Employers Face Compliance Deadlines on Medicare Drug Benefit
written by Ralph M. Silberman

Employers face two major deadlines Congress created when it enacted the Medicare Prescription Drug, Improvement, and Modernization Act in December 2003.

Sept. 30 is the deadline for employers to apply for a federal subsidy for providing a prescription drug benefit to retirees and other Medicare beneficiaries. Nov. 15 is the first day Medicare-eligible beneficiaries can sign up for a Medicare prescription drug plan; it is also the date by which employers must inform beneficiaries whether their employer-provided coverage meets the standards of a Medicare-qualified prescription drug plan.

The Medicare prescription drug program was designed to involve employers as providers of retiree benefits in their own right and as an important component of the system for communicating with retirees about the new program. While the greatest impact of the law is on employers that currently provide health benefits, including drug coverage, for their retirees, there are obligations for all employers that sponsor health plans.

The core of the Medicare prescription drug program, also known by its statutory moniker “Medicare Part D,” involves the creation of a variety of privately sponsored prescription drug insurance policies from which Medicare beneficiaries can choose if they decide to purchase the insurance, which becomes effective Jan. 1, 2006.

The essential element of employer involvement in Medicare Part D is for employers to let those Medicare beneficiaries who have prescription drug coverage from an employer know whether their plan covers as much as or more than a Medicare prescription drug plan. In addition, because Congress was concerned that, by establishing a prescription drug benefit program, it was providing employers with a possible incentive to drop coverage for their retirees, it created a subsidy program to encourage employers to keep those plans going.

Sept. 30: Subsidy application deadline

Since the Medicare Modernization Act became law, employers that provide prescription drug benefits for their retirees have been told repeatedly that they need to choose whether to continue their coverage, terminate their coverage, or change their coverage by purchasing a separate plan that supplements Medicare (a “wrap-around” plan), by sponsoring a Medicare-qualified plan for retirees, or by contracting with someone providing a Medicare-qualified plan.

It is apparent that a large majority of employers have decided—for this year at least—to continue their existing plans. For them, the key question is whether to apply for the subsidy.

The tax-free subsidy amounts to 28 percent of the actual drug expenses incurred by plan beneficiaries—which, in 2006, can range from $250 to $5,000. The Centers for Medicare & Medicaid Services (CMS) of the U.S. Department of Health and Human Services, the administering agency, has estimated that this will amount to $668 on average in annual per capita retiree subsidy payments. For employers subject to federal income tax, this “would be equivalent to about $891 of taxable income for employers with a marginal tax rate of 25 percent and about $1,028 of taxable income for employers with a marginal tax rate of 35 percent,” says CMS.

Edwin C. Hustead, senior vice president, The Hay Group, told HR News that while subsidies of up to $700 per retiree are an attractive proposition, there are real costs to qualifying for subsidies, such that employers with fewer than about 40 retirees (and Medicare-eligible spouses) should probably not even think about it. According to Hustead, the required actuary report can cost from $4,000 to $5,000, and the charges from health plan administrators for running the program are estimated at $10,000 to $15,000 a year.

Add in employer time and expenses, and administrators of a small to medium-sized plan should think in terms of total expenses of around $25,000. To offset that amount, an employer would need to receive subsidies for at least 36 qualified individuals.

CMS has created an online subsidy application tool and has created a mechanism for applying for a 30-day extension of the application deadline. Nevertheless, because of the actuarial tests, employers interested in applying for a subsidy are being advised to begin the process as soon as possible to meet the deadline.

Nov. 15: Notice of creditable coverage

The Medicare Modernization Act requires that every employer that offers prescription drug coverage notify all “Part D-eligible individuals” by Nov. 15 and let them know whether coverage under the employer’s plan is “creditable” or “not creditable.” Creditable coverage has at least an actuarially equivalent value to the minimum coverage required of any Medicare-qualified prescription drug plan.

Hustead told HR News that at least 97 percent of plans that The Hay Group has looked at provide prescription drug benefits that are better than Medicare Part D benefits and thus provide creditable coverage. While this can be an actuarial expense that all plans may need to undertake, it is significantly less expensive than the actuarial expense involved in the subsidy application, he said.

In addition, to go along with a simplified creditable coverage test that the government has created for employers that are not applying for the subsidy, CMS might develop an online measurement tool so that employers can avoid even this actuarial expense, Hustead suggested.

For employers that are seeking subsidies, the notice of creditable coverage is an especially important communication. Not only is it a precondition for receiving a subsidy, it also could be the first communication to their retirees advising them not to enroll in any other Medicare-qualified prescription drug plan. Such enrollment would cost the employer the subsidy for that individual.

For employers that are not seeking a subsidy, the communication is important to help retirees decide what they are going to do about prescription drug coverage. So far, however, there have been no indications of consequences to the employer for failure to provide the notice.

No subsidy? Pay attention anyway

Employers that sponsor health care plans need to pay attention to the Medicare Part D rules even if they do not provide prescription drug coverage for retirees. Employers with employees or spouses of employees who are Medicare-eligible must provide those individuals with the same notice of creditable coverage that retirees would receive. However, employers are not entitled to receive subsidies for the prescription drug coverage they provide such individuals.

The difference in approach is tied to two different Medicare rules.

First, under Medicare’s secondary payer rules, which predate the prescription drug program, employers with 20 or more employees must offer their employees age 65 or older (the “working aged”) the same group health coverage offered to employees under age 65 and, if they offer health care coverage to spouses, they must do the same for spouses 65 and over.

Second, under the new drug benefit program, the subsidies are limited specifically to benefits provided under a “qualified retiree prescription drug plan,” which is a plan providing benefits to individuals who are retirees and, by implication, not working aged.

For this first year of coverage, retirees have an extended period for enrolling in a Medicare-qualified prescription drug plan. If they sign up in a plan before Jan. 1, 2006, the coverage will be effective on Jan. 1. Otherwise, they have until May 15, at which time the transitional prescription drug card program will expire, to enroll for 2006 coverage effective with their enrollment.

For employers, this means that retirees and Medicare-qualified beneficiaries may be asking questions about their drug coverage for several months, even if they have already received their notice of creditable coverage. For employers in the subsidy program, this means that retirees are going to be exposed to marketing of other plans for several months, during which the employer will need to maintain its message advising retirees not to subscribe to any other plans.

Additional resources

The federal government is making an effort to provide resources and answers to employers’ questions. CMS has developed several web sites for all aspects of the program. The starting point for employers is the CMS Employer Information page.  However, for employers applying for the benefit subsidy, the separate Retiree Subsidy home page should be their starting place. In addition, employers should check the guidance document on creditable coverage, .

The Society for Human Resource Management (SHRM) has taken a series of steps to connect employers with the information they need to meet their Medicare prescription drug obligations. Most immediately, interested employers should tune to the upcoming webcast on the subsidy program, . In addition, there is a Retiree Prescription Drug Benefit Medicare Subsidy Toolkit that provides links to other SHRM articles and CMS forms and notices on the subsidy application and creditable coverage notices, as well as related topics, .

Ralph M. Silberman, J.D., is a freelance writer in Arlington, Va.

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