Introduction
As we approach April 15 and many of us are thinking about our taxes, we are starting to notice some tax changes and many of these are related to healthcare reform, i.e. the Patient Protection and Affordable Care Act of 2010 (PPACA). Whether or not you are "for" or "against" healthcare reform as currently legislated, you will definitely feel the impact of some new taxes.

This article attempts to identify and list the taxes that are directly related to the Patient Protection and Affordable Care Act. This article is intended to list and identify taxes associated with healthcare reform — it is not intended to take any formal position for or against healthcare reform. In fact, the author has strong opinions that the US healthcare system is desperately in need of serious healthcare reform and that many aspects of the current reform approach outlined in the Patient Protection and Affordable Care Act make serious attempt to address some of the key issues.

Background
Based upon the count of many experts, there appear to be 19 specific taxes or increased taxes directly related to healthcare reform, estimated by some experts to total $500 billion over 10 years. I have ranked the taxes from largest to smallest, with a description of the tax and when it was effective or will be effective for those not yet in effect.

Summary of PPACA Related Taxes

1. Surtax on Investment Income ($123B): By far the largest tax and going into effect January 2013, this is a new 3.8% surtax on investment income for households with more than $250,000 income.¹
2. Increase in Medicare Payroll Tax ($87B): Beginning January 2013, this tax increases the Medicare employee and self-employed tax on wages in excess $200,000 for an individual/$250,000 for a family by 0.9%.²
3. Mandate Tax ($65B): Beginning January 2014, any individual without a qualified health plan will be subject to an income surtax.³ In addition any employer not offering health coverage, and at least one employee qualifies for a health tax credit, will be subject to a tax. Any employer requiring a waiting will be subject to an additional tax.⁴
4. Tax on Health Insurers ($60B): Beginning January 2014, all health insurance companies and health plans are subject to a federal premium tax, which phases in until 2018.⁵
5. Excise Tax on Comprehensive Health Insurance Plans ($32B): Beginning in January 2018, there will be a 40% tax on "Cadillac" health insurance plans.⁶ Cadillac health insurance plans are those with very rich benefits and are determined by a comparison to an inflation adjusted premium level.
6. "Black Liquor" Tax ($24B): This is a tax on a special type of bio-fuel.⁷ Tax in effect during 2007 - 2009, ended in January 2010 as part of healthcare reform bill.
7. Tax on Innovator Drug Companies ($22B): $2.3 Billion annual tax on the industry imposed relative to sales made that year. Began in January 2010.⁸
8. Tax on Medical Device Manufacturers ($20B): Beginning January 2013 there is a 2.3% excise tax on all items >$100.⁹
9. High Medical Bills Tax ($15B): Beginning January 2013, the threshold for deducting high medical bills was increased to 10% of adjusted gross income.¹⁰
10. Flexible Spending Account Cap ($13B): Beginning January 2013, the formerly unlimited FSA is now capped at $2,500. This tax has been called the "special needs kids tax" since this eliminates the option of families with special needs children to tax effectively pay for tuition for these children.¹¹
11. Medicine Cabinet Tax($5B): As of January 2011, Health Savings Accounts(i.e., HSA) are no longer able to purchase non-prescription, over-the-counter medicines other than insulin.¹²
12. Elimination of Prescription Drug Subsidy($5B): As of January 2013, employers no longer able to deduct prescription drug subsidy for coordination with Medicare Part D drug program.¹³
13. Codification of "economic substance doctrine" ($5B): Beginning January 2010, new provision permitting the IRS to disallow legal tax deductions when the IRS deems the action lacks "substance."¹⁴
14. Tax on Indoor Tanning Services ($3B): Beginning July 2010, new 10% excise tax on indoor tanning salons.¹⁵
15. HSA Withdrawal Tax Increase ($1.4B): Beginning January 2011, taxes for withdrawals were increased from 10% to 20%.¹⁶
16. Health Insurance Executive Compensation Limit ($0.6B): Beginning January 2013, PPACA establishes a $500,000 limit for annual executive compensation.¹⁷
17. Blue Cross Blue Shield Tax Increase ($0.4B): Beginning January 2010 a special tax deduction is permitted only if loss ratio is greater than 85%.¹⁸
18. Excise Tax on Charitable Hospitals (minimal): Beginning January 2010, new $50,000 tax on hospitals if they fail to meet specific rules established by CMS.¹⁹
19. Employer Reporting of Health Insurance on W-2 (minimal): Requires employers to include additional information on W-2's regarding health insurance plans.²⁰

Bottom Line
Although there may be many well intended uses for these taxes, it is clear that healthcare reform has significantly increased tax revenues. The outstanding question remains, will the Patient Protection and Affordable Care Act reduce the cost of health care, increase the access to care, and improve the quality of care for everyone? These were and have been the primary objectives of any healthcare reform effort. As we as a country look forward to our financial futures, we need to carefully assess the impact of health care reform, make modifications where appropriate, and refocus on the key objectives to be sure we achieve what we all know to be the key issues at hand: reduce costs, improved access, and maximum quality of care.

¹ Reconciliation Act, pages 87-93.

² Reconciliation Act, pages, 87-93, 2000-2003.

³ PPACA, page 317-337.

⁴ PPACA, Pages 345-346.

⁵ PPACA, Pages 1986-1993.

⁶ PPACA, Pages 1941-1956.

⁷ Reconciliation Act: Page 105.

⁸ PPACA, Pages 1971-1980.

⁹ PPACA, Pages 1980-1986.

¹⁰ PPACA, Pages 1994-1995.

¹¹ PPACA, Pages 2388-2389.

¹² PPACA, Pages 1957-1959.

¹³ PPACA, Page 1994.

¹⁴ Reconciliation Act, Pages 108-113.

¹⁵ PPACA, Pages 2397-2399.

¹⁶ PPACA, Page 1959.

¹⁷ PPACA, Pages 1995-2000.

¹⁸ PPACA, Page 2004.

¹⁹ PPACA, Pages 1961-1971.

²⁰ PPACA, Page 1957.

In April of 2013 the ISO modified the Commercial Property Forms. It was one of the biggest changes in forms that we have seen in years with the majority of forms taking on some type of change.

Effective April 2013, many of the Commercial General Liability forms also have a new edition date. Some of the changes are minor but carry new edition dates of existing form numbers, and there are some forms that are first being introduced. It is a multistate revision and some of the specific state forms have also taken a change or introduced new forms. Some of the ISO changes have already been adopted in insurance company forms while other changes represent clarification of the "intent" of the form.

There are new multistate endorsements that are being introduced:

• Primary And noncontributory — Other Insurance Condition Endorsement
• Additional Insured — Owners, Lessees or Contractors — Automatic Status for Other Parties When Required in Written Construction Agreement
• Total Pollution Exclusion For Designated Products Or Work Endorsement
• Liquor Liability — Bring Your Own Alcohol Establishments Endorsement
• Amendment of Personal and Advertising Injury Definition Endorsement
• Designated Location(s) Aggregate Limit Endorsement

Specifically we will highlight those changes that have any significant impact and new endorsements to the form series. It goes without saying that any form that narrows coverage requires that we notify our insureds to avoid any gap in coverage as they renew on the new CGL edition date. All of these changes will be discussed in more detail in the Insurance Community class on March 19th.

Liquor Liability Form Revisions
One of the areas that has taken on a significant change is in the area of Liquor Liability. There are several forms that have taken the new edition date including:

As with most liability changes there is case law that gives rise to the need for clarification and form revision. Some of the specific court cases relating to this change are:

• PENN-AMERICA INS.CO. v. PECADILLOS, INC. (27A.3d259 (2011) Superior Court of Pennsylvania;
• McGuire v. Curry and Park Jefferson Speedway, Inc., a South Dakota Corporation (766 N. W. 2d 501 (2009);
• SIMMONS V. HOMATAS (925 n. e. 2D 1089 (2010; 236 ill. 2D 459) Supreme Court of Illinois., to name a few.

In the case of PENN-AMERICA INS.CO. v. PECADILLOS, INC. (27A.3d259 (2011) Superior Court of Pennsylvania, two customers entered the bar after visiting several other drinking establishment where they drank in excess. They continued to drink at Pecadillos, became further intoxicated, and were asked to leave even though they were in no condition to drive. The patrons left, caused an accident, killed two individuals and injured two others. The insured argued that the allegations in the underlying action against them fell outside the related CGL policy's liquor liability exclusion. The court ruled that a "duty to defend" was triggered when an insured was alleged to have continued to serve intoxicated patrons and then ejected them in a dangerously inebriated condition.

In the case of McGuire v. Curry and Park Jefferson Speedway, Inc., a South Dakota Corporation (766 N. W. 2d 501 (2009), a racetrack employer allowed an unsupervised, underage employee access to alcoholic beverages. The employee was a runner hired to deliver alcohol and other supplies to the racetrack's concession stands and bars. One day after the employee's shift ended, he drove his vehicle off the racetrack's premises while intoxicated and injured a passenger on a motorcycle. The plaintiff's suit filed against the racetrack alleged negligent hiring, retention and supervision of an underage employee. The court concluded that the racetrack did have a duty to supervise the employee and to disallow access to alcoholic beverages.

In the last case, SIMMONS V. HOMATAS (et al On Stage Productions, Inc.,) (925 n. e. 2D 1089 (2010; 236 ill. 2D 459) Supreme Court of Illinois, the Illinois court had to rule on whether a business that does not serve alcoholic beverages but allows patrons to bring in alcohol is considered in the business of selling alcoholic beverages. In this case the club, operated by Stage Productions, is a nude strip club that does not serve alcohol but allows its patrons to bring their own alcohol and sells them set ups — providing glasses, mixers, ice, etc. Homatas and his companion brought in a fifth of rum and vodka and became intoxicated. They left the club and retrieved their car from valet parking. The valet parker opened the driver's door and told Homatas to leave the premises. Fifteen minutes later, Homatas collided with another vehicle, resulting in the death of four individuals.

The case had to deal with whether the business can be liable for injuries that arise, not as a result of serving alcohol, but as a result of actions in connection with allowing patrons to consume alcohol that they brought on the premises. The court concluded that the plaintiff's common law claims were not preempted by the state's Dram Shop laws. The court went on to state that the business was not in the business of selling liquor even though they provided the set ups for the liquor that was brought in by the patrons.

Due to these cases and others, the ISO has revised the Liquor Liability exclusion in the various GL coverage forms to clearly state that the Liquor Liability exclusion applies even if the claims against any insured allege the negligence or other wrongdoing in:

• The supervision, hiring, employment, training or monitoring of others; or,
• Providing or failing to provide transportation with respect to any person that may be under the influence of alcohol;

if the "occurrence" which caused the "bodily injury" or "property damage" involved that which is described in Paragraph (1), (2) or (3) of the exclusion.

There is further clarity that a Bring Your Own Alcohol Establishment (BYO) is not considered in the business of selling, serving or furnishing alcoholic beverages. There is a new endorsement available in the series that specifically deals with the BYO exposure titled: Liquor Liability Bring Your Own Alcohol Establishment.

Pollution Form Revisions
There are a couple of forms relating to Pollution that have been modified with the 4/13 change including:

In the Pollution Liability Coverage Forms CG 00 39 and CG 00 40 the "Aircraft, Auto, Rolling Stock or Watercraft" exclusion is revised to clarify coverage as relates claims for negligence in the "supervision, hiring, employment, training or monitoring of others" when the claim involves injury or damage arising out of the use of an automobile. This exclusion has been reviewed in prior form series including in 2000 and 2003. There is a new exclusionary endorsement introduced titled: Total Pollution Exclusion for Designated Products or Work CG 21 99. This new endorsement is similar to the CG 21 98 except that it limits the applicability of the exclusion to the specific product or work described in the schedule on the endorsement. Caution when reviewing the endorsement — it is broadening if the CG 21 99 replaces the CG 21 98. However, addition of the endorsement to a policy that does not contain the CG 21 98 would result in a reduction in coverage.

Additional Insured Endorsements
There are approximately 24 Additional Insured Endorsements that have taken the new edition date. These changes are due, in part, to the various state laws that have "anti-indemnification" laws that prohibit provisions in construction contracts which require one party to indemnify another against liability for the other party's own negligence or fault. Also, there are some states that prohibit providing insurance to an additional insured for the party's own negligence.

One of the clarifications in the new Additional Insured Endorsements is to add new language that will provide insurance to an additional insured "only to the extent provided by law." Further clarification is that the coverage provided under the Additional Insured Endorsement cannot be broader coverage than that provided to the named insured. There is a new Additional Insured endorsement introduced in this form series titled: Additional Insured-Owners, Lessees or Contractors — Automatic Status for Other Parties When Required in Written Construction Contract Agreement (CG 20 38). This endorsement provides additional insured status to parties to whom the named insured has become obligated due to written contract or agreement to name an additional insured under their policy.

Primary and Non-Contributory — Other Insurance Endorsement CG 20 01 04 13 — New Form
A new form has been introduced to clarify that coverage is made available to an additional insured on a "primary and non-contributory" basis. This change is particularly important for the construction client because construction contracts oftentimes require that the additional insured is provided coverage on a "primary and noncontributory" basis. The provisions require that:

• The additional insured is a named insured on other insurance available to them; and
• A written contract or agreement has been entered into by the insured stating that the insured's policy will be primary and wound not seek contribution from any other insurance available to the additional insured.

There are several other forms that have taken a change in edition date that we will be discussing in our upcoming New Commercial General Liability Form class taught on March 19th. The class is being taught by Marjorie Segale, AFIS, CISC, CIC, RPLU, CRIS, ACSR, CISR. Marjorie is the Vice President and Director of Education for the Insurance Community Center and President of Segale Consulting Services, LLC.

This is a listing of the forms that have changed. If it form is marked in "red" it is a new form to the series.

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Call it what you want ... lead generation, business development, canvassing, door to door, talking with referrals, follow up from a networking event, asking for referrals or even making the "Dreaded Cold Call." You can disguise it anyway you want. You are prospecting!

Prospects may come from a variety of sources that include your warm or natural market. You may also receive a steady flow of prospects from centers of influence, such as attorneys, doctors, accountants or VIPs in your community. What about referrals from clients or friends? You may even belong to associations and business networking groups. What about social media? (compliance permitting).

Skeptics say that prospecting is dead. It's not. And it never will be. The decision to prospect is yours alone.

True, the old way of selling is dead and gone forever, but prospecting continues to be the foundation of all successful businesses and salespeople. So what is prospecting?

Prospecting is defined as "in search of" or "to labor for." What are we all searching for? We should be prospecting for (or searching for) new customers, or new business from our existing customers. It's that simple.

Question — If you had the cure for cancer, how many cancer patients would you approach each day? Of course you would approach as many as you could. Make sense?

Why then, do we stop prospecting? The simple answer is that it is hard work. We get lazy and complacent. After all, it's easier to check your voicemail or email isn't it? Voicemail can't object, email doesn't challenge our value. We get caught up in all the stuff that really doesn't matter.

In closing: The following quote from Frank Bettger's book How I Raised Myself from Failure to Success in Selling says it straight out, "You can't make a sale, until you write some business; You can't write some business, until you have had a conversation; And you can't have a conversation until you make the call!" Are you ready to have more conversations, write more business, and make more sales? The decision is yours and yours alone.

Happy Prospecting!

Epoxy is a magnificent substance used in many important applications where strength, hardness, moisture protection and strong adhesion are a requirement. Epoxy coatings are used to protect industrial applications from factory floors to reinforcement bar embedded in concrete. When applied correctly to a strong surface, few coatings are as tough as epoxy.

Recently, epoxy manufacturers have developed a lining process to coat the inside of an old potable water system with epoxy. This method is touted as a fast, 60 year, non-invasive, and inexpensive alternative to re-piping a whole building. However, when applied incorrectly, epoxy coatings can create a dangerous sense of false security especially where hidden from view such as the internal surface of a pipe.

Many epoxy failures are appearing in the field where litigation is often protected by gag orders thereby never reaching the public domain. This document identifies a wrinkle in the market that supports the rapid liner industry as well as the consequences of an unseen failure, should they occur.

This article arrives at the following conclusions:

• The potential for epoxy liner failures may be high in galvanized steel potable water systems.
• There is no reliable way to inspect the adhesion of epoxy inside a pipe.
• If an adhesion failure is found, there is no practical way to repair it except re-pipe — so, why not just re-pipe?
• Epoxy liner failures may typically occur at the precise location where the galvanized steel pipe is already at its weakest.

These observations are very important for the insurance underwriter who would otherwise classify a water system that has been repaired with epoxy liner as a "new" system. These observations are important for the forensic analyst that may determine the cause of a major water system failure on a condition other than being weakened by the epoxy coating. These observations are very important to the insurance broker who may inadvertently force a condominium community into an epoxy liner "solution" as a condition for maintaining coverage on their property.

Recommendation
Insurers should allow their condominium clients to perform a condition assessment without threat of cancellation. A small leak does not necessarily mean that the big rupture is imminent. In any case, epoxy does very little to eliminate the risk of a large rupture and possibly increases the likelihood. Then the insurance industry should work with the community to save enough money to perform a superior re-pipe with new materials such as polypropylene or copper. Together, a strong case can be made for the reserves or lending process. In the long run, a superior re-pipe may cost several times less than an epoxy "solution."

The Vicious Circle
Something as simple as a pinhole leak can generate thousands of dollars of water damage claims. Imagine what a fracture in a main riser cascading down 10 floors of luxury condos can cost? Unfortunately, many insurance underwriters believe that after a few small water claims, the big one is imminent. This may not necessarily be the case. Yet, many a condo is put on notice that they will lose their coverage unless the whole system is immediately replaced.

Long before the first pinhole leak, insurance companies stipulate in their policies that they are not responsible for a pipe failure if the condominium board is aware of the problem and fails to take corrective action. This condition essentially removes the incentive for the condo board to perform a quantitative piping condition assessment — if they don't know that there is a problem, they are insured. If they do know that there is a problem, they are not insured. This creates a compound moral hazard because they have no basis for saving reserve funds for a replacement.

After awhile, a few small leaks may appear leading to some minor insurance claims — this can trigger the threat of insurance cancellation for the condo. But this is the least of their worries; the condominium construction market is renowned for litigation, and many insurance companies make it very difficult or impossible for a contractor to be insured for condominium work. Condominium homeowners associations quickly learn that many contractors are simply unable or unwilling to work on condominiums.

If the homeowners association fails to save for a re-piping project, they are forced into an expensive bank loan from lenders who are equally wary of litigation ... this can become a huge mess far beyond the knowledge and capability of a condo board to manage effectively. The inability to manage a project in a litigious environment leads invariably to more litigation!

Herein lies the wrinkle in the market caused largely by the insurance industry betting against itself thereby creating a vicious circle that has very little to do with actual plumbing. In the midst of this condo / contractor / insurance / banking madness arises the epoxy liner salesman who is quick to provide everyone with exactly what they need — a cheap, fast fix.

The Epoxy Liner Process
The epoxy liner process involves isolation of sections of the existing pipe, drying the pipes with hot air and then sandblasting the inside walls with pressurized air and an abrasive mineral that is supposed to remove all corrosion, leaving bare metal in order to prepare the pipe walls to accept adhesion of the epoxy liner. Once prepared, the paint-like epoxy is blown through the pipes in a liquid state using pressurized air. The epoxy is then "cured in place" either by the application of heat and/or the passage of time (pot life).

A Case Study
A reputable plumbing contractor in the Seattle Area provided samples of epoxy liner sections that were removed from at least three properties and which failed within 4-7 years of entering service.

Failure Modes
The following video demonstrates common epoxy liner failure modes correlated to available literature on epoxy liner vulnerability. The most common vulnerabilities of the epoxy lining system are associated with the planning and quality of the preparation as well as training of the applicator personnel.

The Anatomy of an Epoxy Failure: The following photographs demonstrate the progression of an epoxy failure where the surface has been improperly prepared.

When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at it's weakest — pitted areas and threads.

Pipe threads are especially vulnerable: The photo below shows corrosion in steel pipe near pipe threads. Sandblasting with epoxy would weaken the threaded area further. A crack in the epoxy at this location would allow the corrosion to continue unknown to the residents. In many cases the existing pipe is better off left alone until a full re-pipe can take place.

Literature Review
Epoxy coating of steel is a widespread practice in construction and mainline water service^{2 3 4}. While epoxy is tested safe to drinking quality standards by independent studies¹ and national water quality standards⁶, any such "certification" is dependent upon actual adhesion to the surface of the pipe. The failure modes and vulnerabilities of epoxy are widely known and highly consistent in the progression⁷ of adhesion failure. It is also widely recognized that the project planning, surface preparation, and precise measurement and application of the ingredients to the substrate are the most significant variables in determining the probability of a successful epoxy coating assignment.

These factors are addressed in significant detail by the U.S. Army Corp of Engineers³, The American Water Works Association⁹, the American Society of Testing and Materials¹⁰, the Society of Protective Coatings, etc., who have all developed standards for the planning, preparation, measurement, and application of epoxy coatings. It can be assumed that if, and only if, these standards are followed and documented, then failures in epoxy coatings will not occur.

A comprehensive collection of tests and inspection criteria has been developed for epoxy coatings in any number of applications including internal water pipe coatings.³ Such tests as the knife blade test or those tests specified in ASTM F2831 are simple, fast and conclusive.¹⁰

The Epoxy Paradox
Epoxy coating is extremely strong and adherent if, and only if, applied correctly.⁷ The question arises that if an application should fail a test, inspection, or in service, what is the contingency plan to remediate the flaw? How will the epoxy be removed and how will the re-coating be applied? If re-pipe is the answer, why wasn't re-pipe considered in lieu of epoxy in the first place? If a single failure is found, what test sampling strategy must be applied to give a high likelihood that no other flaws exist in the system? Under what warranty claim would a failure be covered and to what extent will total coverage be warranted? These questions would be imminent in any litigation related to epoxy failures.⁵

Double Jeopardy: When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at its weakest; i.e., pitted areas and threads. As such, a poorly applied epoxy liner could weaken a pipe considerably.⁶ The result could be a catastrophic high-volume pipe failure requiring a high insurance payout, which would not otherwise be attributed to epoxy coating.

Therefore, engineering and construction management representation and oversight can help assure that the epoxy liner material and contractors are aware of the expectation that industry standards will be applied. Independent testing should be applied as a condition of the contract bidding and warranty claims so that they may adjust their pricing to meet customer expectations. Again, epoxy is an amazing substance when applied correctly. But what if it is not?

References

¹ Impact of an Epoxy Pipe Lining Material on Distribution System Water Quality by Ryan Price and supervised by Andrea M. Dietrich, PhD., Chair, Environmental Engineering, Virginia Polytechnic Institute.

² Epoxy Adhesison Testing Sponsored by the Texas Department of Transportation.

³ PUBLIC WORKS TECHNICAL BULLETIN 420-49-35 15 June 2001 IN-SITU EPOXY COATING FOR METALLIC PIPE; Department of The Army; U.S. Army Corp or Engineers.

⁴ INVESTIGATION REPORT ON THE FAILURE OF MAKKAH-TAIF WATER TR.

⁵ Canadian law suit brought against the epoxy applicators.

⁶ Potable Water Pipe Condition Assessment For A High Rise Structure In The Pacific Northwest.

⁷ Layman's Guide to Epoxy Paint / Coating Failures.

⁸ NSF/ANSI Standard 61 Drinking Water System Components.

⁹ AWWS C210-3; Liquid-Epoxy Coating Systems for the Interior and Exterior of Steel Water Pipelines.

¹⁰ ASTM F2831 - 12: Standard Practice for Internal Non Structural Epoxy Barrier Coating Material Used In Rehabilitation of Metallic Pressurized Piping Systems.

Disclaimer
Engineering opinions rendered by any author are solely for the purpose of education and are not engineering advice. If you use any opinion presented in this document or on the website in any way whatsoever, you agree to hold The Engineer and the website harmless of your use of those opinions.

Introduction
Now that health care reform is gradually rolling out into the market, the concept of the "actuarial value" of a specific set of benefits is increasingly important. The Patient Protection and Affordable Care Act of 2010 defines four metallic categories of benefit plans ranging from Bronze to Platinum. The actuarial value of these categories range from 60% for Bronze increasing by 10% for Silver, Gold and capping out at Platinum at 90%. The benefit plans offered through the public exchanges will be required to offer benefit plans that are valued within ±2% of each of the metallic levels. This limitation is critical to benefit plan sponsors as they evaluate their current benefit plans.

Actuarial Value Defined
The actuarial value of a specific health plan is the ratio of net value of the actual benefits to the value of these same benefits without copays, deductibles, limits, and/or coinsurance or other items paid for by the individual covered under that plan. For example, in the case of a plan with an actuarial value of 70% (i.e., the Silver plan), this suggests that 30% of the cost is the responsibility of the individual and 70% is paid for by the health plan or carrier involved. Similarly a Gold plan (i.e., 80%) would cover 80% of the cost with the individual responsible for 20%.

As long as the plan has an actuarial value within 2% of the metallic target it would qualify for that metallic level. For example, a plan with an actuarial value in the range of 68% to 72% would qualify as a Silver Plan. A plan with a value outside of the 2% range would not quality as a specific metallic plan and could not be offered. As a result, it is critical to be sure you know the actuarial value of your plan and what metallic plan it qualifies for.

Actuarial Cost Model
The primary tool used to derive the actuarial value of a specific set of benefits is the actuarial cost model. This is a tool used by actuaries which presents detailed utilization, unit cost information, Per Member Per Month cost information, value of copays/ deductibles/ coinsurance, etc. The actuarial cost model typically includes assumptions for each of the major service types which could include as many as 50 or 60 categories of service. The standard definition used by our company includes the following categories:

Categories are often modified based upon the needs of the actual situation. However, for each of the specific categories of service, the critical assumptions are presented. These assumptions are for a specific population, managed in a specific way, with specific demographics, assumed charge levels, assumed health status, and assumed benefits.

An example of a specific set of utilization and cost assumptions is shown in the following table:

Illustrative Cost Model For Hospital Patient Services

The utilization is shown on a "Per 1,000" basis and the claims cost is shown on a PMPM basis. PMPM stands for per member per month. The total shown above for Hospital Inpatient suggests that the overall inpatient hospital cost per covered life would be $151.66 per month prior to any offsets for deductibles, copays, coinsurance, provider discounts, medical management, demographic adjustments, etc. Similar assumptions are available for the rest of the categories previously shown. This information was developed for a typical commercially insured under age 65 population.

Developing Actuarial Values
Once the benefit design is determined, the information from the actuarial cost model is adjusted for variation in benefit design with the overall value of the benefits determined. The ratio of the value of the benefits to the overall value of covered services is the actuarial value of the benefit plan.

This is a fairly complex process. The government has developed their version of this process and has published a Federal AV Calculator. The final version of this was released on February 20, 2013. Most consulting firms have developed their own calculator to help their clients understand the process prior to the release of the Federal AV Calculator. Since the final calculator was released, there continues to be some serious concern by health actuaries as to the reasonableness of the federal calculator. We continue to use our own AV Calculator in addition to the Federal AV Calculator to better help our clients understand what variations in benefits lead to various AV values. This is a dynamic process with varying opinions depending upon the various plan designs and resulting AVs.

The following chart shows an illustrative result using our firm's AV calculator. This was prepared for a specific plan design in a specific geographic region. It is illustrative only to show the various components of cost variation.

View Chart

The above table shows each of the key variables affecting the actuarial value. Each is important to appropriately incorporate into the calculation. The starting Claim Cost in the first column is determined from the actuarial cost model previously discussed and will be adjusted for:

• Geographic region
• Health status
• Smoking/non-smoking
• Medical management
• Utilization and cost inflation trend
• Demographics

The first adjustment reflects the overall nature of the health benefit plan. A richer plan is associated with higher utilization, a lesser benefit plan is associated with lower utilization. The copay/deductible adjustment either raises or lowers the starting claims cost. The next step eliminates any costs that are excluded from the eligible expenses.

This particular example excluded brand drugs.

The next step evaluates the value of various copays (i.e., office visit copays, pharmacy copays, etc.). These are deleted from the value of the benefit costs since they are paid by the individual. Next coinsurance and deductible values are deducted. This example was developed for a $1,750 deductible 80% coinsurance plan. The last two adjustments are for the value of a family deductible limit and the out-of-pocket limit yielding the final cost. In this situation the final cost was $218.30. This was compared to the net value of benefits after excluded benefits (i.e., $309.85) with a ratio of 70.45% or a "silver" plan per our model.

Assuming this was consistent with the "authorized AV calculator" this plan could become a qualified plan under the Patient Protection and Affordable Care Act.

Complications
As you can see there are many different steps in the process to determine the actuarial value of a benefit plan. There are even more assumptions that have to be made to obtain these estimates of value. Armed with this information the plan sponsor can make informed decisions as to what benefit plan is appropriate and what they want to offer, if any.

These calculations are frequently based upon considerable amounts of professional judgment. Not all actuaries think alike so there oftentimes can be professional differences of opinion. It is critical that the plan sponsor obtain professional input they can trust and rely upon.

The American Academy of Actuaries is the primary organization granting credentials that are relied upon in the industry. One approach to obtaining relevant and reliable input is to insist that your advisor is a qualified health actuary with credentials from the Academy. In most situations, this individual would have both an FSA and MAAA credential and be a recognized member of the Society of Actuaries Health Section. Others are qualified to provide this type of input but valid actuarial credentials provide increased assurance that good input is being offered.

A report published by the Institute of Medicine (IOM) on high-value health care attracted attention when it was issued last June. Authored by a group of eleven leading hospital executives, A CEO Checklist for High-Value Health Care describes programs at various hospitals that resulted in quality improvements and lowered costs. The report has a section called "Yield," quantifying the extent of these improvements. These programs sound notable, and in fact I know some of the executives and hospitals involved, and would vouch that many significantly improved patient care.

But the report is less impressive when it tackles the cost side of the value equation, especially when it names cost control outcomes like: "days cash on hand increased from 180 to 202," and "multiple years of 4-5 percent [hospital] margin." Clearly, the hospitals improved their own bottom lines, but by how much did patient bills decrease? The hospital executives don't account for that in the "yield."

It seems this report defines "high-value" to mean highly valuable to hospital CEOs. Strikingly, though, the authors do not find it necessary to explicitly say so anywhere within the report. Perhaps they simply assume that a high-value checklist for hospital CEOs is automatically high-value to CEOs in other industries that are paying for services from hospitals. No offense to these well-meaning and highly accomplished hospital executives, but that is not always the case. Purchasers don't see high-value health care in hospital cash flow or profit margins. They see value when they get the best service at the best price.

Involving Employees
The contrast between value as seen by hospital executives and value as seen by purchasers is evident when you compare this report with a 2010 book ("The Company That Solved Health Care: How Serigraph Dramatically Reduced Skyrocketing Costs While Providing Better Care, and How Every Company Can Do the Same") by John Torinus, CEO of a company called Serigraph, a manufacturer of parts used to make vehicle instrument panels. He became interested in health care value when his health benefits expense started to eclipse his profits. Torinus might as well have written his book in a different language than the hospital executives in their report. For instance, the only "yield" Torinus notices from hospitals are the painfully obtuse bills they generate. He paid his employees to find mistakes in their hospital bills — and that alone saved him a lot of money. The hospital executives never mention such mundane things as hospital bills, but Torinus sure found opportunities to improve value there.

Torinus describes how he saved money by offering his employees a high-deductible health plan combined with a tax-protected health savings account. He is not alone; today this type of plan is among the fastest growing of all forms of commercial coverage. It means employees use their own money to pay hundreds if not thousands of the first dollars of their health spending every year, which motivates them to consider price when selecting a doctor or hospital. When you are using your own money, suddenly it matters that the MRI your doctor ordered costs $2,500 at one hospital and $750 at another. As Torinus saw it, when employees look for both quality and price, both improve.

A Need For Transparency
The last — and important — difference between the two publications is the issue of transparency. The hospital executives include transparency on their checklist for high-value, but they call it "internal transparency" — meaning information on performance should be fully available to the people working at the hospital. Torinus wants a different kind of transparency, market transparency — for information on quality and pricing to be fully available to employees, patients, and all consumers. Today, purchasers see transparency as critical to getting value, and they want disclosure of both quality and pricing. Two purchaser-led campaigns for this include The Leapfrog Group and Catalyst for Payment Reform.

In his new book, "Catastrophic Care: How American Health Care Killed My Father--and How We Can Fix It," David Goldhill argues that this confusion between costs and prices — and the lack of market transparency — are at the center of the nation's very serious economic problems. Because nobody agrees on who the customer really is in health care, and prices are never discussed in polite company, the invisible hand of the market can't perform surgery when quality and cost-effectiveness lag. Goldhill points out that the implications of this are potentially catastrophic, hence the title of his book. The escalation in health spending displaces wage and job growth throughout the economy and threatens to balloon the federal deficit even further.

Employers can't afford to wait for politicians or health care executives to solve this problem. Now is the time to define what they mean by value and purchase accordingly. Instead of worrying about somebody else's health care costs, start worrying about your health care prices. After all, the most unaffordable price of all is the price of inaction.

This article first appeared on Forbes.com.

In September of 2012, the City of Pittsburgh hosted the 35th annual Great Race, a charity run that raises money for the Richard S. Caliguiri Amyloidosis Research Fund. Caliguiri, a former Pittsburgh mayor, died of this rare protein disorder, and a portion of the race proceeds are used to help find a cure.

It should have been an uplifting event. Yet the Pittsburgh Post-Gazette reported that "despite the rally of support ... the research fund created in Caliguiri's name has had little impact on the effort to find a cure."

Those familiar with the challenges of treating rare conditions like amyloidosis won't be surprised by this news. The sad truth is that the economic incentives for developing life-saving treatments for rare disorders are less than optimal.

But that doesn't mean that we're powerless to fight rare diseases. Policymakers can dramatically improve incentives for researchers and biopharmaceutical firms to create drugs that treat rare conditions — treatments known as "orphan drugs." And they should. Rare diseases collectively represent a major public-health threat.

Rare diseases — conditions like Huntington disease and Burkitt lymphoma which afflict fewer than 200,000 people — cost Americans more than $474 billion a year.

Over 7 percent of Americans — or more than 25 million people — suffer from the roughly 7,000 illnesses that fall into this category.

So the overall market for treatments for rare diseases is large. Indeed, total global spending on orphan drugs runs between $50 billion and $85 billion — or between 5.7 percent and 9.7 percent of what the world spends on pharmaceuticals, according to "A Primer on the Orphan Drug Market: Addressing the Needs of Patients with Rare Diseases," a new paper by economist Dr. Wayne Winegarden, senior fellow at the Pacific Research Institute.

But the potential number of beneficiaries for each individual orphan treatment is relatively small. A narrow market of potential buyers can make investing in orphan drugs perilous.

Part of the problem is that developing a treatment for any illness is a long and expensive process. It takes anywhere from 10 to 15 years to usher a treatment from the research phase, through the Food and Drug Administration (FDA) approval process, and into patients' hands.

At every step of the process, drug firms must spend more money — and face the distinct possibility that their research will fail. According to the best estimates, a single successful drug costs well over $1 billion to develop.

And once a drug goes generic, the firm that created the medicine must deal with fierce competition from other manufacturers.

It's hardly surprising, then, that pharmaceutical firms tend to bet on treatments that will be useful to the largest number of patients. This state of affairs often leaves those suffering from rare diseases with few treatment options.

Fortunately, policymakers have found ways to improve the incentives for pharmaceutical firms to invest in orphan drug research.

Consider the Orphan Drug Act, passed in 1983. It provided drug developers seven years of market exclusivity for their inventions, ensuring that they would have a reasonable amount of time in which to make back their hefty investment, free of competition from other pharmaceutical firms.

The law also lessened the economic burden of drug development by offering a 50-percent tax credit for the costs incurred during the clinical trial phase. On top of that, the Act waived the fees associated with applying for FDA approval.

The results? In the past decade, the number of new drugs — or New Molecular Entities (NME), as they are called in the trade — released in the United States for the treatment of rare diseases has increased dramatically. In fact, more new NMEs were launched in 2011 than in any of the last ten years.

This is encouraging evidence that those who suffer from rare illnesses shouldn't give up hope.

It's now up to our leaders to find new ways to lower the barriers to developing these valuable treatments. They should start by taking the Orphan Drug Act — already over a quarter-century old — and using it as a model.

Drug companies should be rewarded for developing orphan drugs. It's the only way to guarantee that, no matter how uncommon an illness, there will be somebody, somewhere working to find a cure for it.