Medicare Part D Is Not Just About Medicare Prescription Drug Coverage

For employers, much of the focus and attention of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which contains the new voluntary prescription drug program for Medicare-eligible individuals ("Part D"), has been the federal subsidy that will be available to employers who offer retirees prescription drug coverage as part of a group health plan and who elect to receive the subsidy. However, before November 15, 2005, all employers who offer prescription drug coverage under a group health plan that covers any Part D eligible individuals were required to disclose whether the group health plan coverage is creditable, as well as coordinate the group health plan’s prescription drug coverage with Part D, as applicable. This article provides a general overview of the impact of Part D on employer-provided group health plans.

Employer-provided group health plans that offer prescription drug coverage must disclose to all Part D-eligible individuals and the Centers for Medicare & Medicaid Services ("CMS") whether the prescription drug coverage available under their group health plan is "creditable." While the specifics of creditable coverage are beyond the scope of this article (i.e., the calculation of actuarial equivalence), as a general rule, prescription drug coverage is creditable if it is as good as or better than the Part D standard coverage. For 2006, the standard Part D coverage generally provides that (i) after a $250 deductible paid by the Part D enrollee, Medicare pays 75 percent of the next $2,000 in prescription drug expenses; (ii) the Part D enrollee pays 100 percent of prescription drug expenses between $2,251 and $5,100; and (iii) Medicare pays 95 percent of any prescription drug expenses above $5,101 subject to the Part D enrollee’s payment of the greater of 5 percent of the prescription drug cost or a co-insurance of $2 generic/$5 brand.

The purpose of the creditable coverage disclosure notice is to ensure that Part D eligible individuals who have access to an employer-sponsored group health plan that provides prescription drug coverage have sufficient information to determine whether to elect Part D benefits and thereby avoid any Part D late enrollment penalties (i.e., higher premiums). Under Part D, an eligible individual who fails to elect Part D coverage during the initial enrollment period or who fails to enroll within 63 days after the loss of creditable group health plan coverage will incur a late enrollment penalty in the form of higher Part D premiums. The late enrollment penalty equals 1 percent per month for each month that an eligible individual fails to enroll in Part D when creditable coverage is not otherwise available.

All employer-provided group health plans that offer prescription drug coverage, whether through insurance or self-insurance, are subject to the creditable coverage disclosure requirements. Group health plans not subject to the notice requirements include long-term care plans, health flexible spending accounts, health savings accounts, Archer medical savings accounts and health reimbursement accounts. Also, there is no small employer exception to the creditable coverage disclosure requirements.

Unfortunately, there is no published definition of the term "prescription drug coverage" for purposes of determining whether an employer-provided group health plan provides prescription drug coverage nor is it clear that "prescription drug coverage" is limited to only coverage for Part D covered drugs. In addition, depending upon plan design, it is likely that employers offering dental plans, vision plans, and employee assistance programs that provide any amount of prescription drug benefits are subject to the disclosure rules.

If an employer has a group health plan subject to the disclosure requirements, notice must be provided to every Part D-eligible individual who is enrolled in or is seeking to enroll in the employer’s group health plan. A Part D-eligible individual includes an individual who is eligible for benefits under Medicare Part A or who is enrolled in Medicare Part B, and lives in a service area of a Part D plan. This means that participants in an employer-provided group health plan, including active, disabled, and retired workers and their spouses and dependents, could be Part D-eligible individuals.

Numerous difficulties arise in trying to identify those participants who are Part D-eligible. While it may be possible for an employer to accurately determine those employee group health plan participants who could have enrolled in Part D, but chose not to, it is difficult, if not impossible, to determine whether a spouse or dependent covered by the group health plan is eligible to enroll in Part D. This is often the case because employers typically do not know the age, let alone the Part D eligibility status, of spouses and dependents covered under their group health plans. To overcome this dilemma, many employers are choosing to provide the disclosure notice to all group health plan participants.

The obligation to provide the disclosure notice applies only to the employer, as the sponsor of the group health plan providing the prescription drug coverage, and not to an insurer or a third party administrator. For this reason, it is not likely that insurers will be willing to satisfy this requirement. Third party administrators may be more likely to agree to distribute the notice on behalf of the employer; however, they will likely charge an additional fee for this service.

The contents of the required disclosure notice are relatively straightforward—the notice must clearly state whether the employer’s group health plan prescription drug coverage is or is not creditable coverage, and provide an explanation of both why creditable coverage is important and the consequences of a Part D-eligible individual’s failure to enroll in Part D when initially eligible. In addition, the disclosure notice must detail the times that a disclosure notice will be provided and how Part D-eligible participants can request a copy of the disclosure notice. CMS has provided model disclosure notices that may be used prior to November 15, 2005 and has indicated that it will provide additional forms of model notices for use after November 15, 2005.

Employers who maintain group health plans that offer prescription drug coverage must provide the initial creditable coverage disclosure notice prior to November 15, 2005. As a practical matter, all plan design changes for the employer’s prescription drug coverage program should be in place prior to providing the notice. After that, the notice must be given prior to (i.e., within 12 months before) the occurrence of five separate events: (i) the annual coordinated enrollment period for Part D; (ii) an individual’s initial Part D enrollment period; (iii) the effective date of an individual’s Part D enrollment in an employer’s prescription drug program; (iv) upon the request of an individual; and (v) upon any design change affecting whether an employer’s prescription drug coverage is creditable. A single disclosure notice to an employee participant is generally sufficient as to notice to the employee’s plan-covered spouse and/or dependents. A separate disclosure notice is required to be given to each plan-covered spouse and dependent who the employer knows does not reside at the same address as the employee participant.

Although employers who sponsor group health plans providing prescription drug coverage are also required to provide an annual notice of creditable coverage to CMS, there is little formal guidance on the information that must be provided or the form of notice. It is anticipated that CMS will publish details for compliance with this requirement. Unlike the timing of the disclosure notice required to be given to individuals, notice to CMS must be provided annually and upon any plan design change that affects whether the coverage is creditable.

Employers who offer group health plans that provide prescription drug coverage must also comply with the Medicare Part D coordination of benefits rules. The Medicare Secondary Payer rules apply to Part D, which means that for active employees (and their spouses and dependents) covered by a group health plan, Part D will usually be secondary to the employer group health plan coverage. In the instance of retirees covered by an employer-sponsored plan, Medicare is usually the primary payer, with the employer-sponsored plan secondary.

Part D also requires individuals who enroll in Part D coverage to provide Medicare with information about all other prescription drug coverage they may have. Based upon this requirement, it is likely that employers who sponsor group health plans that provide prescription drug coverage will receive additional requests for information about that coverage from employees or retirees entitled to enroll in Part D.

In summary, employers who provide prescription drug coverage, whether to active employees or retirees, should immediately examine each of their group health plans to determine whether a Part D disclosure notice is required. If it is determined that a disclosure notice is required, the employer was required to take action to determine each of the Part D eligible participants (or alternatively decide to give notice to all participants) and distribute the disclosure notice before November 15, 2005. Additionally, employers should take steps to ensure that their group health plans offering prescription drug coverage will comply with the Medicare coordination of benefit rules.

This article is presented for informational purposes only and is not intended to constitute legal advice.