Medicare Bill has Implications for Plan Sponsors

November 26, 2003 ( - Among the many changes arising from the Medicare reform bill are developments that will mean a financial boost for certain employer-sponsored retiree health plans.

Those funds offering coverage at least the actuarially equivalent to the legislation’s standard benefit will receive a 28% subsidy of their drug costs between $250 and $5,000, according to a Watson Wyatt analysis.

The Medicare Prescription Drug, Improvement and Modernization Act (HR1) also grants employers 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. Both the United State House of Representatives and the US Senate have passed the bill; it now awaits President Bush’s signature.

Alternatively, employers could provide premium assistance for retirees who enroll in Medicare prescription drug or integrated plans and could negotiate preferential premiums from integrated plans, Watson Wyatt said.

In an effort to create competition, funding of HMO, PPO and other alternatives to traditional Medicare will be enhanced, which may create opportunities for employers to encourage retirees to join these alternative plans. Under the newly named “Medicare Advantage” program, Congress is hoping that increased funding and a more supportive approach will lead to increased enrollment, which will eventually drive competition and efficiency, according to the analysis.

Generally, among the issues employers need to decide is whether to keep drug benefits as a “qualified” plan and whether to send retirees to stand-alone prescription drug plans or integrated Medicare Advantage plans. Whatever path a company chooses, employers need to notify employees and retirees about the ways Medicare reform will affect their coverage.

For the first time, under the bill, all Medicare beneficiaries will have access to prescription drug coverage. The prescription drug benefit will take effect in 2006.

Consultants at The Segal Company also released their suggestions for a plan sponsors action list. Specifically, Segal said plan sponsors should:

  • investigate how much retiree current outpatient prescription benefits cost
  • determine whether benefits are “actuarially equivalent” to the Medicare Rx benefit
  • evaluate the potential subsidy for retaining Rx benefits in the employer-paid plan and the potential cost of paying for the Medicare Rx benefit (monthly premiums, deductibles, coinsurance)
  • consider purchasing a drug discount card for employees.