On January 28, 2005, the Centers for Medicare and Medicaid Services (CMS) issued final regulations on the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”). As discussed in our previous article on this topic, the Act makes prescription drug coverage, called Part D, available to certain Medicare-eligible retirees beginning January 1, 2006. (See Medicare Prescription Drug, Improvement and Modernization Act of 2003: Retiree Prescription Drug Coverage in our November 2004 issue.) The final regulations serve to clarify or correct those guidelines published in the proposed regulations.
Changes in the Final Regulations
Under the final regulations, certain payments which were previously excluded from consideration as “true out of pocket” expenditures (“TrOOP”) by Part D retirees may now be included. TrOOP are the retiree’s individual expenditures that are counted toward the Part D catastrophic coverage threshold. These include payments made from Health Savings Accounts (“HSAs”), Flexible Savings Accounts (“FSAs”) and Medical Savings Accounts (“MSAs”) held by the retiree. Payments from Health Reimbursement Arrangements (“HRAs”) may not be included in TrOOP because HRAs must be funded by the employer and, therefore, are not considered to be the retiree’s own money. Some charitable contributions and copayment waivers by pharmacies (based on need and circumstance) may also be considered TrOOP.
Information for Plan Sponsors
Every plan offering prescription drug coverage to Medicare-eligible participants, including those plans that do not offer retiree coverage, must attest to whether it is a “qualified retiree prescription drug plan” for purposes of establishing “creditable coverage” for Medicare-eligible participants. “Creditable coverage” is coverage that is actuarially equivalent to Part D coverage. In order to be a “qualified retiree prescription drug plan”, the plan must meet the following requirements:
- Each plan must submit an actuarial attestation showing actuarial equivalency to Part D coverage;
- Each Part D eligible individual covered under the plan must be provided with notice of creditable coverage; and
- Records must be maintained by the plan and made available for audit by CMS or the Office of the Inspector General for six years.
CMS has said that the actuarial attestation, which proves that coverage is at least as comprehensive as Part D, will be simpler for those plans that choose not to apply for the subsidy described below than for those plans that do apply. However, details of the simpler test have not yet been released.
As an incentive for offering retiree prescription drug coverage, the government is offering a 28% direct subsidy (for allowable drug costs from $250–$5,000 per qualified retiree in 2006) to plan sponsors who offer Part D-equivalent coverage to their retirees as an alternative to Part D. Requirements for obtaining the subsidy are as follows.
A two pronged actuarial attestation is required to apply for the subsidy:
- First, the “gross value test” requires a comparison of the actual gross value of claims paid by the plan (regardless of premiums or financing) and the expected claims paid under Part D.
- Second, the “net value test” looks at the gross value, reduced by premiums, to determine equivalence to Part D. The net value test takes into account any coverage that supplements Part D. This is important because supplemental coverage serves to reduce TrOOP for retirees, potentially making coverage less valuable to retirees by delaying catastrophic coverage under Part D. Under Part D, catastrophic coverage would normally begin when the retiree has incurred $5,100 in total allowed prescription drug costs ($3,600 in TrOOP). Supplemental coverage delays catastrophic coverage when the plan pays for prescription drug costs that otherwise might be considered TrOOP.
If a sponsor offers more than one retiree prescription drug plan that may be considered creditable coverage, each plan must qualify separately under the gross value test, but the plans may be aggregated to qualify under the net value test.
Written Agreements with Providers; Annual Application
The actuarial attestation is not the only requirement for obtaining the subsidy. In order to qualify for the subsidy each qualified retiree prescription drug plan must:
- maintain a written agreement with each insurer or third party administrator to disclose information to CMS on behalf of the plan sponsor; and
- submit a signed application for the subsidy, in the form and manner specified by CMS, by the deadline each year (September 30, 2005 for 2006). The signed application must include the following:
- The name, address, contact name, and email address for each plan sponsor;
- The plan sponsor’s EIN;
- An actuarial attestation (signed by a qualified actuary who is a member of the American Academy of Actuaries) for each Part D-equivalent plan;
- A list of all qualified retirees (including spouses and dependents), including the name, social security number or Health Insurance Claim number;
- A signed sponsor agreement; and
- Any other information which may be requested by CMS.
The plan must also agree to comply with the terms and conditions of receiving the subsidy and acknowledge (and have all subcontractors acknowledge) that all information is being provided for purposes of obtaining federal funds.
Special rules apply to fiscal year plans that begin in 2005 and end in 2006. For such plans, the claims incurred in all months of the plan year are taken into account in determining which claims fall between the subsidy threshold and limit, but only those claims incurred in 2006 are subsidized.
CMS expects to release forms, related instructions for the subsidy and actuarial attestation, and guidance relating to data submissions and subsidy payments, this spring.
Becoming a Prescription Drug Plan
Plans that wish to do so may sponsor their own prescription drug plan (“PDP”) or Medicare Advantage prescription drug plan (“MA-PD”). CMS has begun to issue employer group waivers in order to facilitate this option. In general, plans do not need to apply for waivers for PDP purposes; they will be automatically granted. CMS expects to continue issuing waivers, either of its own accord or at the request of plans. Waivers that are granted on a case-by-case basis will apply to all similarly-situated plan sponsors.
Updated guidelines indicate that an initial notice to sponsor a PDP or MA-PD in 2006 must have been provided to CMS by March 23, 2005. The Notice of Intent to Apply packet is available online at http://www.cms.hhs.gov/medicarereform/pdbma/employer.asp. Complete applications, forms for which are not yet posted, will be due April 18, 2005. Formulary submissions are due by June 6, 2005.
For plans that choose not to apply for the subsidy, there are several other options for retiree prescription drug coverage that have been endorsed by CMS in subsequent guidance. Some of the alternatives to offering creditable coverage and collecting the subsidy include:
- Offer creditable coverage but forgo the subsidy. As mentioned above, plan sponsors who do not wish to apply for the subsidy may offer coverage that is considered creditable coverage by meeting a simpler actuarial equivalence test than the two-pronged test described above. This option avoids the complexities of applying for the subsidy while allowing plans to offer coverage that will permit their retirees to participate in Part D in the future, without incurring late enrollment penalties.
- Contract with an MA-PD or PDP plan to offer customized benefits. This option would allow plan sponsors to take advantage of the waivers offered by CMS without having to meet CMS’s short time table for applying to be a PDP because the contracted MA-PD or PDP will be required to conform to a separate process (as an independent Part D provider).
- Offer a Part D premium payment plan. Premiums for Part D coverage are set by CMS. In 2006, premiums are expected to be $35 per month, or $420 per year. This figure will be adjusted annually. This amount, if paid by the retiree, would not be included in TrOOP, so covering it would not delay catastrophic coverage for retirees, and would serve as a valuable savings to those living on fixed incomes.
- Offer supplemental coverage that coordinates with Part D in the same way that a retiree medical plan might coordinate with Part A or Part B of Medicare. Keep in mind that this coverage may affect the catastrophic coverage threshold.
- Provide a supplement to Part D that only covers those drugs that are not allowed under Part D. Because the costs of these drugs would never constitute TrOOP, the catastrophic coverage threshold would not be impacted.
Notice Requirements for Plan Sponsors
Under the final regulations, all plans must give notice to Medicare-eligible individuals about their prescription drug coverage and whether or not it is creditable coverage under Part D. According to recent guidance from CMS, notice must be provided:
- Prior to an initial enrollment period for Part D;
- Prior to the effective date of enrolling in the sponsor’s plan;
- Upon changes to the sponsor’s plan that affect whether coverage is considered creditable;
- Prior to the annual open enrollment period for Part D (which begins each November 15); and
- Upon request by a beneficiary.
This notice must be provided by November 15, 2005 for 2006 enrollees. The notice must include a statement about whether coverage is creditable, and if not, the consequences of non-creditable coverage on the retiree’s delayed enrollment in Part D. Notice can be provided in an SPD or other general notice, so long as it is provided in a timely manner to allow a retiree to make an informed decision. CMS anticipates releasing model language for this notice, but has not yet done so.
Regardless of the path that plan sponsors take, the timeline for Part D is very short. As mentioned above, notice of intent to apply as a Part D PDP or MA-PD was due this month. Applications for the subsidy in 2006 and actuarial attestations are due to CMS by September 30, 2005. Plan sponsors must communicate notice of actuarial equivalence to Medicare eligible participants by November 15, 2005, the date that qualified retirees (as of January 1, 2006) may begin enrolling in Part D. All individuals who are Medicare-eligible on January 1, 2006, but who have not enrolled in Part D or an actuarially-equivalent plan by May 2006, will begin accruing penalties in May, 2006. The penalty is expected to be 1% for every month that an eligible retiree does not enroll.
Timeline for Guidance
According to CMS, certain guidance will follow the final regulations in early to mid-2005. Guidance aimed at employer/union retiree plan sponsors may be found online at http://www.cms.hhs.gov/medicarereform/pdbma/employer.asp.
This article is intended as a brief summary of the final regulations set out by CMS on the Act, and is not intended to provide details on all aspects of those regulations. If you are considering a change to your retiree prescription drug plan(s), please review all options and consider the different effect of each on both the plan and the participants before making any decision. Please feel free to contact Trucker öHuss with any issues that may arise prior to making such a decision.