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MAKING SENSE OF MEDICARE PART D:
For Employers Who Offer Retiree Drug Coverage

OVERVIEW
There are two primary areas of concern for employers preparing for the arrival of the Medicare Drug Program or "Part D" in January 2006.

1) ALL employers, regardless of whether or not they offer retiree benefits, will need to provide a disclosure notice to all Medicare-eligible individuals. This disclosure notice clarifies whether or not the employer's drug coverage is as good as or "creditable" to Medicare Part D.

2) Employers who offer drug benefits to retirees will need to determine, a) if they will apply for the retiree drug subsidy and; b) if they will make any alterations to their retiree drug offering in light of the new options provided by Medicare Part D. Summarized below are the specifics of the disclosure requirements, as well as the options employers will have in offering prescription drug benefits to retirees.

COMMUNICATING CREDITABLE COVERAGE TO EMPLOYEES & DEPENDENTS

What is the purpose of the notification?
All employers providing prescription drug benefits to Medicare-eligible individuals (active or retired) must communicate to those individuals whether their drug coverage is creditable to Medicare Part D by November 15, 2005. Put simply, "creditable" means that the employer's drug benefit equals or exceeds the value of the new Medicare drug benefit.

The objective of this notification is to help Medicare-eligible employees and dependents make the decision between the employer's Rx plan and Medicare Part D. It will be important for individuals to be aware of whether or not their employer's coverage is creditable to Part D in order to avoid late enrollment penalties. Beginning in the fall of 2005, Medicare-eligible individuals will be mailed the Medicare & You 2006 handbook which will list the available prescription drug plans and explain how to enroll. Individuals can also get assistance by calling 1-800-MEDICARE.

Eligible individuals who DO NOT enroll in Part D during the initial open enrollment period of November 15, 2005 until May 15, 2006 may have to pay a premium surcharge if they later enroll in Part D, unless they had coverage through a creditable Rx plan. The premium surcharge is 1% of the premium for each month without creditable coverage. For individuals who will not be Medicare-eligible prior to May 15, the normal initial enrollment period (IEP) will run concurrent with the 7-month IEP for Part B (3 months prior to the month when the individual first becomes eligible and 3 months following the first month of eligibility). Following the IEP, the individual must be enrolled in Part D or be covered by a creditable Rx plan to avoid paying the Part D premium surcharge.

How do I calculate creditable coverage?
Employers can perform a simplified calculation in order to determine if the coverage they provide can be considered creditable. The Centers for Medicare and Medicaid Services (CMS) have provided the following simplified calculation:

Simplified Calculation of Creditable Coverage

1. Drug coverage must be available for brand and generics;
   
   
2. Reasonable access to retail drug providers must be available;
   
   
3. Plan must be designed to pay at least 60% of member's drug expenses;
   
   
4. Plan must meet "maximum benefits test" below.

Maximum Benefits Test is met if one of the three criteria below is met:

1. Drug benefit is not integrated with other benefits (such as medical or dental) and has a maximum benefit of at least $25,000;
   
   
2. Drug benefit is not integrated and is expected to pay at least $2,000 per individual in 2006;
   
   
3. Drug benefit is integrated and has a deductible that is not more than $250, a benefit maximum of at least $25,000 and a lifetime maximum of at least $1 million.

Although not clearly indicated, it appears that plans that have a prescription drug card are not considered "integrated" with the group's medical plan. However, a drug benefit that is subject to the overall deductible of the health plan would be considered integrated. In general, standard prescription drug card plans with copay structures will likely pass the maximum benefits test and be considered creditable.

How do I notify my employees and their dependents?
CMS has provided two model notices employers can use to communicate whether or not their Rx coverage is creditable to Medicare Part D:

1. Medicare Creditable Coverage Notice and
2. Medicare Non-Creditable Coverage Notice

Click above to open the CMS model notices in Word format. These notices may be provided to employees and their dependents in conjunction with other material, such as during open enrollment. One notice can be provided to both the employee and dependents, unless it is known that a Medicare-eligible spouse or dependent lives at a separate address.

The notice obligation is waived if an employer is offering drug coverage through an approved Medicare prescription drug plan (PDP) or an integrated managed Medicare Plan with Rx (MA-PD) because that coverage, by definition, is a Part D equivalent.

Notice of creditable coverage status must also be provided to CMS. Model language for this disclosure is pending from CMS.

OPTIONS FOR EMPLOYERS WHO OFFER RETIREE PRESCRIPTION DRUG COVERAGE

1. Apply for Part D Subsidy for your current Rx Plan
The Retiree Drug Subsidy (RDS) Program goes into effect on January 1, 2006. The application period for plans with benefit years ending in calendar 2006, will begin August 1, 2005 and end on September 30, 2005. Applications must be received during this period in order to be considered for subsidy payments beginning January 1, 2006. For plan years ending in 2007 and beyond, employers must submit an application no later than 90 days prior to the beginning of the plan year. The RDS application and instructions will be available electronically on the following web site beginning August 1, 2005.

http://rds.cms.hhs.gov/

A draft of the subsidy application is available by clicking on the link below. While the application is not yet final, it should give employers a sense of the labor involved in applying for the subsidy. There will clearly be some information that employers will need to obtain from the carriers that administer their plans, but it is not yet known how readily available this information will be. CMS will be taking comments on this draft until July 5, 2005 before finalizing the application by August 1, 2005.

http://rds.cms.hhs.gov/ForCommentby070305.pdf

The process for obtaining the retiree drug subsidy is as follows:

Step One: Submit (electronically or otherwise) an application by September 30, 2005, to qualify for the retiree drug subsidy beginning January 1, 2006. In subsequent years, calendar year plans must submit applications by September 30 of each year; non-calendar year plans must submit applications 90 days prior to the beginning of each plan year.

Step Two: Attach to the application an actuary's attestation that the plan meets the actuarial equivalence standard. The attestation will need to be completed by a qualified actuary who is a member of the American Academy of Actuaries. This step will require some specific data on
your plan such as claims information that will need to be submitted by
your carrier.

Step Three: Certify that the creditable coverage status of the plan has or will be disclosed to plan participants and the Centers for Medicare and Medicaid Services. You can use the model notice provided in the previous section to meet this disclosure requirement.

Step Four: Electronically submit and periodically update enrollment information about retirees and dependents. Entering into a voluntary data sharing agreement with CMS may make the process easier. Information about how to enter into these voluntary data sharing (VDSA) agreements with CMS is available online at: http://www.cms.hhs.gov/medicare/cob/employers/emp_vdsa.asp

Step Five: Electronically submit aggregate data about drug costs incurred, reconcile costs at year-end and maintain beneficiary records for six years. Plan sponsors can choose whether to submit data and receive payments monthly, quarterly or annually. CMS will be providing additional guidance soon on the details of how to submit data electronically.

The Centers for Medicare & Medicaid Services estimate the average annual subsidy to be about $668 per beneficiary. It is also important to note that employers will only receive the subsidy for retirees covered under their plan who do NOT enroll in Part D independently. Therefore, employers will need to clearly communicate that choice between the employer's plan and Part D to employees.

2. Maintain Current Rx Plan without Applying for Subsidy
Employers may decide against pursuing the subsidy even if their retiree drug coverage is creditable to Medicare. Employers with only a few retirees covered under their plan may decide that the financial and administrative costs of applying for the Part D subsidy is not worthwhile. For such situations, employers will still need to communicate to their Medicare-eligible population and to CMS that their coverage qualifies as creditable and continue to offer the benefits as they have in the past.

3. Offer a Medicare Prescription Drug Plan (PDP)
As an alternative to their current plans, employers can contract directly with a stand-alone Medicare PDP program for their Medicare-eligible population. Medicare PDPs will be administered directly by insurance carriers that have been approved by the Centers for Medicare & Medicaid Services (CMS). CMS has indicated that individuals electing Part D through Medicare will have the option of at least two stand-alone PDPs in their geographic area, although employers may have more options as some carriers will offer employer-only plans that will not be available to individuals. In either case, all drug benefits through Medicare will be administered through an insurance carrier- Medicare itself will not directly be offering the benefit. Final PDP plan approval is scheduled for September 2005 and at that time we will know more details about the available plans and carriers. The original design of the Medicare PDP benefit is as follows:

Please note that some low-income retirees (below 135% of the federal poverty line) may qualify for a Part D benefit with no premium contribution or initial deductible.

4. Offer a Medicare Advantage Plans (MA-PD)
Some carriers have also applied to CMS to be approved to offer a Medicare Advantage Plan. The Medicare Advantage Plans will incorporate the Part D drug benefit into a managed Medicare plan. It will resemble the Medicare + Choice Plans that many carriers used to offer, but it will also provide coverage for drugs. The approval process is still underway, so we don't yet know the design of the Medicare Advantage Plans. They will likely to be offered though the larger carriers in the marketplace, such as Aetna and the various Blue Cross plans. As is the case with the Medicare PDP programs, we will know more details after the plans have been approved in September 2005.

5. Pay Retirees' Premiums for Part D
Employers who no longer wish to be involved in offering retiree benefits may choose to encourage their Medicare-eligible retiree population to enroll directly in Part D as individuals. Employers can provide incentives to their retirees by offering to cover all or part of the cost of the approximate $37 Part D monthly premium.

6. Provide a Wrap-around Plan
As an alternative to covering the cost of the Medicare Part D monthly premium, employers could choose to offer retirees a wrap-around plan to Part D. Wrap plans coordinate benefits with Part D and offset some of the retiree cost sharing. The ability to offer this type of plan will be subject to its availability in the marketplace.