December 11, 2003
Key Provisions of the New Medicare Prescription Drug Benefit
President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 into law on December 8, 2003. Consequently, for the first time, beginning in 2006, Medicare will provide a limited, voluntary benefit for outpatient prescription drugs. In addition, the bill has far-reaching implications for both the Medicare program and health plans that coordinate with Medicare. A Medicare change of this magnitude will have an important impact on the design of employer-paid health plans, both for retirees and active workers.
This issue of Capital Checkup focuses on the provisions for Medicare prescription drug coverage. Click on one of the following section headings to go directly to the relevant text:
- Creation of a New Medicare Program for Prescription Drug Coverage: Part D
- Benefit Delivery through Private Prescription Drug Plans
- Subsidies for Sponsors of Group Health Plans that Cover Retirees
- Medigap Policies Must Be Modified
- Temporary Drug Discount Card Program
Separate issues of Capital Checkup discuss other provisions in the Act that will affect retiree health coverage and Medicare and the new personal health savings accounts that apply to both active and retiree health coverage.
Creation of a New Medicare Program for Prescription Drug Coverage: Part D
The Act creates a new Medicare Part D program, which would be open to eligible individuals who voluntarily choose to pay an extra premium for it. The table below summarizes the key Part D provisions:
|KEY PART D PROVISIONS||DETAILS|
|Eligibility||Individuals entitled to benefits under Part A or enrolled in Part B|
|Enrollment||Initial six-month open enrollment period commencing November 15, 2005; annual election thereafter|
|Participant's Monthly Premium||$35 (estimate only - no actual figure in Act)
Premium will be adjusted annually (including adjusted for drug cost inflation)
|Participant's Annual Deductible||$250*|
|Participant's Coinsurance and Coverage "Gap"||25% coinsurance up to $2,250*
No coverage between $2,250 and $5,100*
95% coverage above $5,100*
|Subsidized Premium and/or Coinsurance for Low-Income Participants||Yes|
|Annual Out-of-Pocket Maximum||$3,600*
The following do not count toward the OOP maximum: premium payments; expenses reimbursed by private health plans; and expenses incurred for non-formulary drugs.
|Effective Date||January 1, 2006|
|* Dollar figures would be adjusted annually based on drug cost increases.|
Although the above table describes the Medicare Part D design, it is important to realize that the actual drug benefit coverage that will become available with Medicare funding will probably look quite different. That is because the Act leaves the actual delivery of coverage and benefits to commercial carriers and employer-funded plans, which would have flexibility to redesign the benefit program as they like as long as the resulting plans are either "actuarially equivalent" to or more generous than the basic Medicare design. (See the next section.) In other words, it might be fruitful to evaluate the plan designs set out in the Act more as financial benchmarks than as likely insurance products in themselves.
Benefit Delivery through Private Prescription Drug Plans
The Act depends on the private sector to deliver the new drug benefit, specifically Medicare Advantage plans (an expanded version of Medicare-funded managed care approaches that are currently called Medicare+Choice) and stand-alone commercial prescription drug plans (PDPs). PDPs will have to be state licensed as a risk-bearing entity or meet federal solvency standards. Health insurance companies, health maintenance organizations (HMOs) and pharmacy benefit managers (PBMs) will likely seek PDP contracts from the U.S. Department of Health and Human Services (HHS). PDPs and Medicare Advantage plans will bear the risk for the prescription drug coverage they provide, but will receive monthly premiums from enrolled individuals, as well as direct subsidies and reinsurance subsidies from Medicare.
There will have to be at least two prescription drug plans in each geographic region (although one could be a stand-alone PDP and one could be a Medicare Advantage plan). Plans could offer the standard drug benefit, an actuarially equivalent benefit or a supplemental benefit (e.g., coverage including cost-sharing or optional drugs for which a PDP could charge a higher premium to the covered individuals).
A PDP will be able to use a formulary and/or a tiered copayment structure if it is consistent with the standard drug benefit. There will have to be notice to beneficiaries and physicians before a drug is removed from a formulary (for example, by posting information on the plan's Web site). PDPs also must implement prescription drug utilization management programs.
The Act contains additional rules for operation of a PDP, including an "any willing pharmacy" requirement and a requirement to offer a convenient local pharmacy option (not mail order only). These rules could also affect the employer-based operations of PBMs because the network composition of the PBM could change.
PDPs will bid on providing drug benefits in a region just as Medicare+Choice plans do now. HHS will also consider "limited risk" prescription drug plans if there are not enough full risk plans in a region. In addition, the Act provides for a "fallback" plan if sufficient full risk or limited risk plans are not available.
Individuals would be entitled to purchase drugs at plan negotiated discounts even when they are not being reimbursed by a prescription drug plan for that particular drug purchase (for example, enrollees could take advantage of the discount even though they have not met their deductible). Cards would be issued to the individual to allow them to receive the discounted rate.
Subsidies for Sponsors of Group Health Plans that Cover Retirees
How the new Medicare prescription drug benefit will coordinate with existing employment-based retiree health plans is a key concern for plan sponsors.
The Act will subsidize employment-based retiree health plans for individuals who are eligible for a Medicare Advantage plan or a PDP and who get drug coverage through their employment-based plan instead. In order to receive the subsidy, the retiree health plan would have to offer benefits that are actuarially equivalent (but not necessarily identical) to Medicare standard coverage. For example, an employer could offer a retiree prescription drug benefit comparable to its drug benefit for active workers (assuming actuarial equivalence), rather than the Medicare standard plan design. In addition, the retiree health plan would be subject to audits from the HHS - to confirm that its coverage is in fact actuarially equivalent to the standard - and to the disclosure requirements discussed below.
The Act permits any plan sponsor of an employment-based group health plan to receive the subsidy. This includes sponsors of single employer plans, collectively bargained and multiemployer plans, church plans, and federal, state and local governmental plans. If a group health plan is maintained jointly by one employer and an employee organization, and the employer is the primary source of financing, the subsidy will be paid to the employer. The sponsor would not receive a subsidy for any individual who obtained drug coverage from a PDP or a Medicare Advantage plan.
The subsidy is 28 percent of incurred prescription drug costs between $250 and $5,000 (maximum $1,330) per eligible individual. The dollar figures are indexed. Plan sponsors will only receive subsidies for costs that are actually paid (net of discounts, chargebacks and rebates), and administrative costs cannot be included (e.g., there is no subsidy for a PBM administrative charge). Implementing regulations will provide additional guidance on how subsidies are calculated. Previous versions of the bill included both tax credits and reinsurance for plan sponsors, but these were not included in the final bill. The subsidy is not taxable to employers who receive it.
The Act permits a plan sponsor to pay all or part of the Medicare Part D premium for their retirees. Plan sponsors could also pay other cost sharing, such as deductibles and coinsurance. However, the amount paid by the plan sponsor would not count toward an individual's out-of-pocket maximum. Therefore, if a plan sponsor paid all of an individual's coinsurance amounts, the individual would never become eligible for the Medicare catastrophic coverage for drug costs because he or she would never have any out-of-pocket expenses.
In addition, the Act states that any payments by an individual for non-formulary drugs would not count toward the individual's out-of-pocket maximum. Therefore, it may be difficult for individuals taking non-formulary medications to ever receive catastrophic coverage under the Medicare Part D program.
The Act imposes a new disclosure obligation on plan sponsors. Plan sponsors will need to disclose to the Secretary of HHS and to eligible individuals whether or not the employment-based coverage provided by the sponsor is actuarially equivalent to the standard benefit design. This information is relevant to whether an individual seeking enrollment in a prescription drug plan will be subject to a late enrollment penalty. HHS will determine the time and manner of this disclosure in implementing requlations.
Medigap Policies Must Be Modified
Many current Medicare beneficiaries have a Medigap policy that covers services not covered by Medicare. Three types of Medigap plans (H, I, and J) offer some drug coverage. The Act limits when Medigap policies may provide drug coverage after January 1, 2006. Specifically, Medigap policies with prescription drug coverage cannot be sold, issued or renewed for Part D enrollees after Part D takes effect. However, individuals who are not Part D enrollees may renew their Medigap prescription policies that were in place prior to January 1, 2006. If a Medicare beneficiary initially enrolls in Part D, he or she may either continue his or her previous Medigap policy without drug coverage, or enroll in a new Medigap policy that does not provide drug coverage. Medigap issuers would be required to notify beneficiaries of the rules regarding these policies. The Act requires the Secretary of HHS to ask the National Association of Insurance Commissioners to review and revise the standards for Medigap policies.
Temporary Drug Discount Card Program
As a transition to Medicare drug coverage, the Act creates a Medicare Prescription Drug Discount Card program to operate beginning in (approximately) April 2004 through 2005. The program is similar to that proposed previously by HHS but struck down by the courts for lack of legislative authority.
The card would give seniors access to negotiated drug discounts, if they enroll in and pay for the card. Medicare would endorse at least two drug cards per region, and beneficiaries could choose the card they like. Card sponsors could charge beneficiaries an annual enrollment fee of up to $30.00. Any Medicare beneficiary (except Medicaid dual-eligibles) could purchase a drug card. A state could pay for the card. Low-income seniors who do not have drug coverage could receive a drug card that is "pre-loaded" with a set amount of money (up to $600 annually).
Sponsors of health plans that cover retirees will have several choices to make. The key to plan design will be the current cost of retiree health benefits, whether coverage is actuarially equivalent to the Medicare standard benefit design, and the amount of the subsidies available to the retiree health plan. In addition, it is likely that plan sponsors will, in consultation with their professional advisors, be able to reduce retiree health liability projections because receipt of the subsidy will mean lower future costs.
When reviewing retiree health benefit design in light of the new Part D benefit, plan sponsors could:
- Continue to provide their current drug coverage to retirees and take steps to obtain a subsidy,
- Cease providing drug coverage, but subsidize individuals by paying either all or part of the Part D premium or a portion of the cost-sharing amounts, or
- Cease providing payments toward drug coverage and channel those payments into another retiree benefit.
Plan sponsors will need to consider issues such as the amount and certainty of the subsidy and legal and collective bargaining responsibilities to continue to offer certain benefit designs and allocation of drug-coverage dollars so that the most benefit may be obtained for employees and retirees.
Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.