Many large and midsize employers are excited about the new federal subsidy for qualified retiree pharmacy programs.
But benefits advisors should make sure to inform clients that another strategy, setting up a pharmacy supplemental plan, could generate more savings and less risk.
When members of Congress were evaluating the cost of adding a Medicare pharmacy benefit provision to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), they wanted to avoid financing the benefit for retirees who already were receiving pharmacy coverage through an employer-sponsored plan.
A 28% federal subsidy was included in the final legislation to create an incentive for companies to continue to provide retiree pharmacy benefits. The subsidy will generate tax-free revenue for qualified plans equal to 28% of the prescription drug costs for incurred claims between $250 and $5,000 for qualified retirees in 2006. For a typical company, this is likely to equal about $600 for each Medicare-eligible retiree and dependent that the plan covers.
Companies that opt for this subsidy should realize that there are a number of costs and risks associated with applying for it:
An annual attestation is required to certify that the plan being offered is at least actuarially equivalent to the standard Medicare Part D benefit. A federal mandate requires that retirees who receive the benefit be notified annually that their benefit is a qualified plan. Plans that are not qualified will need to be altered in order to receive the subsidy. These additional administrative costs will add up over time, especially for companies that offer several retiree medical options.
The company must pay for the process of applying for the subsidy, and the calculations and underlying data are subject to federal audit. The audit may require the company to substantiate the basis for the subsidy calculation and documentation of retiree eligibility. That means record keeping will be important for companies that go this route.
The timing of subsidy payments likely will lag the payment needed to finance the retiree benefit.
A retiree who decides to sign up for Part D coverage will invalidate the plan sponsor’s ability to collect the subsidy for that retiree. In other words, even if a company does all that is required of it, Robbie the Retiree could cause the company to forfeit the subsidy for Robbie’s coverage simply by signing up for Part D coverage.
The subsidy is a significant step in the right direction for companies that are struggling with retiree medical costs. Some companies hope the subsidy will cut their liability for post-retirement benefits other than pension benefits by hundreds of millions of dollars per year.
But offering a supplemental pharmacy plan can cut employer costs, too, while maintaining the current level of benefits and making the whole process transparent to the retiree. Making the federal Part D program the primary payer will typically reduce a company’s retiree pharmacy costs for Medicare-eligible individuals by 40% to 50%. That compares with a typical reduction of 20% to 30% for employers that accept the subsidy. Even after a company accounts for the favorable tax treatment afforded the subsidy, the supplemental plan could turn out to be less expensive.
The Part D pharmacy supplemental plan would be very similar to the Medicare supplement plans that already exist for medical coverage provided by Medicare Parts A & B. Retirees would enroll in a Part D standard benefit plan, and the retirees’ former employer would provide supplemental coverage for the gaps that exist in the federal program. The supplemental plan could, for example, cover the upfront deductible as well as the gap in coverage that has become known as the “doughnut hole.”
This approach may not have been considered up until now because of the confusion from a complicated provision in MMA. That provision lets Private Drug Plans offer Part D benefits that are at least actuarially equivalent to the standard plan design. A PDP can offer a copay plan rather than one with a deductible and coinsurance, and that type of plan design can be coordinated more easily with a supplemental plan. Pharmacy benefit managers realize this and are developing this capability to serve the employer market.
The supplemental plan also can be structured to offset a portion of the Part D copay if the current retiree pharmacy plan has lower copays and the company would like to maintain its retiree benefit level. The Part D benefit must maintain certain minimum benefit levels, but those typically will not impact the benefit coordination required to make this process seamless for retirees.
is a Fellow of the Society of Actuaries and a consulting actuary in the Hartford office of Milliman USA. He can be reached at firstname.lastname@example.org.
Reproduced from National Underwriter Edition, October 14, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.