Segal's April 26, 2007 Capital Checkup

print this page

April 26, 2007

CMS ANNOUNCES INDEXED MEDICARE PART D AMOUNTS FOR 2008

On April 2, 2007, the Centers for Medicare & Medicaid Services (CMS) announced the indexed Medicare Part D standard benefit and Retiree Drug Subsidy (RDS) amounts for 2008.^* This Capital Checkup features charts comparing the 2008 numbers and the 2007 numbers.

The Medicare Modernization Act (MMA) requires CMS to announce indexed Medicare Part D standard defined benefit amounts each year that reflect the increase in drug costs. The increase for the deductible, initial coverage limit and out-of-pocket threshold for 2008 is 4.64 percent.

RDS Amounts

For 2008, plan sponsors eligible for the RDS will receive 28 percent of Part D prescription drug expenses between $275 and $5,600.

RDS Amounts
	2007	2008
Cost Threshold*	$265.00	$275.00
Cost Limit**	$5,350.00	$5,600.00


*	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

The table below compares the standard benefit design parameters for 2008 to the amounts for 2007.

Standard Benefit Design Parameters
	2007	2008
Deductible	$265.00	$275.00
Initial Coverage Limit*	$2,400.00	$2,510.00
Out-of-Pocket Threshold**	$3,850.00	$4,050.00
Total Covered Part D Drug Spending before Catastrophic Coverage***	$5,451.25	$5,726.25


*	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).

In 2008, if an individual is in a Medicare Part D Prescription Drug Plan (PDP) with the standard benefit, he or she will pay a deductible of $275 and 25 percent of allowable Part D prescription drug costs up to $2,510 ($558.75). The individual then hits a coverage gap, where he or she is responsible for 100 percent of prescription drug costs until he or she reach the out-of-pocket maximum of $4,050. After the individual incurs total drug costs of $5,726.25, he or she becomes eligible for catastrophic coverage, which generally covers 95 percent of prescription drug expenses. The chart below explains how the Medicare Part D standard benefit design works in 2008.

Medicare Part D Standard Benefit Design: 2008

How It Works in 2008:

Individual pays $275 annual deductible

Individual pays 25% of allowable costs up to $2,510 (25% of $2,510-$275 = $558.75)

“Doughnut Hole”: Individual pays the next $3,216.25

After $4,050 paid out of pocket, catastrophic coverage begins at $5,726.25 ($275 + $558.75 + $3,216.25 = $4,050)

Individual pays nominal amount (e.g., 5% or $2/$5 copayment) of allowable costs over $5,726.25

Copayments in Catastrophic Coverage Portion of Benefit
	2007	2008
Generic/Preferred Multi-Source Drug*	$2.15	$2.25
Other Drug	$5.35	$5.60


*	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 2008 Medicare amounts are based on drug cost increases of 4.64 percent (down from 6.19 percent in 2007). The cost of the Medicare drug benefit is less than originally expected because projections of cost increases in the double digits have not materialized. Part of the reason for the low cost increases is that large numbers of drugs have a generic counterpart.

Plan sponsors should note the new benefit amounts for planning purposes for 2008 — either with respect to expected RDS income or to the design of their Medicare Part D prescription drug plan that is offered to retirees. As the Medicare Part D market has proven more robust than originally expected, and the RDS administrative process more complex and costly, more plan sponsors are exploring moving from the RDS to a Medicare Part D PDP. In many instances, contracting with a PDP may produce a greater cost savings than the RDS because the reimbursement insurers get from CMS can be greater than what plan sponsors obtain in direct subsidy.

Prior to finalizing benefits designs for 2008, plan sponsors may wish to analyze the benefits of contracting with a Medicare PDP as opposed to retaining the RDS.

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 on issues related to Medicare Part D.


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

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. For back issues of Capital Checkup, click here.