CMS Releases 2020 Thresholds for Retiree Drug Plans

Employers should determine if their retiree prescription drug coverage is at least actuarially equivalent to standard Medicare Part D coverage

By Leslye Laderman and Richard Stover, © Buck June 21, 2019
CMS Releases 2020 Thresholds for Retiree Drug Plans

The Centers for Medicare & Medicaid Services (CMS) announced the 2020 Medicare Part D standard benefit parameters in April, including the cost thresholds and limits for qualified retiree prescription drug plans. CMS also posted a fact sheet that summarizes the 2020 changes.

Plan sponsors that offer prescription drug coverage must provide notices of "creditable" or "non-creditable" coverage to Medicare-eligible individuals before each year's Medicare Part D annual enrollment period by Oct. 15.

Prescription drug coverage is creditable when it is at least actuarially equivalent to Medicare's standard Part D coverage and non-creditable when it does not provide, on average, as much coverage as Medicare's standard Part D plan.

Medicare Part D Parameters

Increases for the 2020 parameters range from 4.8 percent to 5.9 percent, with the out-of-pocket (OOP) threshold increasing by 24.5 percent.

The significant one-year increase in the OOP threshold is due to the expiration of the ACA provision that modified how the annual OOP spending threshold was calculated between 2014 and 2019. Effective for 2020, the OOP threshold is determined using the pre-ACA calculation method.

2019 2020 Change
Deductible$415.00$435.00+ 4.8%
Initial coverage limit$3,820.00$4,020.00+ 5.2%
Out-of-pocket threshold$5,100.00$6,350.00+ 24.5%
Minimum copay (catastrophic portion of benefit)
  • Generic/preferred multi-source drug
$3.40$3.60+ 5.9%
  • All other drugs
$8.50$8.95+ 5.3%

Donut Hole Closes in 2020

Prior to 2011, the standard Part D benefit did not include coverage between the initial coverage limit and the level of spending at which the OOP threshold was met, i.e., where the catastrophic coverage commenced. The ACA included a provision that phased out the Part D coverage gap or "donut hole" by 2020.

The Bipartisan Budget Act of 2018 made significant changes in the coverage of brand drugs. Starting in 2019, it increased the manufacturer brand discount from 50 percent to 70 percent, effectively shifting 20 percent of the cost for brand drugs to the drug manufacturers. It also reduced the plan benefit to 5 percent. The combination of the 5 percent plan benefit and the 70 percent brand discount results in retiree-paid coinsurance of 25 percent for brand drugs in 2019. Because this is the same level of coinsurance that applies to brand drugs before the donut hole, the donut hole is effectively closed for brand drugs in 2019, one year earlier than under prior law. With the increase in generic drug coverage to 75 percent in 2020, the donut hole will be closed for both brand and generic drugs in 2020.

Year Generic benefit Brand benefit Brand discount
2020 and after75%5%70%

Retiree Drug Subsidy Amounts

The cost threshold and cost limit for the retiree drug subsidy (RDS) program will also increase in 2020.

2019 2020 Change
RDS cost threshold$415.00$435.00+ 4.8%
RDS cost limit$8,500.00$8,950.00+ 5.3%

For 2020, plan sponsors eligible for the RDS will receive 28 percent of Part D prescription drug expenses between $435 and $8,950. The theoretical maximum potential subsidy per covered retiree will increase from $2,264 in 2019 to $2,384 for 2020.

RDS payment reduction due to budget sequestration

The Budget Control Act of 2011 authorized automatic spending cuts to certain federal programs — a process known as "sequestration." While some major programs like Social Security and Medicaid were exempt from sequestration, Medicare spending generally was reduced by 2 percent. This 2 percent Medicare spending reduction applies to the RDS program (RDS Q&A).

In 2014, CMS released guidance detailing the impact of sequestration on RDS payments. The 2 percent RDS reduction applies to plan months beginning with April 2013 and will apply through 2023. Cost reporting is unaffected by sequestration. Plan sponsors will continue to report cost data by month. The 2 percent reduction will be applied as part of the reconciliation process, which occurs after the end of the plan year when the plan sponsor finalizes the covered retiree list, submits final cost data, and makes the reconciliation payment request.

Effects of New Parameters

Plan sponsors that want to remain qualified for the employer retiree drug subsidy will have to determine if their 2020 prescription drug coverage is at least actuarially equivalent to the 2020 standard Medicare Part D coverage and should also consider whether to move Medicare retirees into an employer group waiver plan (EGWP).

Sharing Manufacturer Rebates at Point of Sale

CMS has proposed rules that would require Part D sponsors, including EGWPs, to pass through a portion of manufacturer rebates at the point of sale to plan participants beginning in 2020. CMS has not finalized the proposal.

Plan sponsors that provide coverage directly or indirectly through an EGWP or Part D plan may want to evaluate the impact of the new parameters and provisions on their plans.

Leslye Laderman, JD, LLM, is a principal in the Knowledge Resource Center at HR consultancy Buck. Richard Stover, FSA, MAAA, is a principal at the consultancy. This article has been abridged from the original, which appeared in the June 17, 2019, issue of For Your Information, produced by Buck's Knowledge Resource Center. © 2019 Buck Global LLC. All rights reserved. Republished with permission.

Visit SHRM's resource page for the Affordable Care Act.

Related SHRM Article:

Oct. 15 Deadline Nears for Medicare Part D Coverage Notices, SHRM Online, September 2018


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