Legislative Watch

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January/February 2004

By George G. Olsen, JD, and Rebecca A. Reisinger

The new Medicare Prescription Drug Act will have a big impact on employers and their health insurance plans.
In our November column we reviewed the provisions of the Medicare proposals that would affect employers and their ability to continue to provide health care coverage to their employees both current and retired. Now that the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is law, it is instructive to examine the provisions of the act that bear on employers and their health insurance plans. Health care providers, as business entities, will need to understand the options available to them as they decide whether and how to provide care to their employees and retirees.

Overview of Options
With Medicare Part D, beneficiaries will have several options from which to choose if they want Medicare to cover their prescription drug expenses. To the extent available, Medicare enrollees may receive coverage through private, stand-alone prescription drug plans (PDPs); private Medicare Advantage (MA) plans that offer drug coverage in addition to other Medicare benefits; a government-managed “fallback” plan in areas where private plans do not participate; or employer-sponsored retiree health plans.

The addition of a drug benefit marks the largest expansion of Medicare since the program’s inception in 1965. In an attempt to keep program costs as contained as possible, Congress passed a law with two goals in mind: to enlist private sector plans to participate in delivering the drug benefit and to bear some insurance risk, and to supplement rather than supplant private sector dollars currently being used to provide prescription drug coverage to Medicare-eligible Americans.

Beginning in 2006, employers will have three basic options for providing prescription drug coverage to their Medicare-eligible retirees. First, employers may retain prescription drug coverage for retirees and receive special subsidy payments from the government. Second, employers may provide “wrap-around” coverage (eg, cover the cost of the monthly premium, annual deductible, or cost-sharing expenses) to their retirees who are enrolled in Medicare Part D. Finally, an employer could act as a Medicare drug benefit plan for all its Medicare-eligible retirees, requiring them to be subject to a multitude of not-yet-written regulations. If an employer decides not to provide prescription drug coverage to retirees, the new law allows those retirees to sign up for Medicare Part D without incurring penalties.

What The Act Means To Employers The new law allows “qualified employer-sponsored retiree health plans” to receive direct subsidy payments for Medicare-eligible retirees who continue to receive drug coverage through the employer plan rather than enrolling in Medicare Part D. Qualified retiree plans must: certify that the prescription drug coverage for retirees equals or exceeds the actuarial value of the standard Medicare drug benefit; allow the Secretary of Health and Human Services access to records pertaining to the costs of providing drug coverage for audits; and provide for disclosure to the Secretary and Medicare beneficiaries that the coverage is “creditable coverage” and meets the actuarial equivalence requirements. The law defines a “group health plan” as including federal and state governmental plans, collectively bargained plans, and church plans. A “qualified retiree prescription drug plan” is defined as employment-based retiree health coverage where individuals are eligible to participate because of their status as retired enrollees.

The special subsidy payments equal 28% of the “gross covered drug costs” between a cost threshold amount ($250 in 2006) and a cost limit amount ($5,000 in 2006.) The maximum subsidy is $1,330 and equals approximately 100% of the value of the standard Medicare Part D benefit. Subsidy payments are excludable from taxation. Employers will be allowed maximum flexibility in operating their prescription drug plans (eg, plan design, formularies, and pharmacy networks.) After 2006, the cost threshold and the cost limit amounts will be adjusted each year by the annual percentage increase in the average per capita aggregate expenditures for covered Part D drugs. The drug costs subject to the subsidy payments do not include the costs of administering the prescription drug plan; however, employers may receive subsidy payments for the costs directly associated with dispensing the covered drugs.

The Secretary will determine in what manner payments to employers are made. The law states that the Secretary may make interim payments during a calendar year based on “the Secretary’s best estimate of amounts that will be payable after obtaining all of the information.” An employer’s eligibility to receive estimated payments is predicated on the employer providing information requested by the Secretary. Payments will be made from the new Medicare Prescription Drug Account established within the Federal Supplemental Medical Insurance (Medicare Part B) Trust Fund.

Employers will also be exempted from the Medicaid “Best Price” policy. As a result, pharmaceutical companies should be more willing to negotiate deeper discounts on prescription drug prices because they will not be bound to offer the same discounts to state Medicaid programs.

Employers may choose to supplement, or “wrap around,” the Medicare Part D drug benefit by requiring their retirees to enroll in Part D and then make contributions toward the costs of monthly premiums, deductibles, and cost-sharing. Employers may also negotiate preferential premiums for retirees enrolled in integrated Medicare Advantage plans offering Part D drug coverage. However, employer payments used by retirees to cover cost-sharing expenses will not count toward the Part D annual out-of-pocket threshold. Thus, for every dollar an employer pays on behalf of a retiree enrolled in Medicare Part D, the employee will still be required to spend $3,600 a year in out-of-pocket costs before being eligible for the catastrophic benefit.

The law requires the Secretary to establish a method of coordinating between Medicare Part D and other prescription drug coverage utilized by Medicare beneficiaries. Benefit coordination includes payment of premiums and coverage as well as payment of supplemental prescription drug benefits. The Secretary is required to consult with employers as part of the process of establishing benefit coordination requirements. The Secretary is allowed to impose user fees on employers and others transmitting benefit coordination information.

What happens to a retiree if an employer drops prescription drug coverage? The law provides a penalty-free, open enrollment period for that retiree to sign up for Medicare Part D. In general, Medicare-eligible retirees have one opportunity to enroll in Part D and will be assessed a penalty if they enroll after the initial period has passed. However, a Medicare beneficiary who involuntarily loses their retiree drug coverage may enroll in Part D without penalty. For the employer-sponsored drug coverage to be eligible for this exception, it must meet or exceed the actuarial value of the standard Medicare drug benefit.

If employer-sponsored prescription drug coverage is reduced in value below the actuarial value of the standard Part D drug benefit, the retiree will be deemed to have involuntarily lost drug coverage and may take advantage of a “special enrollment period.” The Secretary is directed by law to determine the parameters of any special enrollment periods.

Health Savings Accounts
Health Savings Accounts (HSAs) provide tax-favored treatment for current medical expenses and allow the beneficiaries to save for future medical expenses. Contributions to HSAs are deductible if made by an eligible individual and are excludable from gross income for employment tax purposes if made by the employer of an eligible individual. Distributions for qualified medical expenses are not includable in gross income. In general, individuals are eligible for HSAs if they have only a high deductible health plan. In some circumstances, an individual with a plan other than a high deductible plan may be eligible for an HSA. Under the new law and for purposes of HSAs, a high deductible plan has a minimum deductible of $1,000 for self-only coverage or $2,000 for family coverage; there also must be an out-of-pocket expense limit that is no more than $5,000 for self-only coverage or $10,000 for family coverage.

The maximum aggregate annual contribution is the lesser of 100% of the annual or maximum deductible permitted under an inflation-adjusted Archer MSA high deductible plan (for 2004 the maximum high deductible is estimated to be $2,600 for self-only coverage or $5,150 for family coverage; annual contribution limits are raised for individuals aged 55 and older). Contributions may not be made once an individual is eligible for Medicare. However, qualified medical expenses now include health insurance premiums for Medicare-eligible individuals; the employee share of premiums for employer-sponsored retiree health insurance is also included.

GAO, ADEA, and Medicare Advantage
Under the new law, the Government Accounting Office (GAO) must conduct two studies on trends in employment-based retiree health coverage. An initial study is due to Congress in November 2004, and a final study must be completed by January 1, 2007. The Comptroller General must consult with sponsors of employment-based retiree health coverage during the design of both studies.

The initial GAO study will include information concerning trends in employment-based retiree health coverage prior to the passage of Medicare prescription drug legislation; the opinions of sponsors of retiree health coverage concerning which options they are most likely to utilize for their retirees; and the likelihood of sponsors to maintain or adjust levels of retiree health benefits in light of the new Medicare drug benefit. The final GAO study will include data concerning changes in retiree health coverage trends since the completion of the initial study. The report will also include recommendations by employers on ways that “voluntary provision of employment-based retiree health coverage may be improved and expanded.”

The Senate bill had a provision amending the Age Discrimination in Employment Act (ADEA) to allow employers to offer different health care benefits to retirees based on their Medicare eligibility, but the provision was not included in the conference report. To encourage employers to offer MA plans to their Medicare-eligible retirees, the Secretary is allowed to “waive or modify requirements that hinder the design of, the offering of, or the enrollment in” such plans. Employers may also limit enrollment to their own retirees.

George G. Olsen, JD, is a partner of the firm Williams & Jensen, PC, Washington, DC. He is also legal counsel for the National Association of Rehabilitation Agencies and Providers. Rebecca A. Reisinger is an associate at Williams & Jensen, PC.

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January/February 2004