On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). Among other things, the Act makes prescription drug coverage available to retirees through Medicare beginning in 2006. The new prescription drug coverage, termed Part D, is available to retirees eligible for Medicare Part A (coverage for in-patient hospital care) or enrolled in Part B (coverage for out-patient care) as of 2006 and is provided through commercial prescription drug plans or through Medicare Advantage — Prescription Drug plans.
The focus of this article is the effect of the new Medicare prescription drug coverage on employment-based retiree group health plans.
In 2006, annual premiums for Part D are estimated to be $420, or $35 per month. The initial deductible is $250 per year. Once the deductible is met, Part D covers 75% of prescription costs until total prescription drug expenses for the year reach $2,250. A “doughnut hole” exists between $2,250 and $5,100 where the participant must cover all prescription drug costs. If the participant’s total prescription drug costs exceed $5,100 in one year, catastrophic coverage will cover 95% of all costs over $5,100. By the time a participant’s drug expenses reach $5,100, that participant will normally have incurred out of pocket expenditures totaling $3,600. This plan design is illustrated in the table below:
There are special subsidies for low-income participants to defray the out of pocket costs.
A participant who is prescribed a drug that is not covered by their plan’s formulary (the list of drugs covered by the plan) must pay the entire cost associated with purchasing the drug out of pocket, and that cost does not count toward either the deductible or the threshold for catastrophic coverage. Since commercial prescription drug plans and Medicare Advantage—Prescription Drug plans may change their formulary offerings at any time and without notice to the participant, total out of pocket costs may be unpredictable.
Those retirees eligible for Part D on January 1, 2006, may begin enrolling in Part D prescription coverage starting November 15, 2005, and must do so by May 15, 2006, to avoid a penalty, unless they receive actuarially equivalent coverage through other means. The initial enrollment period for retirees who become eligible on or after May 1, 2006, is the same as the enrollment period for Part B.
Prescription Drug Discount Card
Prior to 2006, Medicare-eligible recipients who are not covered under another prescription drug plan may purchase one of a variety of Prescription Drug Discount Cards. These cards enable holders to have access to negotiated drug prices on prescription drugs and discounts on medical supplies and, in some situations, over-the-counter drugs. The fee for a card may be up to $30 per year, which may be paid by the state in which the participating retiree resides. To our knowledge, there is nothing to indicate that a plan cannot pay a participant’s premium for the card. Card holders are expected to save up to 15% on their prescription drug costs (as compared to those without prescription drug coverage).
Once enrolled with one Discount Card, participants may not voluntarily change to another unless they move to an area not covered by the original card, join or leave a Medicare Managed Care plan, enter or leave a long term care facility, or the provider stops offering the card. In any of these cases, a second (non-prorated) enrollment fee to enroll in a new plan may be required.
Discount Card sponsors are prohibited from charging participants for any services required by the legislation, except as included in the $30 maximum annual premium for the card.
Low income participants may be eligible for additional credits of up to $600 from Medicare.
Popular reports indicate that there is great confusion about what the various cards have to offer, and that Medicare’s websites have not reduced that confusion.
Plan Sponsor Benefits
The proposed rules released on August 3, 2004, by the Department of Health and Human Services, implementing the Medicare Prescription Drug Benefit (“Proposed Rules”), allow group health plans sponsored by employers, unions or Boards of Trustees to do one of the following with regard to prescription drug coverage for retirees:
- maintain prescription drug coverage under the plan in lieu of Part D coverage that is at least equivalent to Part D and receive a 28% nontaxable subsidy reimbursement from Medicare for eligible annual gross prescription drug costs; or
- forgo the subsidy, thus requiring Medicare-eligible retirees to enroll in Part D, and choose whether to offer supplemental coverage.
Application Process for 28% Subsidy
In order to receive subsidy payments, plans need to attest that the benefits provided are at least actuarially equivalent to Part D and will need to follow certain procedures such as those outlined in the Proposed Rules. Although technical details of the application process have not yet been released, the Centers for Medicare and Medicaid Services (“CMS”) has indicated that all applications for 2006 calendar year subsidies must be submitted by September 30, 2005, and annually thereafter at least 90 days prior to the beginning of the year. For plans applying for the subsidy after September 30, 2005, the first application must be turned in at least 150 days prior to the beginning of the first year in which subsidies are requested. Applications must include detailed information about the plan, its actuarial equivalency, and individual participant information.
Recouping the 28% Reimbursement from Medicare
CMS has proposed a number of reimbursement options. The option favored by CMS would require each plan to certify to CMS by the 15th of the month that the total amount of per-person actual retiree/beneficiary gross drug spending (minus rebates) by the plan for the previous month falls within the threshold and the limit. For 2006 the threshold is $250 and the limit is $5,000. Medicare would reimburse the plan 28% of that gross drug spending by the 30th of that month. Because rebates, discounts and other price concessions are often granted in a month other than the month in which a prescription drug is purchased, the plan must reconcile and report these amounts for the month in which they are received. These amounts will offset thesubsidy otherwise reimbursable to the plan. If the rebates, discounts and price concessions total more than the subsidy for the same month, the plan must pay the difference to Medicare.
Alternative payment options that CMS is considering include:
- one yearly payment after the close of the year;
- monthly interim payments based on historical payments that are reconciled after the close of the year; or
- lagged payments that occur on the 15th of the month two months after the month actually paid.
Multiemployer Plans Should Note…
Multiemployer plans are eligible for the same 28% subsidy as single-employer plans. Since the Board of Trustees of a multiemployer plan is generally considered to be the sponsor of the plan, the subsidy refund will be paid to Boards of Trustees rather than to individual employers.
Plans that do not wish to collect the subsidy but want to provide a benefit to their participants have the following options:
- provide wrap around coverage that supplements Medicare Part D. Under this option, retirees enroll in either a Medicare Advantage—Prescription Drug plan or commercial prescription drug plan, and the plan supplements Part D with enhanced insurance;
- the sponsor may seek approval for its own Medicare Advantage—Prescription Drug plans or commercial prescription drug plan, most likely offering supplemental coverage;
- cancel group health plan prescription drug benefits and subsidize premium payments in a Medicare Advantage—Prescription Drug plans or commercial prescription drug plan of the participant’s choosing; or
- provide coverage that does not interrelate with Part D.
In choosing an option to pursue, sponsors should realize that any option that supplements Medicare Part D by paying copayments or the “doughnut hole” with employer-contributed or plan-contributed funds will have the effect of postponing eligibility for catastrophic coverage. This is because contributions made by a plan cannot count toward personal contributions required to meet the deductible or catastrophic threshold. Generally, plans may cover the Part D premium and costs that would not be covered under Part D (for example, drugs not covered under the participant’s Part D formulary) without postponing eligibility for catastrophic coverage.
States Concerned Over Part D
According to comments offered to CMS by the National Association of State Medicaid Directors, National Governors Association and National Conference of State Legislators, many states are concerned about the negative consequence Part D may have on state Medicaid systems and people covered by both Medicare and Medicaid (“dual eligibles”). Under Part D, states must turn over prescription drug coverage of dual eligibles to CMS and must reimburse CMS for the cost savings provided by no longer covering these individuals. Many states are concerned over the administrative and financial burdens this will place on their individual Medicaid systems. The states will also lose the discounts they have secured for their participants through direct negotiations with drug companies, something that CMS does not have the authority to do. States have also expressed concern that the implementation of Part D will cause coverage problems for people currently covered by the states’ Medicaid systems because people moving from the states’ Medicaid systems to Part D will be moving from an open formulary to a closed formulary and because the transition period is very short.
It is expected that many plans will continue to offer their own benefits, and that many will apply for the 28% subsidy. Some plans, however, have expressed the concern that gathering the data necessary to receive the subsidy is too expensive and confusing and say they will not attempt to do so. Before offering qualified retiree prescription drug coverage, plan sponsors should consider the difficulties associated with providing the attestation that the benefits provided are equivalent to Part D and maintaining records to prove the accuracy of payments. If your plan currently offers benefits that do not meet the test for actuarial equivalence, you should consider increasing benefits in order to qualify for the subsidy; the cost of doing so could be lower than the subsidy payment, resulting in a net savings to the plan.
According to a study published by Boston University, drug companies are expected to gain up to $139 billion in profit over the next eight years as a result of the Act. Plan sponsors and recipients are not expected to fare as well. For example, low income state Medicaid recipients will no longer be able to get inexpensive drugs through their states, but will be forced to sign up for coverage with a private provider through Medicare. CMS is forbidden from negotiating with drug companies for below-market drug prices for Medicare recipients; insurance companies and drug companies are left to determine which drugs will be covered and at what price.
This article is intended as a brief summary of the options available to retiree health plans under the Act, and is not intended to provide details on all aspects of those options. If you are considering a change, please review all options and consider the different effect of each on boththe plan and the participants before making any decision. Please feel free to contact Trucker Huss with any issues that may arise prior to making such a decision.