HHS Releases Final Medicare Drug Subsidy Regs

January 21, 2005 (PLANSPONSOR.com) - Employers who opt for the new retiree drug subsidy contained in recent Medicare reform legislation would get an average annual tax-free payment of $668 per beneficiary in 2006.

>Word of that figure came in  the release by the US Department of Health and Human Services (HHS) of final federal regulations governing the new Medicare drug benefit including help to employers to continue offering retiree health care coverage. Earlier estimates of the subsidy contained in the Medicare Prescription Drug, Improvement and Modernization Act (MMA) had placed the figure at $611 per beneficiary in 2006 (See  Feds Hand Down Medicare Drug Subsidy Guidance ). The subsidy represents 28% of employers’ drug costs between $250 and $5,000. 

>At least based on the employer reaction federal officials say they’ve gotten in recent months, the Centers for Medicare and Medicaid Services (CMS) in HHS said Friday, it expects that a much larger number of beneficiaries than first estimated will receive coverage either through a retiree plan that qualifies for the retiree drug subsidy or through one of the other options available to employers to add to the standard Medicare drug benefit.

>For example, in 2006, about 9.8 million beneficiaries will receive prescription drug coverage from an employer or union-sponsored retiree plan that is eligible for the retiree drug subsidy – a million more than the highest previous estimates, according to officials. CMS said it also expects that a growing number of employers and unions will provide lower-cost comprehensive coverage by taking advantage of the opportunity to “wrap around” the Medicare prescription drug benefit, as they do today for Part A and Part B benefits – up to 2.4 million covered in this manner by 2010.

“These estimates reflect the favorable response CMS received from employers and unions related to the retiree drug subsidy program and other options for providing comprehensive coverage, the findings from recent employer surveys which suggest that many employers are planning to use one or more of these methods to provide comprehensive coverage, and the additional flexibility that the final rule provides for employers/unions while avoiding windfalls,” officials said in a CMS statement.

>To get the subsidy, plan sponsors have to show that their coverage is as good as, or better than, Medicare’s standard prescription drug benefit. The regulations issued Friday include a two-part to determine whether this standard, referred to as “actuarial equivalence,” has been met.

>Medicare officials said Friday that the government is providing a set of calculation methods, which they said would allow most employers to show they qualify for the subsidy and that they are giving plan sponsors flexibility to apply the test on an aggregate basis when they have several plans with different benefit options and designs. Companies can do the calculations across plans “provided that each of the benefit options meets the gross value test of being at least as comprehensive as the Medicare drug benefit,” Medicare officials said in announcing the regulations.

>Finally, the government said in the final rules that it had three different processes to pay employers who qualify for the retiree drug subsidy – monthly, quarterly, or annually.

>Another option available for plan sponsors is to encourage their retirees to enroll in a Medicare Prescription Drug Plan or Medicare Advantage plan that includes prescription drugs ("Part D plans"), while opting to provide them with extra help, Medicare officials said.

>According to Friday's announcement, there are are several ways that employer and union plan sponsors could supplement the standard Medicare drug benefit:

  • they can set up their own separate supplemental plans and coordinate benefits with the coverage offered by prescription drug benefit plans their retirees enroll in to provide extra help with cost sharing in much the same way they currently supplement the standard Medicare Part A and B benefits.
  • they can pay for enhanced coverage through a drug plan to subsidize more of their retirees' cost-sharing and provide additional benefits. CMS plans to use its waiver authority to allow sponsors to make special arrangements with drug plans for, or offer their own drug plans to, their retirees. These waivers would allow employers to provide more flexible benefits and to limit enrollment to their retirees.

>CMS estimated that in 2006 plan sponsors who choose to offer comprehensive drug coverage by wrapping around or enhancing the prescription drug benefit will save at least $900 on average.

>The CMS officials said the regardless of whether employers choose to provide additional coverage that supplements the standard Medicare prescription drug coverage, plan sponsors can also provide other financial help, such as helping their retirees pay for some or all of their prescription drug benefit premiums or contributing to a tax-favored account for medical expenses.

The prescription drug benefit, and the other provisions included in the regulations issued today are elements of the Medicare Modernization Act passed by Congress and signed into law by President Bush on Dec. 8, 2003. Enrollment for the new prescription drug plans will begin this November.

A CMS fact sheet about the new regulations is  here . Other information including the regulations is  here .