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Medicare Employer Drug Subsidy
What is the Medicare Employer Drug Subsidy?
Beginning on January 1, 2006 the new Medicare Part D Rx benefit will be offered to Medicare eligible individuals. Employers who offer Medicare eligible retirees a prescription drug benefit may be eligible for a tax-free government subsidy of up to $1,330 per retiree.
Review of Medicare Part D
Part D of Medicare was introduced by the Medicare Prescription Drug Improvement and Modernization Act of 2003. In May 2004, a drug discount card was offered to Medicare eligible individuals. Starting in January 2006, the following drug benefit will be offered to Medicare eligibles as a replacement for the discount program:
| Medicare member meets $250 deductible |
| After deductible met, Medicare pays 75% of member's drug costs up to $2,250 |
Member pays 100% of drug costs between
$2,250- $5,100
($3,600 total member out-of-pocket) |
Medicare pays 95% of drug costs
Beyond $5,100 |
How does an employer qualify for the Medicare Rx subsidy?
Under Part D, employers may be eligible for a subsidy of their retiree drug program if the following conditions are met:
- Employer must provide Rx benefits to Medicare eligible retirees that are as generous as or more generous than the Medicare Rx benefit. The employer's plan is then considered "creditable coverage";
- The employer must communicate to its Medicare eligible retirees that its Rx plan qualifies as creditable coverage prior to November 15 each year. (The notice requirement is designed to help individuals avoid Medicare's late enrollment penalty, which is waived if they are covered by another creditable drug plan);
- The retirees under the employer's plan must not actually be enrolled in Medicare Part D (no double-dipping);
- The employer must pass a two-part (gross value and net value) test to determine if an "actuarial equivalence" standard has been met between their Rx plan and Medicare Part D;
- The employer must file an application for the subsidy with the Centers for Medicare & Medicaid Services (CMS) by September 30, 2005. This application must include certain demographic information about the retiree population, as well as an attestation of actuarial equivalence.
How much can an employer receive under the subsidy?
The Part D subsidy is designed to encourage employers to provide Rx benefits to retirees and will pay 28% of a retiree's drug costs between $250 and $5000 for 2006. The maximum subsidy amount works out to be $1,330 per retiree covered. The CMS has estimated the average subsidy to be about $668 per retiree in 2006. Employers can request either monthly, quarterly or annual subsidy payments.
What is involved in the two-part test to qualify for the subsidy?
The first part of the test determines the "gross value" of the employer-sponsored Rx plan based on actual claims experience. It ignores retiree contributions and determines if the employer's Rx plan is at least as valuable as Medicare Part D in terms of pure claims dollars.
The second part is a "net value" test that factors in the retirees' contributions to determine the value of the employer's plan. The CMS will be providing additional guidance on the application of these tests in the near future.
RSI Gallagher will provide additional information on this subsidy as it becomes available.
More detailed information can also be obtained from CMS's website at:
http://www.cms.hhs.gov/medicarereform/pdbma/employer.asp
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