Feds Hand Down Medicare Drug Subsidy Guidance

July 29, 2004 (PLANSPONSOR.com) - The Centers for Medicare & Medicaid Services (CMS) issued guidance on the new prescription drug benefit that will become available to Medicare beneficiaries starting in 2006, which contains implications for plan sponsors on a prescription drug subsidy.

Plan sponsors that follow guidelines mapped out in the new Medicare regulations – laid out inthe Medicare Prescription Drug, Improvement and Modernization Act(MMA) – will be eligible for a 28% subsidy of their drug costs between $250 and $5,000. The estimated value of the subsidy is $611 per beneficiary in 2006, and for employers with tax liability, the tax-free retiree drug subsidy would be equal to a taxable subsidy of $855 at the average corporate marginal tax rate and $940 at the 35% marginal tax rate paid by many large companies, the US Department of Health and Human Services (HHS) said in a news release.

The subsidy comes in addition to plan design flexibility as well as more ability to change formularies and networks – all of which are aimed at encouraging employers to continue sponsoring plans (See Medicare Bill has Implications for Plan Sponsors ).   Under the recent guidance, Medicare will allow retiree drug plans that meet Medicare’s standards to qualify as Part D plans and obtain the Part D subsidy. In this option, Medicare would subsidize the cost of drug coverage primarily through direct premium subsidies for the enhanced benefit plans, and additionally through reinsurance subsidies for beneficiaries who reach high out-of-pocket expense levels.   Additionally, beneficiaries who receive high-quality coverage through a private, coordinated-care health plan offered only to a firm’s retirees could also obtain the Part D subsidy.

Further, plan sponsors can offer “wrap around” coverage, providing supplemental Part D benefits for Part A and Part B benefits. As in the previous options, Medicare would provide both direct premium subsidies and reinsurance subsidies to these enhanced drug plans.

Plan sponsors do not have carte blanche on the subsidy however, as HHS plans to ensure ultimately the retirees are better off.   As an example, HHS said one of the objectives of the proposed rule is to avoid “windfalls” for employers and unions, whereby retirees would receive a smaller subsidy from their retirement plan than Medicare would pay on their behalf.

“While the retiree drug subsidy is likely to be the most attractive option to employers and unions, the additional options are important to help ensure that retirees are better off,” HHS said.

The rule will be published in the August 3 Federal Register. The comment period on the proposed regulations lasts 60 days, closing on October 4. Final rules are expected to be issued early in 2005. Enrollment for the new Prescription drug plans will begin in the fall of 2005 for benefits starting in on January 1, 2006.  

More information about the guidance can be found at  http://www.cms.hhs.gov/medicarereform/ .