A Medicare change of this magnitude could have an important impact on the design of employer-paid health plans, both for retirees and active workers. However, since both the fact and the shape of a final bill are still uncertain, it is premature to consider detailed changes in the design of retiree health plans in anticipation of the legislation. When and if a Medicare prescription drug program is enacted, plan sponsors will want to review the details carefully to determine how it will affect their retirees and their benefit programs. For plan sponsors that want to consider the current proposals, this Capital Checkup discusses the key Medicare prescription drug coverage provisions of both bills. 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
• Temporary Drug Discount Card Program
• Implications of the Proposals for Sponsors of Group Health Plans that Cover Retirees
• Outlook

Separate issues of Capital Checkup discuss the House and Senate bills' other proposals that would affect retiree health coverage Medicare and their proposals for improving access to more affordable prescription drugs for health plan participants of all ages, as well as the House's proposals for new personal health savings accounts.

Creation of a New Medicare Program for Prescription Drug
Coverage: Part D

Both bills would create a new Medicare Part D program, which would be open to eligible individuals who choose to pay an extra premium for it. The table below compares the two bills' key Part D provisions.

Although this table describes the Medicare Part D designs as they are laid out in the bills, it is important to realize that the actual drug benefit coverage that would become available with Medicare funding would probably look quite different. That is because the bills assign the actual delivery of coverage and benefits to commercial carriers and employer-funded plans, which would have great 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. In other words, it might be fruitful to evaluate the plan designs set out in the proposed legislation more as financial benchmarks than as likely insurance products in themselves.

Benefit Delivery through Private Prescription Drug Plans

Both bills depend on what are called private sector Prescription Drug Plans (PDPs) to offer the new coverage, for Medicare beneficiaries who elect it. These PDPs would include Medicare health maintenance organizations (HMOs), health insurance companies and pharmacy benefit managers (PBMs). The PDPs would bear the risk for the prescription drug coverage they provide, but would receive monthly premiums and reinsurance subsidies from Medicare. A PDP would have to be state licensed or meet federal solvency standards.

The bills would require at least two PDPs in each geographic region. The Senate bill would provide a "federal fallback" if a PDP were unavailable in a region. In that case, the Medicare program itself would offer the drug benefit, not a private entity. The House bill does not have a federal fallback. Instead, it would underwrite the risk of a PDP that offers benefits in an underserved geographic region.

PDPs could offer the standard drug benefit, an actuarially equivalent benefit or an enhanced benefit (for which a higher premium could be charged to the covered individuals). Both bills provide premium subsidies for low-income individuals, but the amounts and criteria for subsidies differ. A PDP would be able to use a formulary and/or a tiered copayment structure if it is consistent with the standard drug benefit. The bills contain additional rules for operation of a PDP, including an "any willing pharmacy" requirement, requirement to offer a local pharmacy option (not mail order only) and notice requirement before a drug is removed from a formulary. If these rules are adopted, they could also affect the employer-based operations of PBMs.

Under both bills, individuals would be entitled to purchase drugs at the discounts applicable under the Medicare program even when they are not being reimbursed by a PDP for that particular drug purchase (for example, enrollees could take advantage of the discount even though they have not met their deductible).

Under the Senate bill, no PBM that is owned by a pharmaceutical manufacturing company could provide Medicare Part D benefits. PBMs that do manage Medicare prescription drug benefits would have to meet reporting and disclosure requirements including disclosure of rebates and other payments from manufacturers.

In addition, under both bills, Medigap policies would no longer be permitted to provide prescription drug coverage. To minimize adverse selection, Medicare beneficiaries would have to get their drug coverage either through Medicare Part D or an employment-based health plan.

Temporary Drug Discount Card Program

As a transition to the Medicare drug coverage, both bills would create a Medicare Prescription Drug Discount Card program to operate in 2004 and 2005, similar to that proposed previously by the Department of Health and Human Services (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 or the card. Both bills would assist low-income seniors who obtain a drug card, but through different policies. For example, under the House bill the card would be "pre-loaded" with a set amount of money for low-income seniors.

Implications of the Proposals for Sponsors of Group Health Plans that Cover Retirees

How the new Medicare prescription drug benefit would coordinate with existing employment-based retiree health plans is a key concern for plan sponsors.

Both bills would subsidize employment-based retiree health plans for individuals who are eligible for a commercial Medicare Advantage Plan -an expanded version of Medicare-funded managed care approaches that are currently called Medicare+Choice - or a stand-alone commercial Prescription Drug Plan and who get the coverage through their employer-paid 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, 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.

The biggest open question for sponsors of employment-based retiree health plans is how their prescription drug coverage would coordinate with the new Medicare coverage, if their retirees do enroll in a Medicare plan. Right now the outlook is not encouraging.

Both bills would permit plan sponsors 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 employee's coinsurance amounts, the employee would never become eligible for the Medicare catastrophic coverage for drug costs because he or she would never have any out-of-pocket expenses.

Plan sponsors will have several choices to make if a version of these bills becomes law. The key to plan design will be the amount of the subsidies available and the extent to which a retiree health plan is permitted to coordinate with the new Medicare 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 premium or a portion of the cost-sharing amounts, or
• Cease providing payments toward drug coverage and channel those payments into another retiree benefit or elsewhere in their businesses.

The Congressional Budget Office (CBO) has estimated that 32 percent of Medicare beneficiaries who would have employer-provided drug coverage under current law would not receive an employer supplement to the Medicare Part D benefit under the House bill (37 percent under the Senate bill). (The CBO cost estimate for and H.R.1 and S.1, which was published on July 22, 2003, is available at from the CBO Web site.) On the other hand, the Employee Benefits Research Institute (EBRI) estimates that only 2 to 9 percent of Medicare beneficiaries with retiree health coverage would lose that coverage. However, EBRI researchers caution any estimate is, of necessity, based on so many assumptions that the real impact cannot be reliably gauged until the legislation goes into effect.

Although plan redesign cannot take place until the terms of a likely compromise bills are more definite, plan sponsors will need to consider issues such as the amount and certainty of the subsidy, 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.

Outlook

The outlook for enactment of prescription drug legislation is less certain than it originally appeared. Among the many controversial issues that could be decided are the following questions concerning the prescription drug coverage:

• How should the subsidy for employment-based retiree health plans be designed and how much should be subsidized?
• Should dual Medicare/Medicaid beneficiaries be covered under the Medicare drug benefit?
• Should for individuals with higher adjusted gross income receive reduced benefits?

If Congress passes the bill that eventually emerges from the Conference Committee, President Bush has announced his intention to sign it into law. The Segal Company will report on significant developments regarding this legislation.

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