CMS Releases 'Actuarial Equivalence' Guidance on Retiree Drug Subsidy

>The new CMS document describes specifically how employers with retiree prescription drug plans can demonstrate that their coverage is actuarially equivalent to the standard prescription drug coverage. CMS estimated that the per-participant subsidy would be equivalent to $891 for plan sponsors with a 25% marginal tax rate and $1,028 for plan sponsors with a 35% marginal tax rate (See  HHS Releases Final Medicare Drug Subsidy Regs ).

“Of all the options available for employers and unions under the (Medicare Modernization Act), the retiree drug subsidy provides the most continuity for existing retiree prescription drug plans,” the CMS document declared. “It is also the least burdensome option to administer and provides the most design flexibility as long as the sponsor’s plan is at least actuarially equivalent to the defined standard prescription drug benefit under (Medicare) Part D.”

In trying to prove actuarial equivalence to CMS, the agency said actuaries should use a two-prong test. The first involves a “gross value” calculation – the expected amount of paid claims for Medicare beneficiaries under the sponsor’s plan must be at least equal to the expected amount of paid claims for the same beneficiaries under the defined standard-prescription drug coverage including catastrophic coverage available when an individual’s out-of-pocket expenses exceed a specified threshold ($3,600 in 2006).

The second required calculation is a “net value” test proving that the net value of the sponsor’s plan is at least equal to the net value of the defined standard prescription drug coverage. CMS said actuaries would calculate the “net value” figure by subtracting the retiree premium/contribution from the gross value of the sponsor’s plan.

Among the points of guidance CMS offered in the document are that:

• in calculating the net value of the defined standard prescription drug coverage, the beneficiary premium is subtracted from the gross value of Part D. The national average beneficiary premium can be used to determine the beneficiary premium.
• in calculating the gross value of the sponsor’s plan, only prescription drugs that are Part D drugs can be considered.
• for purposes of the net value prong of the actuarial equivalence test, the value of the defined standard prescription drug coverage under Part D can be adjusted to reflect the impact of a sponsor’s plan supplementing Part D for those beneficiaries who enroll in Part D.

Additional information about the Medicare retiree drug subsidy is  here .