Medicare Part D - Important Decisions for Employers and Individuals

Submitted by Edward Coates, Texas Mutual Insurance Company

Introduction

The new Medicare prescription drug program (Medicare Part D) has gotten lots of media attention recently because of the projected cost of the program, confusion among seniors about what they need to do, the thousands of plans offered by private insurers, and problems with the initial rollout. Besides seniors, employers and other health plan sponsors have several important decisions and required regulatory activities related to the program. Due to the complexity of the program and notices employers must distribute, HR benefits professionals may get lots of questions from employees about the program. This article will outline the basics of the program and key decisions and activities for individuals and employers.

What is Medicare Part D?

As of January 1, 2006, Medicare began providing prescription drug coverage for individuals over the age of 65 who elect this optional drug coverage. In addition to those 65 and older, the program is also available to other Medicare- eligible individuals, such as the disabled and those with end stage renal disease. This program is known as Medicare Part D.

After a $250 annual deductible has been met, Medicare will pay 75% of the cost of prescriptions, up to $2,250 in covered expenses per year. Then, the individual will be responsible for 100% of the next $2,850 of true out-of-pocket expenses. This true out-of-pocket expense provision means that the participant must incur these expenses and they cannot be reimbursed or covered by any other plan. This has been referred to as “The Donut Hole.” Once the individual’s total prescription expenses reach the true out-of-pocket limit ($5,100 if there is no other coverage or subsidy), Medicare Part D coverage resumes, covering 95% of prescription costs.

The prescription program has many approved providers, including many of the national insurance carriers and pharmacy benefits management companies. Medicare participants are required to pay a monthly premium for the coverage, which is estimated to average $35 per month or $420 annually for the first year.

Action required by Medicare-eligible individuals

The initial enrollment for Medicare Part D began November 15, 2005 and ends May 15, 2006 for individuals currently eligible for Medicare. For individuals who become eligible for Medicare after May 15, 2006, the initial enrollment period for Part D is a seven-month period starting three months prior to eligibility for Medicare Part B and ending the third month after the month they become eligible. Medicare-eligible individuals must make a decision on whether to enroll in an approved Medicare Part D plan during this initial period. If a Medicare-eligible individual has other prescription benefit coverage that is considered “creditable coverage” when compared to a Part D plan, they are not required to enroll during the initial enrollment period. The “creditable coverage” may be provided by a retiree health plan, Medicare supplement policy, or an employer-provided health plan.

In general, a plan is considered to offer creditable coverage if, on average, the plan is expected to pay out as much as the standard Medicare prescription drug coverage. All plan sponsors are required to provide notices to participants stating whether or not their plan is considered to have “creditable coverage.”

Individuals who decline to enroll in Medicare Part D during this initial enrollment period or when they become Medicare-eligible will be subject to an additional premium surcharge for Part D if they enroll at a later date, unless they can show they had other creditable coverage at the time they became Medicare-eligible. The premium surcharge is an additional one percent for each month that an individual is without creditable coverage. For example, if someone enrolls eight months after their initial eligibility and they did not have creditable coverage, they will pay an eight percent higher premium for the remainder of the time they are enrolled in Part D.

Employer options and requirements -
Medicare Part D coordination with retiree coverage

Companies that provide retiree health coverage with pharmacy benefits have several options for coordinating with the new drug program. In general, retiree health plans are typically designed to be a secondary payor to Medicare for Medicare-eligible retirees. This means that Medicare would pay benefits first, and then the retiree health plan would cover some or all of the remaining amounts, depending on the plan design. Prior to the implementation of Part D, prescription drug coverage was one of the most utilized features of most retiree health plans because Medicare offered no prescription drug coverage.

Employers have several options to coordinate prescription coverage with the new Medicare program:

1. Employers can choose to maintain their current prescription drug coverage and not coordinate with Medicare. To encourage employers to maintain their current prescription plans, the Center for Medicare & Medicaid Services (CMS) offers a rebate equal to 28% of prescription expenses, up to $1,330 per retiree if the coverage is determined to be actuarially equivalent. This is a stricter test than the one used for creditable coverage and requires documentation of an actuarial review. The actuarial equivalent test not only takes into account the benefits provided, but also the premium charged for the coverage. Annually, employers must register with CMS for the subsidy, provide an actuarial attestation and submit claims data to receive the subsidy.
2. Employers may contract with an approved Medicare Part D plan to provide drug coverage and pay the premiums for retirees over age 65.
3. Employers may elect to coordinate coverage with Medicare Part D and cover additional expenses above the first $2,250 per year. By covering the additional expenses, the “Donut Hole” is moved to a higher starting amount, and the retiree is still required to pay a total of $3,600 in out-of-pocket expenses. Employers who coordinate may elect to pay the Part D premium.
4. Employers may elect not to offer any prescription coverage to retirees over the age of 65, allowing the individual retirees to elect Part D on their own.

A recent survey by Kaiser Foundation and Hewitt indicate that 79 percent of the nation’s largest employers are maintaining prescription coverage for retirees and seeking the government subsidy. The survey also indicates that employers will continue to evaluate their options in future years.

Employer notice requirements

Employers who offer prescription drug coverage (to active employees and retirees) are required to provide all Medicare- eligible participants a notice of determination stating whether or not the current prescription drug coverage is considered to be creditable coverage. The notice should have been provided by November 15, 2005 to all Medicare-eligible participants. The companies also have an ongoing notification requirement to provide a certificate of creditable coverage three months prior to a participant becoming eligible for Medicare Part B. If an employer provides an annual notice to all participants prior to each year’s Medicare Part D enrollment period, it is not required to issue the notices throughout the year to newly eligible Medicare participants.

In addition to providing the notice to employees, employers must also provide annual notification to CMS indicating whether their plan’s coverage is creditable or not. For plans years ending in 2006, this notice to CMS must have been submitted by March 15, 2006. In future years, the notice to CMS must be made within 2.5 months of the start of the plan year.

Below are some keys dates related to the new Medicare Prescription Drug Program:

Conclusion

Medicare Part D requires both employers and individuals to make several important decisions. Failure to act or poor decision making could have financial implications in the future for both groups. HR benefit professionals should stay abreast of developments in the Medicare prescription program in order assist employees with questions related to the programs and to ensure that their health plans are compliant with Medicare Part D regulations.

More information about the program and requirements are available at the CMS website, www.CMS.gov.