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April 11, 2006

CMS ANNOUNCES INDEXED MEDICARE PART D
AMOUNTS FOR 2007

On April 5, 2006, the Centers for Medicare & Medicaid Services (CMS) announced the indexed Medicare Part D amounts for 2007.^* This Capital Checkup features charts comparing the 2007 numbers and the 2006 numbers.

The Medicare Modernization Act (MMA) requires CMS to announce indexed Medicare amounts each year that reflect the increase in drug costs. CMS's Office of the Actuary estimates that this year's 6.86 percent increase (numbers are then rounded) reflects both higher drug utilization among seniors and reduced prices in prescription drug costs that have been negotiated by Part D prescription drug plans.

Retiree Drug Subsidy (RDS) Amounts

*	The cost threshold is the minimum amount of covered Part D drug expenses that must be incurred by an individual before a plan sponsor is eligible to receive the RDS based on the individual's claims.
**	The cost limit is the maximum amount of covered Part D drug expenses for which a plan sponsor may claim the RDS for each individual.

Standard Benefit Design Parameters

*	Once Part D drug expenses (paid by the individual and by the Part D plan) reach the initial coverage limit, the individual is responsible for 100 percent of the costs incurred until the individual has reached the out-of-pocket threshold.
**	The out-of-pocket threshold is the amount that the individual must pay on his or her own before catastrophic coverage begins.
***	Once an individual reaches the catastrophic portion of the benefit, the Part D plan covers approximately 95 percent of the Part D drug expenses incurred. Cost-sharing is set at the greater of 5 percent coinsurance or fixed copayments (see below).

Copayments in Catastrophic Coverage Portion of Benefit

*	For Part D plans that charge copayments in the catastrophic portion of the benefit (instead of 5 percent coinsurance), the amount of the copayment for a generic drug or for a preferred multiple source drug (i.e., generally one for which there are two or more products that are therapeutically and pharmaceutically equivalent) is set at a lower amount than the amount for any other drug.

Implications for Plan Sponsors

The effect of the new Medicare amounts is straightforward for calendar year plans (i.e., the next plan year begins on January 1, 2007). Plan sponsors would use the new Medicare amounts to test plans for actuarial equivalence, and would receive RDS payments based on 28 percent of claims incurred between $265 and $5,350. These plan sponsors must assure that a new application for the RDS is filed by September 30, 2006.

For non-calendar year plans, the results are somewhat more complicated. The new numbers may affect the attestation of actuarial equivalence (depending on when it is filed) and will definitely affect the amounts plans can receive for the RDS.

Plan sponsors with non-calendar year plans should review the Medicare amounts with their actuary to determine whether to use the 2006 or 2007 amounts for their next plan application. Any RDS applications filed after June 6, 2006 (60 days after release of the numbers) must use the new 2007 numbers for calculating actuarial equivalence. The regulations permits plans that file applications between April 5 and June 6, 2006 to file attestations based on the 2006 Medicare amounts.

Regardless of the numbers used in submitting the attestation, plan sponsors with non-calendar year plans ending in 2007 will be paid based on covered Part D claims between $265 and $5,350, instead of the 2006 amounts.

As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on the integration of Medicare with their employee benefit plans. The Segal Company can be retained to work with plan sponsors and their attorneys to evaluate the impact of the decision and possible compliance responses.

*	To see the CMS information, click here. (To return to the Capital Checkup text, click here.)