proposal-Directional


Change
• Effective date 2011 • Projected annual increase in • Effective date delayed until 2012
corporate tax of approximately
• Positive directional change due to
$32M and FAS 106 expense of the delayed effective date
$120M (based on 2009)

Grandfathered Plans
• In the original health care reform proposals, the intent of this provision was to allow individuals to keep
the plans they have today CGrandfathered Plans'); however, other stipulations have been added
• The President's proposal would impose certain requirements on grandfathered employer plans (effective
dates vary from 6 months after enactment of bill to 2018); those with the greatest impact to employers
include:

- Extend coverage for adult dependents up to age 26; if not a tax dependent then income will be
imputed (effective 6 months after enactment)

- Require an independent appeals process (effective 6 months after enactment)

- Prohibit plans from imposing annual and lifetime limits (effective 2014)

- Prohibit plans from imposing pre-existing condition exclusions (effective 2014)

- Require plans to cover preventive services with no cost sharing (effective 2018)

Changes to Medicare
• There are proposed changes Medicare beneficiaries and employer plans with both positive and negative
impacts

• Provisions with positive impacts:

- Creation of an independent Medicare Advisory Board tasked with presenting their best ideas to
improve the quality of Medicare and reduce costs for Medicare beneficiaries

- Release of Medicare claims data

- Increase in preventive care services by waiving co pays for most preventive care services and fully
covering an annual well ness visit and personalized prevention plans

• Provisions with negative impacts to Employers are:

2 Health Care Reform Impact 03/03/2010

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- Medicare provider payment reductions

- Medicare Advantage payment reductions

- Phasing out of the "donut hole" by 2020 provides more comprehensive coverage for Medicare-eligible
individuals; however, it makes it harder for employer to qualify for RDS (not an immediate issue for
Verizon due to very rich plan designs and ability to aggregate populations)

Potential Cost Shifts to Employers


• There are several provisions in health care reform that will have a direct cost impact on employer
provided health coverage
• Generally, these provisions are fees or excise taxes imposed to health manufactures and health
insurance providers that will be shifted to employers through increased fees and rates; these provisions
include:

- Annual fee on branded drug manufacturers/importers

- Excise tax on medical device manufacturers/importers

- Annual fee on health insurance providers

- Per participant tax for Comparative Effectiveness research


Pre-Medicare Retiree Reinsurance Program
• The Senate bill includes a reinsurance program for employers that offer health insurance to early retirees

• The program creates a temporary federal program with $58 in funding to help offset the cost of health
care claims

• The proposal projects a savings up to $1,200 for every family enrolled; however, like 'cash for clunkers'
the limited amount of funds available will probably be spent quickly with no material savings for Verizon.

"Free Rider" Assessment


• Companies that do not offer coverage to their employees or that offer coverage considered unaffordable,
would be required to pay an assessment
• Even though the proposed assessments are material, they are modest when compared to the average
cost of health care

- To avoid additional costs and regulations, employers may consider exiting the employer health
market and send employees to the Exchanges

Senate-passed Bill Verizon Impact President's Proposal-Directional


Change
• If coverage not offered: $750 per • Potential assessment for • If coverage not offered: $2,000
full-time employee approximately 3,000 employees per full-time employee
• If unaffordable coverage: $3,000 considered to have unaffordable • If unaffordable coverage: $3,000
per full-time employee coverage per full-time employee
• No real change to Verizon

Medicare Hospital Insurance (HI) Tax Base for High-Income Taxpayers


• This provision would not directly impact employers but would have a significant financial impact to high-
income employees

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Senate-passed Bill Verizon Impact President's Proposal-Directional
Change

• Increase in the HI tax of 0.9% on


earned income
• Increased taxes for high-income
taxpayers
• An additional 2.9% tax on
unearned income from interest,
dividends, annuities, royalties
• For single taxpayers applies to and rents on taxpayers with
incomes above $200,000 and respect to income above
$250,000 for married couples $200,000 for single taxpayers
filing JOintly and $250,000 for married couples
filing jointly

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