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November 2003


Legislative Watch

By George G. Olsen, JD


As House and Senate conferees struggle to reconcile the considerable differences between HR 1, the Medicare Prescription Drug and Modernization Act of 2003, and S 1, the Medicare Prescription Drug and Improvement Act of 2003, there has been increasing concern about the effect of the legislation on the benefits that Medicare-eligible individuals receive under health care plans sponsored by their employer or former employer. The fear is that once the legislation is put into effect, employers will eliminate or severely limit the benefits they now make available to seniors—eg, through retiree health plans. Seniors and, indeed, Congress recognize that employer-sponsored retiree prescription drug coverage is, on the whole, more generous than any drug benefit Congress can afford to create under the Medicare program. Furthermore, the budgetary limit of $400 billion (over 10 years) that Congress established for Medicare reform and the drug benefit requires that, to the greatest extent possible, private health care dollars (from employers) not be replaced by public health care dollars through Medicare.

Five consecutive years of double-digit health care cost increases have made employers extremely sensitive to the costs of providing health insurance to their employees and retirees. A recent survey conducted by Towers Perrin concluded that health care costs are expected to increase by 12% in 2004—a doubling of health care expenditures since 1999. The average employer health care cost for each active employee will be approximately $7,308 in 2004, or $742 more than the average expenditure this year. It is little wonder then, that employers will be inclined to shift some of their costs to the Medicare program when the Medicare drug benefit and reform legislation is passed.

The manner in which Congress disposes of this issue will have a considerable impact on employers, employees, patients, insurers, and providers of care.

Assuming that a Medicare drug benefit is passed by Congress, employers will have four basic options for providing health care benefits to Medicare-eligible employees or retirees.

First, employers may drop prescription drug coverage and other benefits completely. Under a second option, employers could require Medicare-eligible retirees to enroll in the newly created Medicare Part D drug benefit and then contribute money to retirees so that premium, deductible, or cost-sharing payments under the Medicare benefit are reduced for the retiree. Third, employers may retain prescription drug coverage for retirees and receive subsidy payments provided for in both House and Senate legislation. Finally, an employer could choose to act as a Medicare drug benefit plan for all its Medicare-eligible retirees. This option would require an employer to follow government regulations established for all Medicare drug benefit plans.

This article focuses on three areas of HR 1 and S 1 that have particular significance for Medicare-eligible retirees and their former employers: (1) Medicare Part D enrollment policies for retirees with employer-sponsored prescription drug coverage; (2) subsidy payments to employers who retain prescription drug coverage for Medicare-eligible retirees; and (3) the impact of employer contributions on a retiree’s eligibility for catastrophic coverage (also known as an “out-of-pocket” spending limit.)

Finally, we will outline the impact of the legislation from the perspectives of the Congressional Budget Office (CBO) and the Employee Benefits Research Institute (EBRI). These two entities disagree about the number of Medicare-eligible retirees who will lose retiree prescription drug coverage once a Medicare drug benefit is established.

Drug Benefit Enrollment Policies

The House and the Senate bills establish an open enrollment period for eligible persons to enroll in the Medicare drug benefit program; both bills also assess a penalty on those who choose to enroll in the drug benefit program after the enrollment period has passed. Exceptions to this penalty policy exist in both measures, but the details differ.

The Senate legislation allows Medicare beneficiaries who involuntarily lose employer-sponsored retiree drug coverage to enroll in the Medicare program without penalty as long as the enrollment takes place within 63 days of the beneficiary receiving notice that drug coverage will be discontinued or the date coverage is discontinued—whichever date is later. In order for employer-sponsored drug coverage to be eligible for this exception, it must meet or exceed the actuarial value of the standard Medicare drug benefit. The House legislation is more generous than the Senate provision in that it does not require a beneficiary involuntarily to lose employer-sponsored drug coverage in order to be eligible for the penalty-free enrollment period. The penalty policy was added to the legislation after the CBO expressed concern that allowing an “open door” enrollment policy would result in adverse selection and higher costs as healthier beneficiaries delayed enrolling in the program until they needed prescription medications.

Payments for maintaining Retiree Prescription Drug Coverage

The Senate legislation 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 the Medicare Part D drug benefit program. Qualified retiree health plans must certify that the prescription drug coverage for retirees equals or exceeds the actuarial value of the standard Medicare drug benefit; the plan is also required to allow the Secretary of Health and Human Services access to books and records that pertain to the costs of providing drug coverage for the purpose of audits.

The Senate formula for the subsidy payments equals approximately 64% of the value of the Medicare standard benefit. S 1 also includes a provision allowing employers to provide differential benefits to Medicare-eligible retirees and those ineligible for Medicare. The legislation amends the Age Discrimination in Employment Act (ADEA) to clarify that employers will not violate ADEA if the only punishable activity consists of providing differential benefits to Medicare-eligible and Medicare-ineligible retirees.

The House legislation provides for “special subsidies” to be paid to qualified retiree prescription drug plans for Medicare beneficiaries who remain in the retiree plan rather than enrolling in a Medicare prescription drug plan (either a stand-alone plan or an integrated MedicareAdvantage plan). A “qualified retiree prescription drug plan” is defined in the legislation as employment-based retiree health coverage where individuals are eligible to participate because of their status as retired enrollees of such a plan. The following requirements must be met in order for a plan to be designated as a “qualified retiree prescription drug plan”: coverage must provide at least the same actuarial value as the standard benefit outlined in the bill; the sponsor must maintain records in case of audits or other oversight activities; and the sponsor is required to provide certifications that Medicare-eligible retirees have such coverage.

“Special subsidy” amounts in the House bill equal 28% of “allowable” drug costs between the deductible ($250 in 2006) and $5,000—equaling roughly 100% of the Medicare standard drug benefit as defined in the legislation. After 2006, the $5,000 total spending limitation on subsidy payments may be adjusted by the Secretary of Health and Human Services so that it is equal to the amount of payments made to Medicare prescription drug plans.

Contributions to Retirees with Medicare Drug Benefit

While the Senate bill includes a $3,700 “out-of-pocket” limit for prescription drug spending by Medicare drug benefit enrollees, it applies only in certain instances. Employers may choose to supplement, or “wrap around,” the Medicare drug benefit by requiring their retirees to enroll in the Part D drug benefit and then make contributions toward the costs of monthly premiums, deductibles, and cost-sharing. However, for purposes of the $3,700 out-of-pocket spending limit, dollars contributed by an employer on behalf of an employee will not count toward the spending limit. This policy, referred to as the “True Out-of-Pocket” spending limit, was developed last year by Congressional staff who wanted to make the out-of-pocket spending limit look more attractive to Medicare beneficiaries.

The House bill includes a provision that is nearly identical to the Senate provision: the only real difference is that the House out-of-pocket limit is $3,500 rather than $3,700.

Impact of Legislation on Retiree Drug Coverage

On July 22, 2003, CBO released an official cost estimate comparing the House and Senate bills. CBO estimated that fewer retirees would lose prescription drug coverage under the House plan than under the Senate plan.

Approximately 28% (11.25 million) of Medicare beneficiaries receive drug coverage through employer-sponsored retiree health plans. CBO estimates that 37% of beneficiaries who currently have employer-sponsored retiree health coverage will lose it as a result of the Senate bill becoming law; the House bill could result in 32% of those with retiree drug coverage losing their benefit.

In the cost estimate, CBO states that the true out-of-pocket spending policy (which does not allow employer-paid dollars to “count” toward the out-of-pocket spending limit) would provide a “clear financial disincentive for employers to supplement the Part D [drug] benefit.”

An analysis prepared by the EBRI disputes the information included in the CBO cost estimate. EBRI contends that the figures cited by CBO (regarding the percent of Medicare-eligible retirees who will lose employer-sponsored drug coverage) are estimates for the 10-year budget window; the figures are not simply an immediate reaction to the establishment of a drug benefit.

EBRI believes that somewhere between 2% and 9% of current Medicare enrollees with employer-sponsored retiree prescription drug coverage will lose it once an outpatient prescription drug benefit is available—for the simple reason that such a benefit exists.

While the trend in retiree health benefits is for employers to decrease the amount of the benefit, it is unclear from existing survey data whether future employer behavior includes eliminating drug coverage for future retirees or current beneficiaries. In establishing the estimate of those who will lose existing coverage, EBRI assumes the following: retirees with health coverage tied to former union or public sector employment will not lose drug coverage; most private-sector employers interested in dropping drug coverage for current retirees have already done so; and current trends in retiree drug coverage will continue whether or not a Medicare drug benefit is enacted.

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.

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