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0906 HR Magazine: Retiree Drug Coverage Comes Up for Renewal

By Pamela Babcock   9/1/2006

HR Magazine, September 2006

Vol. 51, No. 9

By the end of September, most employers collecting federal subsidies for providing retiree drug coverage will have to decide whether to stay with the program.

For companies that offer prescription drug benefits to retirees, it is time to make a decision—whether to continue providing that benefit for 2007. Canceling it would, in effect, send retirees to the new prescription drug program offered through Medicare, although employers that do so can establish a supplemental plan that would pick up some or all of the costs that retirees would take on under the Medicare program.

Decision time is running short for companies whose benefit plan years begin in January—the most common month for plan starts. If they don’t want to miss out on the tax-free federal subsidies they can get for providing retiree drug coverage, they have to decide the fate of their program by the end of September.

To qualify for the subsidies, which are available through the Medicare prescription drug benefit—known as Part D—employers must submit an application to the Centers for Medicare & Medicaid Services (CMS) showing that their retiree drug plans are at least as generous as Medicare’s benefit, which is for individual enrollees. ›

This year is the first for which individuals could sign up for Part D coverage, and the first for which employers could collect subsidies designed to encourage them to maintain their own retiree drug coverage. So employers have had less than a full year of experience with subsidies under Part D to help them decide if they want to maintain retiree drug coverage and keep receiving subsidies.

Not all of the first-year experiences with Part D have been positive. Millions of eligible individuals were confused by perceived intricacies of the program, but those problems have eased substantially. For employers, however, administrative headaches continue even now. Some have found the details of qualifying for—and applying for—the retiree drug subsidies under Part D to be unexpectedly complex.

In addition, many employers say they’re not convinced that the federal subsidies provide sufficient financial incentive to continue offering retiree drug benefits. Experts note, however, that many possess limited data on their net costs for retiree drug coverage this year because they’re uncertain just how much they’ll get back in subsidies from Medicare.

For those reasons of cost and administrative burdens, experts believe some employers will eliminate drug coverage for retirees—who then would enroll in a Part D plan—and thus become ineligible for federal subsidies. Companies that decide to send their retirees to the Medicare drug program may reimburse them at least partly for the extra costs the retirees would encounter under the federal program, but some companies may not provide any such help.

Before deciding to cancel retiree drug coverage, employers should consider several important issues.

Change in the Wind

Just because companies opted to receive subsidies under Part D for 2006 doesn’t mean they will necessarily do it again for 2007. In surveys done around the time Part D was implemented, most companies said they would adopt a wait-and-see approach and apply for subsidies rather than cancel retiree drug coverage for this year. In fact, 65 percent of plan sponsors expressed that view in a survey last January by Towers Perrin and the International Society of Certified Employee Benefit Specialists.

Nonetheless, 63 percent of the respondents were unsure if they would apply for the subsidy after this first year. And of the 37 percent who had already made plans for 2007, less than half expected to maintain current benefits and collect the subsidy. About one in 10 of those companies that had made their decision for next year said they would eliminate all retiree medical coverage or at least eliminate prescription drug coverage.

For companies that planned to discontinue retiree drug coverage and forgo the subsidy in 2007, the most popular alternatives were to offer a supplemental plan that would pick up some or all costs that retirees would have to pay under Part D or to sponsor a Part D plan.

“The biggest message is [that] everybody went, in a lot of ways, with the easy answer for 2006, and many companies are looking at changing that strategy moving forward,” says Dave Osterndorf, a principal and senior health care consultant with Towers Perrin in Milwaukee. “It’s understandable because you just didn’t know what the marketplace would look like.

“But now, for some companies, you can potentially do better by moving away from the subsidy to an employer-sponsored plan or, in the extreme case, by getting out of coverage completely.”

 o9o6 Babcock Chart

Financial Concerns

If companies do opt out of the federal subsidy, it won’t surprise Kathryn Bakich, a senior vice president and national director of health care compliance in Washington, D.C., for the Segal Co., a New York-based HR, compensation and benefits consulting firm. “The subsidy appeared to be an easy route when it was first announced,” she says, “but administratively, it is fairly complicated, and people are still not sure exactly what their payoff will be.”

The subsidy, Bakich says, “was originally estimated by CMS to be $668 for each retiree, but in our experience, few people would get $668, and it would probably be more in the range of $600 and maybe even lower depending on your individuals’ drug uses.”

Gary B. Kushner, SPHR, president and CEO of Kushner & Co., an employee benefits consulting and administration firm in Portage, Mich., knows of many public- and private-sector organizations that plan to drop the subsidy because it simply didn’t provide enough funding to offset costs. These organizations are talking instead about subsidizing the costs that retirees would be charged under Part D, he says.

For organizations that don’t pay taxes—either because they are not making money or because they are set up as nonprofit organizations—there is a reduced financial incentive to apply for the tax-free Medicare subsidy. (For a tax-paying company, a tax-free subsidy of $600 would actually be worth approximately $900 since no taxes would be due on the funds. A company that does not pay taxes would not receive that benefit.)

As a result, says Osterndorf, nonprofits are “specifically looking at other alternatives.”

The Administrative Questions

Osterndorf, like other experts, thinks another reason some companies plan to forgo the subsidy program and set up alternative retiree drug coverage arrangements for next year is the “cumbersome” nature of the application process and the ongoing submission requirements.

Companies must produce a wealth of information for CMS throughout the year. They must submit census data every month listing new retirees who are being added to the plan and other retirees who are being dropped from the rolls due to death or ineligibility, Osterndorf says. And depending on the time frame the companies have chosen for receiving subsidy payments—monthly, quarterly or annually—they must also submit a payment request.

While employers are used to sending eligibility files from HR information systems to claims payers, they face additional requirements in complying with the CMS application process.

Moreover, “when you put in an application to CMS, you have to say, ‘Here are all the different types of benefit options we have,’ ” Osterndorf explains. “A typical large employer might have 30 to 100, and you have to decide which retiree is in which benefit option.”

Employers also must make sure that their claims payers have data on each employee and that benefit options are coded exactly as they are in the company’s records.

“It can be painful, but it’s not impossible to accomplish,” Osterndorf says. And he notes that those types of administrative challenges may not persist. “The first year is always the toughest for administration, due to the need to set up systems and negotiate arrangements with third parties,” he says. “Once the first year is over, following years should be much smoother.”

Thus, companies that place too much emphasis on negative administrative experiences this year could potentially forgo a subsidy next year just when their initial investment would start paying off.

Making Your Decision

If you provide retiree drug benefits and still haven’t decided whether to do so next year, Bakich says, you’ll need to consider several factors.

“The first thing people need to do is evaluate the amount they are getting as a result of the subsidy and see if that meets their expectations,” Bakich says. The first opportunity for many to do that was this past July, when the retiree drug system began accepting regular submissions for the first six months of claims.

Bakich recommends asking your pharmacy benefit manager if that six-month period is representative “of prescription drug claims or if the plan is likely to see higher or lower costs in the last six months of the year.”

Another consideration is the year-end reconciliation process. “There needs to be an itemized submission of all the claims by the individual that CMS will audit to make sure you got the right amount of money,” Bakich says. “That might take time for administrators to sort through with actuaries and consultants.”

The question to ask, Bakich says, is whether you “can ... afford to keep a good retiree drug package that your retirees will like and, instead of doing it with the retiree drug subsidy, enter into a contract with a Part D prescription drug plan and design a program that’s better than what a retiree can buy in the individual market.

“The punch line is there’s still a lot of work to do to get your subsidy. It’s not a matter of simply applying for it and then you’re done.”

Staying the Course

Two organizations offer a glimpse at their thinking for 2007 and beyond regarding retiree drug plans.

At the Boy Scouts of America (BSA), headquartered in Irving, Texas, retiree prescription coverage is tied to medical coverage and does not change when an employee retires or becomes enrolled in Medicare for hospital and physician benefits.

The BSA plan “is above the coverage Part D offers, so we chose to continue our plan as it is and didn’t make any changes as a result of Part D,” says J. Michelle Morgan, SPHR, benefits director for the organization. Like many employers, the BSA does not yet know how financially beneficial the federal subsidies will be. The organization elected to receive its federal payment annually.

The BSA plans to continue providing prescription benefits for retirees next year, Morgan says.

The retiree prescription drug plan for the University of Missouri system in Columbia, Mo., meets the Part D equivalency test, and the subsidy has been financially beneficial in relieving, “to some extent, budgetary pressures on the university as well as the retirees that are covered under our health care plan,” says Michael J. Paden, associate vice president of faculty and staff benefits.

For 2006, the university made some changes to prescription benefits for retirees 65 and older, and it initiated management programs that “allow for a more efficient infrastructure that promotes/requires a cost-efficient [drug] formulary as well as cost-effective utilization” by faculty and staff, Paden says.

Other than formulary changes, the university isn’t planning significant changes for 2007. Participants’ costs will increase in line with inflation and utilization costs, and only as needed to properly finance the benefits on a self-insured basis, Paden says.

When looking at its retiree drug coverage, the university considers several factors, including the adequacy of coverage and the costs that retirees would take on if they were in Part D. “If Part D improved to the point where coverage under our program was not needed, that would be a factor,” Paden says.

Other factors include the extent to which the university can afford to continue supporting the subsidization of post-employment health care benefits, and the extent to which its employment market, including other educational institutions and the public sector in general, continue to offer subsidized post-employment health benefits.

If the university were to drop coverage and send retirees to Part D, Paden says, it “would give serious consideration to some level of subsidization.”

No Crystal Ball

Now that Medicare Part D is in operation, it will contribute to the growing amount of data and experience to consider when assessing your organization’s retiree benefit strategies for the long haul. Says Kushner: “We will have a better idea next year at this time, once we have a full year under our belts, to know what’s working and what’s not.”

No Crystal Ball

Now that Medicare Part D is in operation, it will contribute to the growing amount of data and experience to consider when assessing your organization’s retiree benefit strategies for the long haul. Says Kushner: “We will have a better idea next year at this time, once we have a full year under our belts, to know what’s working and what’s not.”

Osterndorf adds a note of caution in forecasting now how employer-sponsored retiree prescription drug benefits will play out next year: “To say 2007 is going to be dramatically different than 2006 is wrong. Different companies have different needs and different financial constraints. It might very well be the path they took last year is the absolutely right one to stay on.”

Pamela Babcock is a freelance writer based in the New York City area. She has worked as a reporter for The Washington Post and The News & Observer in Raleigh, N.C., as well as in corporate communications.

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 Web Extras

 

SHRM toolkit:
Retiree Prescription Drug Benefit Medicare Subsidy

SHRM article:
Five Reasons To Keep Retiree Health Benefits
(Compensation & Benefits Focus Area)

Article:
Medicare Part D--Important Decisions for Employers and Individuals
(American Association of State Compensation Insurance Funds)

Web sites:
The Medicare program

The Medicare Drug Benefit 101

Report:
Secretary's Progress Report IV on the Medicare Prescription Drug Benefit
(Department of Health and Human Services)

The Medicare Drug Benefit 101 

Medicare Part D provides prescription drug coverage to individuals 65 and older; other parts of Medicare provide coverage for hospital charges and doctors’ fees.

At 65, when an individual becomes eligible for Medicare, enrollment in the traditional hospital and physician segments is straightforward, and employer-sponsored health coverage generally becomes secondary as Medicare coverage becomes primary. While Part D is available to anyone on Medicare, enrollment is not automatic. A participant has to sign up for Part D and choose a benefit provider.

Part D coverage is provided through health insurance companies or other nongovernment entities, although coverage is overseen by the U.S. government. Providers vary in their fees and the drugs they cover. Also, a person covered by an employer-sponsored prescription drug plan cannot also enroll in Part D for supplemental coverage.

Under Part D, tax-free subsidies are available to companies that provide prescription drug coverage to retirees 65 or older, provided the coverage is at least as good as that available under Part D. The subsidies are to function as incentives to employers to retain their drug coverage for retirees rather than drop coverage and send retirees to the Medicare drug program.

Employers must apply for the subsidies, which are paid according to the number of retirees covered and are equal to 28 percent of allowable drug costs between $250 and $5,000 per retiree in 2006. Those threshold amounts rise to $265 and $5,350 next year. Each year, companies can choose to continue offering coverage and collecting the subsidy, or drop it, in effect sending retirees to Part D.

At some organizations, retiree drug coverage doesn’t make the grade, so employers don’t qualify for subsidies, and their retirees 65 and older should sign up for Part D. In some but not all instances, those retirees can retain the rest of the health coverage provided by their former employer.

A Part D participant pays a monthly premium and must keep track of all charges, the provider’s list of covered medicines and other details.

In June, according to the Centers for Medicare & Medicaid Services, there were 6.9 million retirees on the rolls of Medicare’s Part D subsidy program for employers.

—Pamela Babcock