United States: Decision Time for Retiree Health Plan Sponsors

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) added a new prescription drug benefit to the Medicare program, effective January 1, 2006. This coverage, known as Medicare Part D, will be available to all Medicare-eligible individuals who enroll and pay the required premium (approximately $37 per month for 2006). Employers and unions that sponsor retiree health plans must soon decide whether to apply for a new federal subsidy, whether and how to integrate their existing plan benefits with the new Part D benefit and how to communicate these complex decisions to retirees. This article summarizes the options available to retiree health plan sponsors and describes the key implementation issues that sponsors face.

Medicare Part D will provide partial coverage for most outpatient prescription drugs. The program will be administered by the Centers for Medicare and Medicaid Services (CMS). CMS will enter into contracts and pay privately sponsored prescription drug plans (PDPs) or Medicare Advantage prescription drug plans (MA-PDPs) that agree to deliver the Part D standard drug benefit. For 2006, the Part D standard drug benefit will provide basic coverage (a $250 deductible plus 75 percent co-insurance) for drug costs up to $2,250; no coverage for drug costs between $2,250 and $5,100 and catastrophic coverage (95 percent co-insurance) after an enrollee pays $3,600 in out-of-pocket costs.

Medicare-eligible individuals will be able to enroll for Part D coverage during an initial open enrollment period that runs from November 15, 2005 until May 15, 2006. Individuals who first become eligible for Medicare after this period will be eligible to enroll in Part D during a seven-month initial enrollment period that begins three months before and ends three months after the first month of Medicare eligibility. After these initial enrollment periods, all Part D enrollees will be permitted to change their Part D election (that is, they may choose a different PDP or MA-PDP) during an annual open enrollment period that runs from November 15 to December 31 of each year.

The advent of Medicare Part D provides an array of plan design and financing choices for retiree health plan sponsors, each of which has different legal and compliance repercussions. The following is an overview of the principal options.

Retiree health plan sponsors may apply for a new retiree drug subsidy if the actuarial value of the plan’s drug coverage is equal to or greater than the actuarial value of the Part D standard coverage. This test requires the plan (or each benefit option under the plan) to satisfy both a gross value and a net value test. If the plan qualifies, the federal government will pay the plan sponsor a subsidy in the amount of 28 percent of the allowable retiree drug costs between $250 and $5,000 for each qualifying retiree. A qualifying retiree is an individual who is eligible for, but not enrolled in, Part D coverage. Allowable retiree drug costs include only the cost of Part D drugs net of any rebates or other price concessions paid to drug manufacturers. To apply for the subsidy, the sponsor must submit an electronic application by September 30, 2005 that includes an actuarial attestation, individual data for each qualifying retiree and other required documentation. In addition, the sponsor will not qualify for the retiree drug subsidy unless it provides notices of creditable prescription drug coverage to all Medicare-eligible enrollees and beneficiaries (To access the "Group Health Plan Sponsors Required to Send New Medicare Notice" article click on the 'next page' link at the bottom of this page).

Retiree health plan sponsors may coordinate their plan benefit with the Medicare Part D benefit the same way they coordinate their plan benefit with the benefits provided under Medicare Parts A and B. Under this approach, the plan benefit would be determined by assuming that a retiree is enrolled in Medicare Part D and then reducing the plan’s prescription drug benefit by the amount paid for drugs by the Part D plan. CMS has promised to establish an electronic mechanism for coordinating prescription drug coverage at the point of sale by January 1, 2006.

Retiree health plan sponsors may directly contract with one or more PDP or MA-PDP sponsors to provide drug coverage for their retirees. Several PDP sponsors have announced that they intend to offer Medicare Part D plans in all regions of the country, so it will be possible for a retiree health plan sponsor to negotiate a single Part D plan contract for all of its retirees nationwide. Under this approach, retiree health plan sponsors would negotiate contracts with one or more PDP or MA-PDP sponsors to provide drug coverage, and the sponsors would enroll the retirees in one or more Part D plans. In most cases, retiree health plan sponsors will negotiate drug coverage in excess of the Part D standard benefit to ensure that retirees receive the same benefits promised by their retiree health plan.

Retiree health plan sponsors with significant numbers of retirees may want to contract directly with CMS to convert their retiree health plan into a Part D plan. Under this approach, the retiree health plan sponsor would receive payments from CMS as if it were a commercial PDP or MA-PDP sponsor. Presumably, retiree health plan sponsors pursuing this option will not pay the overhead and profit charges that would be paid if they contracted with a Part D plan sponsor.

These options are not mutually exclusive. For example, a retiree health plan sponsor might apply for the retiree drug subsidy for retirees that do not enroll in Part D and coordinate the plan benefit for retirees that do enroll in Part D. In addition, retiree health plan sponsors might consider other options, such as paying some or all of the Part D premiums on behalf of retirees and/or reducing or terminating the plan’s prescription drug coverage.

Retiree Communications
Once retiree health plan sponsors commit to a particular option(s), it will be critically important to develop and manage a communication strategy for retirees. For example, if a retiree health plan sponsor intends to apply for the retiree drug subsidy, it may want to discourage retirees from enrolling in Part D. Conversely, if a retiree health plan sponsor intends to coordinate the plan benefit with the Part D benefit, it may want to encourage retirees to enroll in Part D. Plan sponsors may need to modify the model Medicare notices of creditable prescription drug coverage to accomplish their particular objectives. Retiree health plan sponsors should bear in mind that retirees will be receiving conflicting messages from multiple sources when CMS and the PDP and MA-PDP sponsors begin their advertising campaigns in advance of the November 15, 2005 open enrollment period.

Regardless of which option a retiree health plan sponsor chooses, it will be important to ensure that an appropriate compliance plan is in effect. Plan documents, summary plan descriptions and vendor contracts will need to be reviewed and modified to ensure that the option(s) chosen by the retiree health plan sponsor are properly documented and that vendors will operate the plan in accordance with the chosen option(s). In addition, retiree health plan sponsors that choose to apply for the subsidy or contract directly with CMS will need to coordinate information from multiple vendors (such as enrollment vendors, pharmacy benefit managers and the plan’s actuaries) and vouch for the accuracy of the information submitted to CMS. These submissions create potential liability under the federal False Claims Act, raising the importance of contractual provisions that clearly assign vendor and sponsor responsibilities.

Retiree health plan sponsors have only a limited window of time to analyze and implement the available options. CMS will announce the commercial PDPs and MA-PDPs available for 2006 on or about September 2, 2005. Applications for the retiree drug subsidy for 2006 must be submitted on or before September 30, 2005. The initial open enrollment period for 2006 will begin on November 15, 2005. This means that retiree health plan sponsors have no more than a three-month window in which to make plan design decisions, develop appropriate communications for retirees and complete the necessary legal due diligence.

The benefits lawyers at McDermott Will & Emery are uniquely qualified to assist retiree health plan sponsors as they prepare for the challenges of integrating their retiree health plans with the new Medicare Part D prescription drug benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To view "Group Health Plan Sponsors Required to Send New Medicare Notice" click 'next page'.