What Employers Should Know About Medicare Part D

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added a new voluntary prescription drug benefit under Medicare (known as Medicare Part D) to eligible participants, effective January 1, 2006.  Eligible participants are individuals who are covered by Medicare Part A or Part B, including those who have Medicare coverage due to age (attainment of age 65), disability or end-stage renal disease.  This includes active employees or retirees, and their spouses and dependents.

This new benefit has created additional communication, administrative and compliance concerns for all employers.  However, Hill, Chesson & Woody is ready to provide assistance in understanding Medicare Part D and the options and resources available to employers to ensure compliance with this program.

Federal Subsidy Option

Plan sponsors that currently offer and continue to offer retiree coverage may be eligible to apply for a federal subsidy.  The tax-free subsidy will be 28% of the beneficiary’s actual drug expenses incurred between $250 and $5,000 in 2006 (to a maximum of $1,330).  The Centers for Medicare and Medicaid Services (CMS) estimates the average after-tax value of the subsidy to be approximately $668 annually for each retiree beneficiary NOT enrolled in Medicare Part D.

In order to qualify for the subsidy, the prescription drug plan offered by the employer must be “actuarially equivalent” to (i.e. at least as generous as) the standard benefit provided under Medicare Part D.   In order to be “actuarially equivalent,” the expected amount of paid claims for the plan must be at least equal to the expected amount of paid claims under Part D.   The equivalence test will also need to take into account the plan sponsor’s contribution toward the financing of the drug coverage.

The subsidy application requires an attestation of the plan’s actuarial equivalence to be provided by a qualified actuary.  In addition to the actuarial attestation, the application also requires employers to submit eligibility and claims data to CMS.   For most small employers, Hill, Chesson & Woody believes that the cost of obtaining the actuarial attestation, the reporting data, and the additional administrative responsibilities will outweigh the value of the subsidy.

Creditable/Non-Creditable Coverage Notification

Regardless of whether or not employers provide retiree prescription drug coverage, all employers are responsible for notifying eligible participants as to whether or not their current prescription coverage is “creditable” (i.e. actuarial value of the current plan is equal to or better than the actuarial value of the standard Part D plan – see “Guidelines to Determine Creditable Coverage” below).

The purpose of the notice is to ensure that individuals have sufficient information about enrolling in Part D when they are first eligible.  There is a late enrollment penalty of 1% for each month the individual did not have creditable prescription coverage after the end of their initial enrollment period, or May 15, 2006. The penalty does not apply if an individual has creditable coverage from the date of first becoming eligible for Part D until the date of actual enrollment in Part D (without any coverage gaps of 63 days or more.

The notices are required to be distributed to all eligible participants at the following times:

  • Prior to November 15, 2005 (and annually thereafter),
  • Prior to an individual’s initial enrollment for Part D,
  • Before the effective date a Medicare-eligible individual’s enrollment in the employer’s prescription plan,
  • Whenever the prescription drug plan coverage ends or changes so that it is no longer creditable or it becomes creditable, and
  • Upon a beneficiary’s request.

CMS has released model notices that employers may use for creditable and non-creditable coverage, but employers may create their own notices as long as they fulfill the agency’s content requirement.  Employers are not obligated to send these notices out as a separate mailing and may distribute them with other communication materials, such as enrollment or renewal materials.

In addition to notifying the eligible participants, all employers must also notify CMS of the plan’s creditable status on an annual basis and upon any change that affects the creditable status.  While there are currently no stated penalties for employers who fail to send out the notices, such a failure may be considered a fiduciary breach.   Employers distributing these notices will greatly help individuals avoid late enrollment penalties by letting them know whether or not their existing health plan coverage is (or is not) creditable.  For individuals who can establish that they were not adequately informed that their coverage was not creditable, they can write to CMS and apply for a waiver of the late enrollment penalty.

Guidelines to Determine Creditable Coverage

For employers that are not applying for the federal tax subsidy, CMS has provided safe harbor guidelines to determine if their coverage is “creditable”.  Under this simplified test, a prescription drug plan is deemed creditable if it meets the following standards.

  1. Provides coverage for brand and generic prescriptions,
  2. Provides reasonable access to retail providers and, optionally, for mail order coverage,
  3. Pays on average at least 60% of participants’ prescription drug expenses, and
  4. Satisfies at least one of the following:
    • The prescription drug plan has no annual benefit maximum benefit or a maximum annual benefit payable by the plan of at least $25,000, or
    • The prescription drug plan has an actuarial expectation that the amount payable by the plan will be at least $2,000 per Medicare eligible individual in 2006, or
    • For entities that have integrated health coverage, the integrated health plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000, and has no less than a $1,000,000 lifetime combined benefit maximum.  (The definition of integrated for this purpose is when the prescription drug plan is subject to the same deductible and out-of-pocket maximum as the medical plan.)

Under this simplified test, most current prescription drug copay plans will be creditable.  Group health plans that do not pass these requirements may still be creditable; however, actuarial resources may be necessary to confirm creditable coverage status.

Further information on Medicare Part D

If you have questions on how the introduction of Medicare Part D may affect you and your company please contact Hill, Chesson and Woody at 919-403-1986, or the Centers for Medicare and Medicaid Services (CMS) at 877-267-2323.

For more information on creditable and non-creditable coverage notices, please click here.  For plan sponsors interested in applying for the retiree subsidy, please visit the Retiree Drug Subsidy Program.

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Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.

July 21, 2005

194 Finley Golf Course Road, Suite 200,
Chapel Hill, NC 27517
Phone: 919.403.1986
Fax: 919.913.0237

www.hcwbenefits.com


Important Deadlines for Employers to Remember

September 30, 2005 – Federal Subsidy Application Deadline.  (Employers that choose to continue to provide prescription drug coverage that is primary to Medicare have until this date to apply for a federal subsidy.)

November 15, 2005 – Final Notification Deadline.  (Employers that provide prescription drug plans must notify all Medicare-eligible active and retired employees, as well as their spouses dependents, regarding Part D enrollment and as to whether or not their current plan is considered “creditable” under current guidelines.)