Medicare Drug Benefit: Retiree Provisions

Medicare Drug Benefit: Retiree Provisions

Order Code RL33041
CRS Report for Congress
Received through the CRS Web
Medicare Drug Benefit: Retiree Provisions
Updated February 9, 2006
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare Drug Benefit: Retiree Provisions
Summary
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (MMA, P.L.108-173). The
legislation created a new voluntary prescription drug benefit for Medicare
beneficiaries under Medicare Part D. It went into effect January 1, 2006.
Beneficiaries are able to purchase “standard coverage” or alternative coverage with
actuarially equivalent benefits. Coverage is provided through private prescription drug
plans (PDPs) or, for those enrolled in Medicare-Advantage (MA) plans, MA
prescription drug (MA-PD) plans.
In recent years, employers have been cutting back on health benefits offered to
their retirees. When MMA was being considered, there was concern that employers
would use the enactment of a Medicare drug benefit as an excuse to further reduce
retiree health benefits or drop such coverage entirely. In response, the legislation
includes significant incentives for employers to continue to offer drug benefits to their
Medicare-eligible retirees.
Specifically, MMA required the Secretary of the Department of Health and
Human Services (HHS) to make special subsidy payments to employers or unions
offering qualified retiree prescription drug coverage. Qualified plans are defined as
those offering drug benefits at least actuarially equivalent to “standard coverage. “
Subsidy payments are made on behalf of an individual covered under the retiree health
plan who is entitled to enroll under a PDP or MA-PD plan but elects not to. In 2006,
subsidy payments will equal 28% of a retiree’s gross drug costs between $250 and
$5,000. (The dollar amounts will be adjusted annually by the percentage increase in
Medicare per capita prescription drug costs.) Subsidy payments to employers and
unions are not subject to federal tax.
Employers or unions may select an alternative option (instead of taking the
subsidy) with respect to the new Part D. They may elect to pay a portion of the Part
D premiums. They may also elect to provide enhanced coverage, though this has
some financial consequences for the employer or union. Enhanced coverage may be
provided through supplementary or “wrap around” benefits. Alternatively, employers
or unions may contract with a PDP or MA-PD to offer the coverage. Finally, they
may become a Part D plan sponsor themselves for their retirees.
In January 2006, the Secretary of HHS announced that close to 24 million
Medicare beneficiaries had prescription drug coverage. This included 6.4 million
persons in retiree plans receiving a subsidy. An additional 1 million retirees were in
employer coverage that incorporated or supplemented Medicare’s coverage, and
another 500,000 continued in plans with coverage at least as good as Medicare’s. An
estimated 3.1 million beneficiaries were in TRICARE and the Federal Employees
Health Benefits program (FEHB).
This report provides a summary of the MMA provisions and an overview of the
implementation requirements. It will be updated as events warrant.

Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Requirements for Employer/Union Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Plan Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Qualifying Covered Retiree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Actuarial Equivalence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Comparison to “Standard Coverage” . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notification to Retirees of “Creditable Coverage” . . . . . . . . . . . . . . . . 5
Administrative Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Subsidy Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Other Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
True Out-Of-Pocket (TROOP) Implications . . . . . . . . . . . . . . . . . . . . . . . . . 7
Employer/Union Sponsored Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Federal Payments to Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Beneficiary Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Impact of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Distribution of Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsequent Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Average Employer Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Medicare Drug Benefit: Retiree Provisions
Overview
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173). The
legislation created a new voluntary prescription drug benefit for Medicare
beneficiaries under Medicare Part D. It went into effect January 1, 2006.
Beneficiaries are able to purchase “standard coverage” or alternative coverage with
actuarially equivalent benefits. Coverage is provided through private prescription drug
plans (PDPs) or, for those enrolled in Medicare-Advantage (MA) plans, MA
prescription drug (MA-PD) plans. The program relies on these private plans to
provide coverage and to bear some of the financial risks for drug costs, with the
government covering the bulk of the risk to encourage participation. The plans
determine payments and are expected to negotiate prices.1
In recent years, employers have been cutting back on health benefits offered to
their retirees.2 When MMA was being considered, there was concern that employers
would use the enactment of a Medicare drug benefit as an excuse to further reduce
retiree health benefits or drop such coverage entirely. In response, the legislation
included significant incentives for employers to continue to offer drug benefits to their
Medicare-eligible retirees.
Specifically, MMA requires the Secretary of the Department of Health and
Human Services (HHS) to make special subsidy payments to employers or unions
offering qualified retiree prescription drug coverage. Qualified plans are defined as
those offering drug benefits at least actuarially equivalent to “standard coverage.”
Subsidy payments are made on behalf of an individual covered under the retiree health
plan who is entitled to enroll under a PDP or MA-PD plan but elects not to. In 2006,
subsidy payments equal 28% of a retiree’s gross drug costs between $250 and $5,000.
(The dollar amounts will be adjusted annually by the percentage increase in Medicare
per capita prescription drug costs.) Subsidy payments to employers and unions are not
subject to federal tax.
It should be noted that employers may select an alternative option with respect
to the new Part D. They may elect to pay a portion of the Part D premiums. They
may also elect to provide enhanced coverage, though this has some financial
1 See CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, by Jennifer O’Sullivan, Hinda Ripps Chaikind, Sibyl
Tilson, Jennifer Boulanger, and Paulette Morgan.
2 See CRS Report RL32944, Health Insurance Coverage for Retirees, by Hinda Ripps
Chaikind and Fran Larkins.

CRS-2
consequences for employer or union sponsors. Enhanced coverage may be provided
through supplementary or “wrap around” benefits. Alternatively, employers may
contract with a PDP or MA-PD to offer the coverage. Finally, they may become a Part
D plan sponsor themselves for their retirees. Most employers and unions offering
drug benefits to retirees in 2005 elected the subsidy for 2006.
This report provides a summary of the MMA provisions and an overview of the
implementation requirements as outlined by the Centers for Medicare and Medicaid
Services (CMS, the agency that administers the Medicare program). CMS issued final
Part D regulations in January 20053 and has provided, on a periodic basis,
supplemental guidance documents on its website.
Requirements for Employer/Union Subsidies
The employer/union subsidy is available to sponsors of qualified plans provided
certain conditions are met. The plan itself must meet the definition of a qualified plan.
The plan sponsor must submit an application to CMS on a timely basis. This
application must include an actuary’s attestation that the plan meets the actuarial
equivalence requirements. The plan sponsor must also meet certain administrative
requirements.
Qualified Plans
MMA applies the employer/union subsidy provisions to qualified prescription
drug plans.
Plan Requirements. A qualified plan is defined as employment-based retiree
health coverage provided under a group health plan. Group health plans may include
federal and state government plans, collectively bargained plans, and church plans.
However, the Office of Personnel Management stated that plans offered under the
Federal Employee Health Benefits (FEHB) program would not be applying for the
subsidy.
A health reimbursement arrangement (HRA), may also qualify.4,5,6 HRAs are
accounts, funded by an employer or union, which reimburse for medical expenses.
Participants are credited up to a specified annual maximum dollar amount with unused
3 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, “Medicare Program: Medicare Prescription Drug Benefit,” 70 Federal Register
4194, Jan. 28, 2005.
4 The arrangement will have to meet the definition of group health plan as specified in the
Employee Retirement Income Security Act of 1974 (ERISA).
5 Other account arrangements such as a Health Savings Account and an Archer Medical
Savings Account will not be considered as a qualified medical plan because contributions
to the plan cannot be made once the individual is eligible for Medicare.
6 See CRS Report RS21573, Tax-Advantaged Accounts for Health Care Expenses:
Side-by-Side Comparison, by Bob Lyke and Chris Peterson.

CRS-3
amounts carrying forward to subsequent coverage periods. HRAs, and other account
based arrangements are often combined with high deductible health plans (HDHPs).
Regardless of whether an account standing alone is a group health plan, the HDHP
associated with that account can qualify as a group health plan if it is contributed to
or otherwise established or maintained by an employer or union.
Qualifying Covered Retiree. Subsidies are linked to an individual’s status
as a retired participant in the qualified group health plan or as the Medicare-enrolled
spouse or dependent of the retired participant. Thus, a sponsor offering qualified
coverage for dependants will be able to claim coverage for a Part D eligible dependent
of a retired participant, even if the retiree is under age 65 and not Part D eligible.
However, the sponsor will not be able to claim coverage for a Part D eligible
dependent of an active employee.
It should be noted that subsidies are only paid for qualifying retirees covered
under the qualified employer plan, but not covered under Part D. Individual retirees
may elect to enroll in Part D. However, that decision may have consequences. A
recent survey of anticipated employer responses to the MMA provisions found that
among large employers who expected to continue to offer drug coverage (and receive
the subsidy), 41% said retirees who signed up for Part D would maintain employer-
sponsored coverage, 31% said the retirees would lose prescription drug coverage only,
and 29% said these retirees would lose both employer-sponsored medical and drug
coverage. In addition, 44% of these employers stated that once an individual signed
up for Part D they would not be allowed to enroll or re-enroll in the employer plan at
a future date.7
Actuarial Equivalence
The sponsor of the plan must provide CMS with an attestation that the actuarial
value of the retiree prescription drug coverage is at least equal to Part D standard
coverage. The determination must be made using the methodology specified by CMS
and be signed by a qualified actuary. The attestation must be provided annually.
Comparison to “Standard Coverage”. In order to determine actuarial
equivalence, coverage under the retiree health plan is compared to “standard
coverage” under Part D. In 2006, standard coverage has a $250 deductible, 25%
coinsurance for costs between $251 and $2,250, then no coverage until the beneficiary
has true-out-of-pocket (TROOP) costs of $3,600 ($5,100 total drug spending). Once
the beneficiary reaches the catastrophic level, or TROOP trigger, the program pays all
costs except for the greater of: (1) $2 for a generic or preferred multiple source drug
and $5 for other drugs; or (2) 5% coinsurance.
Calculation. Calculation of actuarial equivalence is determined according to
a “two-prong test.” First, under the “gross value test,” the actuarial gross value of the
7 Kaiser Family Foundation and Hewitt, Prospects for Retiree Health Benefits as Medicare
Prescription Drug Coverage Begins - Findings from the Kaiser/Hewitt 2005 Survey on
Retiree Health Benefits; December 2005. [http://www.kff.org/medicare/
med120705pkg.cfm].

CRS-4
retiree prescription drug coverage under the plan for the plan year must be at least
equal to the actuarial gross value of standard coverage under Part D for the year in
question. Second, under the “net value test,” the net value of the plan (taking into
account expected premiums) must be at least equal to the actuarial net value of Part
D standard coverage.
In general, gross value of coverage is determined using actual claims experience
and demographic data for Part D eligibles who are in the sponsor’s plan; alternative
approaches are permitted under certain conditions. The plan satisfies the gross value
test if the total expected paid claims for beneficiaries under the sponsor’s plan will be
at least equal to the total expected paid claims for the same beneficiaries under the
defined standard Part D benefit.
The net value of coverage under the sponsor’s plan is determined by reducing the
gross value of coverage by the expected premiums. Plan sponsors that charge a single
premium for both drug and other medical coverage must allocate a portion of this
premium to drug coverage. The plan’s net value is compared with the net value of
standard coverage under Part D. The net value of standard Part D coverage is
calculated by reducing the gross value by: (1) monthly beneficiary premiums
expected to be paid for standard coverage; and (2) an amount reflecting the impact of
sponsor-provided supplemental coverage on the value of standard coverage. (If the
sponsor provides coverage that supplements standard coverage, this will delay the
point at which retiree will qualify for catastrophic coverage because sponsor-paid
costs will not count toward the TROOP trigger; this in turn decreases the value of that
catastrophic coverage.)
Assurances related to the gross value test must be provided separately for each
benefit option for which a sponsor is requesting a subsidy. Assurances related to the
net value test may be provided in one of several ways. It may be applied separately
for each benefit option, for a subset of benefit options that in the aggregate meet the
test, or in the aggregate for all benefit options. For example, if a retiree group health
plan has five separate options, all of which individually meet the gross value test, the
plan could claim the subsidy for: (1) each of the options that separately meet the net
value test; (2) all five options if they meet the net value test in the aggregate; or (3) a
subset of the options if the subset meets the net value test in the aggregate.8
CMS notes that actuaries will have considerable flexibility in the use of
simplified actuarial calculations, treatment of multiple benefit options, and allocation
of premiums between drug and non-drug coverage. Further, once the actuarial
equivalence standard is satisfied, plan sponsors will have full flexibility in plan benefit
design.9
8 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Service, “Medicare Program; Medicare Prescription Drug Benefit; Interpretation,” 70
Federal Register, Mar. 21, 2005.
9 CMS, The Retiree Drug Subsidy: Why Employers and Union Plan Sponsors Should
Consider It, Apr. 6, 2005, at [http://www.cms.hhs.gov/medicarereform/pdbma/
employer.asp].

CRS-5
Notification to Retirees of “Creditable Coverage”. MMA imposes a
premium penalty for persons who delay enrollment in a Part D plan after their initial
enrollment period. The penalty is equal to 1% of the beneficiary’s Part D premium
for each month of delayed enrollment. Thus, a one-year delay would result in a 12%
surcharge.
However, there is an exception for persons who maintain creditable coverage
through some other public or private source and then choose to enroll in Part D at a
later date. Creditable coverage is defined as drug benefits whose actuarial value
equals or exceeds that of standard coverage.
Sponsors of retiree plans are required to disclose whether their plan is creditable
coverage. The disclosure must be made to all their retirees and their spouses and
dependents who are both eligible to participate in the retiree health plan and who are
eligible for Part D.
Administrative Requirements
Plan sponsors are required to submit applications containing information on the
employer, plan, and individuals that the sponsor believes are qualifying covered
retirees. A sponsor may satisfy the requirement relating to individual information by
entering into a voluntary data sharing agreement with CMS. Once a full application
has been submitted, CMS will match the name and identifying information on
individuals with the Medicare Beneficiary Database to determine which retirees are
Part D eligible individuals who are not enrolled in a Part D plan. The results will be
provided to the sponsor.
In general, an application for a plan year must be submitted no later than 90 days
prior to the beginning of the plan year. Applications had to be submitted by
September 30, 2005 for plan years beginning in 2006.
Sponsors are required to provide information necessary to assure accurate
subsidy payments. This includes electronic submission and periodic updating of
enrollment information about retirees and dependents; electronic submission of
aggregate data about drug costs; and reconciliation of costs at the end of the year.
Sponsors are required to maintain, and furnish to CMS or the Office of Inspector
General upon request, certain records. These include reports and working documents
of the actuaries who wrote the required attestation of actuarial equivalence and
documentation of incurred costs and other information used to calculate the subsidy.
Records must be retained for a minimum of six years after the expiration of the plan
year in which the costs were incurred. A longer period is required in the event of
investigation, litigation or negotiation involving civil, administrative, or criminal
liability.

CRS-6
Subsidy Payments
As noted above, the MMA subsidy provisions were intended to counteract the
erosion in employer-provided retiree health benefits. The subsidy is calculated based
on gross plan-related drug costs that are actually paid (net any manufacturer or
pharmacy discounts, chargebacks, rebates, and similar price concessions). The
calculation includes drug payments made by the qualified retiree drug plan and those
made by the covered retiree (or on the retiree’s behalf). Gross costs include costs
directly related to dispensing of the drugs but not administrative expenses.
In 2006, subsidy payments equal 28% of an individual’s gross drug costs between
$250 (the cost threshold) and $5,000 (the cost limit). The dollar amounts for the cost
threshold and cost limit will be adjusted annually by the percentage increase in
Medicare per capita prescription drug costs.
Subsidy payments may be made on a monthly, quarterly, or annual basis, as
elected by the plan sponsor, unless CMS determines that these options must be
restricted because of operational limitations.
MMA specifies that subsidy payments to plan sponsors are not subject to federal
tax.
Other Options
Types of Options
Instead of taking the subsidy, an employer or union may choose another option
for providing prescription drug coverage for their retirees. Under these options, the
retiree is encouraged to sign up for Part D; the employer or union plan would then
provide some additional assistance. The following are the major options available:
! Payment of Part D Premiums. Employers or union sponsors could
choose to pay some or all of the Part D premiums for their Part D
eligible retirees and eligible dependants.
! Providing Supplemental Coverage. Employers could set up their own
separate plans that supplement or wrap around Part D coverage.
These plans would coordinate with benefits offered by any PDP or
MA-PD the beneficiary chooses. Health plans typically take this
approach for services (such as hospital and physicians services),
provided under Medicare Parts A and B.
! Purchase of Enhanced Part D Benefit Through PDP or MA-PD. An
employer or union could elect to contract with a specific PDP or MA-
PD plan to offer enhanced prescription drug benefits to retirees (and
dependants) eligible for Medicare.
! Become a PDP or MA-PD. Alternatively, the retiree plan itself could
apply to be a Part D plan for its retirees.

CRS-7
True Out-Of-Pocket (TROOP) Implications
If employers or unions elect to sponsor enhanced alternative coverage, or provide
separate coverage that wraps around Part D, this will have financial consequences for
them. As noted above, Part D enrollees with standard coverage must have $3,600 in
TROOP costs in 2006 before Part D catastrophic coverage begins. TROOP costs
include only those payments paid by the individual, paid by another family member
on behalf of the individual, paid on behalf of the individual under the low-income
subsidy provisions, or under a state pharmaceutical assistance program.10 Insurance
and other third party payments do not count toward TROOP. Thus, if an employer
chooses to pay some of the Part D cost-sharing on behalf of its retirees, this would
have the effect of delaying the point at which the Part D catastrophic coverage would
begin. The employer could therefore end up paying some costs which would
otherwise be covered under the catastrophic portion of the Part D benefit.
Employer/Union Sponsored Plans
Employers or unions that contract with a Part D plan to provide a customized
package for their retirees, as well as those who elect to become a Part D plan
themselves will have to meet Part D plan requirements. This means they will have to
meet the applicable bidding requirements for PDPs or MA-PDs. However, both the
law and subsequent CMS guidance11 permits waivers from certain Part D requirements
which would otherwise hinder the development and offering of such plans. The
intention is to facilitate employer/union sponsors to offer these group plans.
Waivers. The following are some of the key waivers that have been identified:
! Enrollment. Plans may restrict enrollment solely to their retirees.
Further, they do not have to meet otherwise applicable minimum
enrollment standards.
! Governmental Entity Requirements. In general, governmental entities
are not permitted to be PDP or MA-PD sponsors. However, this
prohibition is waived for governmental entities applying to sponsor
a PDP or MA-PD plan for their retirees, such as for state retirement
funds and municipal and local government plans.
10 It should be noted that CMS final regulations state that distributions from health savings
accounts, flexible savings accounts, and Archer medical savings accounts count toward
TROOP. However, distributions from health reimbursement accounts do not count toward
TROOP.
11 For further guidance information, see (1) Part D Waiver Guidance for Employer/Union
Retiree Coverage, Feb. 11, 2005; (2) Additional Part D Waiver Guidance for
Employer/Union Retiree Coverage, Mar. 9, 2005; (3) Additional Part D Waiver Guidance
for Employer/Union Retiree Coverage, Apr. 6, 2005; and (4) 2006 Part D Application
Instructions for Employer Sponsored Retiree Group Plans (Employer/Union Direct
Contractors and PDP/MA-PD/Cost Plan Sponsors Offering Employer/Union Retiree Group
Plans), revised Apr. 19, 2005. All of these documents can be found at
[http://www.cms.hhs.gov/medicarereform/pdbma/employer.asp].

CRS-8
! Service Area Requirements for Direct Contracts. In general, Part D
plans can only cover beneficiaries in the service areas in which they
operate. Under employer union direct contracts, coverage can be
extended to all retirees, regardless of where they reside.
! Service Area Requirements for PDPs Offering Customized
Employer/Union-Only Group Plans. To qualify for a waiver, the
PDP must offer non-retiree coverage in the area where the largest
portion of the employer/union’s total number of employees/
participants reside. Coverage may then be offered to all the
employer/union retirees, regardless of where they reside. Otherwise,
coverage is limited to retirees in the same region that the PDP offers
non-retiree coverage.
! Service Area Requirements for MA-PDs Offering Customized
Employer/Union-Only Group Plans. If a local MA-PD sponsor
provides coverage to individuals in any part of a state, it can offer
retiree-only coverage for an employer or union throughout the state.
An MA organization offering a regional plan in a specified MA
region may offer an employer/union sponsored MA-PD plan in any
area within the MA region or throughout the region. CMS may, on
a case by case basis, grant a waiver to permit a regional MA-PD to
extend coverage to retirees living outside the area.12
! State Licensure. State licensure requirements may be waived for
direct contracting plans. However, they are required to meet certain
financial solvency standards. If the employer or union does not meet
these specified standards, CMS may approve, on a case-by-case basis,
waivers of the requirements provided the entity can demonstrate that
(1) its fiscal soundness is commensurate with its financial risk; and
(2) it can assure that claims for benefits will be covered.
! Calendar Year Operation. Part D plans are required to operate on a
calendar year basis. Employer/union sponsored plans will be able to
operate on a non-calendar year basis.
! Pharmacy Access. Plans will not be subject to the Part D retail
pharmacy access standards. However, they will have to provide an
attestation that the plan’s networks are sufficient to meet the needs of
its retiree population, including situations involving emergency
access. Waivers of the mail-order only prohibition will not be
granted.
! Marketing/Beneficiary Communication Requirements. CMS will
waive specific Part D marketing/beneficiary communication
requirements upon receipt of an attestation that the plans comply with
alternative disclosure requirements (such as those applicable under
ERISA).
! Reporting Requirements. In general, Part D plan sponsors are
required to disclose certain information to CMS, enrollees, and the
general public. For direct contracting plans only, information must
12 For a discussion of local and regional MA plans, see CRS Report RL32618, Medicare
Advantage Payments, by Hinda Ripps Chaikind and Paulette Morgan.

CRS-9
be disclosed to the extent required by other law (such as ERISA or
securities law) or by contract.
Federal Payments to Plans. In general, federal payments to Part D plans
include (1) a direct monthly per capita payment for each plan enrollee, which is
labeled the direct subsidy payment (not to be confused with subsidy payments to
qualified retiree plans discussed earlier); (2) catastrophic reinsurance payments equal
to 80% of an individual’s costs over the annual out-of-pocket threshold amount (the
TROOP level); (3) risk corridor payments if a plan’s losses exceed specified
thresholds; and (4) subsidies for low-income enrollees.
CMS has established several payment modifications for employer/union plans,
discussed below.
Per Capita Direct Subsidy Payments to Plans. Direct subsidy risk
adjusted payments to employer/union plans will be based on the national benchmark
amount rather than the bid submitted by the plan.
Catastrophic Reinsurance Payments. For most Part D plans, catastrophic
payments will be made prospectively, with reconciliation adjustments at the end of
the year. However, for employer/group plans, CMS will make the full reinsurance
payment at the end of the year. CMS expects that since the employer/union plans will
be providing enhanced benefits which do not count toward TROOP, the reinsurance
trigger will be delayed and reinsurance payments will be small as a result.
Catastrophic reinsurance payments will not be available for non-calendar year
plans. However these plans will still be required to provide catastrophic coverage.
Risk Corridor Payments. CMS guidance states that employer/union drug
plans will forgo risk corridor payments. Risk corridors permit Part D plans to share
both losses and gains with Medicare. Risk corridor payments were included in MMA
to assist entities entering new markets in which they have no experience. CMS notes
that employers/unions already have experience with their retiree population.
Low-Income Subsidies. In general, low-income subsidies will apply in the
same manner they apply to other Part D plans.13 Low-income premium subsidies paid
on behalf of an eligible retiree must first be used to reduce the portion of the monthly
premium paid by the beneficiary with any remainder used to reduce the
employer/union contribution.
CMS guidance states that if the premium subsidy amount is less than the
beneficiary premium, the beneficiary should be informed of the premium impact of
remaining in the employer plan versus enrolling as an individual in another Part D
plan.
13 See CRS Report RL32902, Medicare Prescription Drug Benefit: Low-Income Provisions,
by Jennifer O’Sullivan.

CRS-10
Beneficiary Payments. In general, Part D plans are required to charge a
uniform premium for each beneficiary enrolled in the plan; this is the standard
premium for basic coverage. The plan can charge 100% of the value of any
supplemental coverage.
CMS will give employer/union plans flexibility in determining the amount they
will subsidize for retirees, subject to certain conditions. Employer/union plans can
subsidize different amounts for different classes, provided the classes are reasonable
and are based on objective business criteria such as years of service, business location,
or job category. This is in recognition of the fact that employers often acquire new
employee groups as a result of business deals.
Premiums for employer/union plans cannot vary based on eligibility for the low-
income subsidy. Further, enrollees cannot be charged more than the sum of the
premium for standard Part D coverage plus 100% of the premium for supplemental
coverage. Finally, the per capita direct subsidy payments from CMS to the
employer/union Part D plan must first be passed through to the beneficiary to reduce
the amount of the beneficiary premium.
Timing. In the fall of 2005, CMS signed contracts with employer/union direct
contract plans. It also signed contracts with PDP and MA-PD plans with addenda for
customized benefits for employer/union group applicants.
Impact of Provisions
Distribution of Beneficiaries
2006. When CMS issued the final Part D regulations in January 2005,14 it
estimated that, in the absence of MMA, 11.4 million persons (28% of beneficiaries)
would have employment-based retiree coverage (including unsubsidized coverage) in
2006. Of these, CMS estimated that 9.8 million persons (86%) would receive
creditable drug coverage through an employer/union sponsored retiree plan that was
eligible for the subsidy (though some employers, such as the federal government,
would not apply for the subsidy). An estimated additional 0.4 million persons (3%)
would receive coverage through a PDP or MA-PD plan with the employer/union
offering enhanced benefits or providing wrap around or coordinated coverage. The
remaining 1.3 million (11%) would enroll in a standard PDP or MA-PD; a portion of
these persons will receive assistance with premium costs.
On January 17, 2006 the Department of Health and Human Services (HHS)
released a press release on drug coverage.15 It estimated that nearly 24 million persons
14 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid
Services, Medicare Program: Medicare Prescription Drug Benefit; 70 Federal Register
4194, Jan. 28, 2005.
15 HHS, Nearly 24 Million Medicare Beneficiaries Now Have Prescription Drug Coverage,
(continued...)

CRS-11
had drug coverage as of that date. The statistics include both those covered under Part
D as well those persons who continued to have drug coverage through retiree plans.
It estimated that 6.4 million persons were in retiree plans receiving a subsidy. About
1 million retirees were in employer coverage that incorporated or supplemented
Medicare’s coverage, and another 500,000 were continuing in plans with coverage at
least as good as Medicare’s). Approximately 3.1 million persons were receiving their
drug benefits through TRICARE and the Federal Employees Health Benefits program
(FEHB).
Subsequent Years. When CMS issued its January 2005 estimates, it
suggested that the projected ratios would change over the five-year estimation period
as some employers who elect the subsidy in 2006 transition to other options in later
years. (See “Current Issues” discussion, below.) For 2010, CMS estimated a total of
11.8 million would have had coverage in the absence of MMA. Of these, an estimated
7.2 million (61%) would have assistance through a subsidy-eligible plan, 2.4 million
(20%) would have enhanced or wrap around coverage and the remaining 2.3 million
(19%) would enroll in a standard PDP or MA-PD.
Average Employer Savings
In the final Part D regulations,16 CMS estimated that the employer/union retiree
drug subsidy payments would average $668 per beneficiary in 2006. For employers
with tax liability, this translates into a taxable per capita payment of $891 for an
employer in the 25% marginal tax category and $1,028 for an employer with a 35%
marginal rate. By comparison, the average indirect subsidy for employers/unions
choosing to provide supplemental coverage was estimated to be about $900 per person
(excluding reinsurance payments which are expected to be low for this population
because of the TROOP rules).
For employers/unions who cannot take advantage of the tax-free nature of the
subsidy, such as state governments and non-profit corporations, one of the alternative
options may appear more attractive than the subsidy. In its August 3, 2004 proposed
rule-making, CMS estimated that 60% of beneficiaries over 65 receiving retiree health
benefits were obtaining them from entities exempt from taxation.
Current Issues
In recent years, employers have been cutting back on health benefits offered to
their retirees. When MMA was being considered, there was concern that employers
would use the enactment of a Medicare drug benefit as an excuse to further reduce
retiree health benefits or drop such coverage entirely. In response, the legislation
includes significant incentives for employers to continue to offer drug benefits for
their Medicare-eligible retirees. Most notably, the law both provides for a subsidy of
15 (...continued)
press release, at [http://www.hhs.gov/news/press/2006pres/20060117.html].
16 HHS, 70 Federal Register, Jan. 28, 2005, op.cit.

CRS-12
a portion of retiree drug costs and exempts these subsidy payments from federal taxes.
As noted, the legislation also offers other options to encourage employer/unions to
continue to provide assistance to retirees.
CMS strongly encouraged employers/unions to take advantage of the subsidy
rather than one of the other available options in 2006. It stated that it was generally
a better option, because the value of the subsidy was generally expected to be larger,
though the actual value of the assistance varies by a number of factors. Further, CMS
established a streamlined application process for the subsidy.
Most large employers offering retiree health benefits in 2005 have taken the
subsidy in 2006. Some plans may wish to avail themselves of other options; however
it might take time to restructure their plans in light of the new Part D. A 2005 survey
by Kaiser Family Foundation and Hewitt17 noted that its survey of 300 large private-
sector firms with 1,000 or more employees showed that the majority of plan sponsors
(82%) would seek the subsidy, at least in the first year. Fifteen percent said they were
likely to supplement the benefit; and 2% said they intended to become a PDP. Eleven
percent said they were likely to discontinue prescription drug coverage; of which 3%
reported they were discontinuing both drug and other medical coverage.18 When
asked which strategy they were most likely to pursue for their largest plan, 79% of
surveyed employers (representing 89% of the age 65+ retirees in the largest plans),
expected to take the subsidy in 2006.
The Kaiser/Hewitt study reported that many employers taking the subsidy in
2006 were likely to pursue additional cost control strategies. Thirty-six percent were
very or somewhat likely to increase copayment or coinsurance charges; 21% were
likely to require use of mail-orders for refills or maintenance drugs; 14% were likely
to replace copayments with a coinsurance approach; 13% were likely to only cover the
cost up to the level of the lowest-cost drug for a given condition; 8% were likely to
impose deductibles specific to the drug benefit; 3% were likely to impose a cap on the
drug benefit; and 2% were likely to cover generic drugs only.
Over time, many plans may face an additional consideration. It is not clear that
employers will be able to continue to meet actuarial equivalence standards necessary
to qualify for the subsidy. For a variety of reasons (including the Financial
Accounting Standards Board (FASB) standards FAS 106)19 many employers are
capping their contributions to future retiree health benefits. These amounts may fall
below the level necessary to keep pace with the actuarial value of the Part D drug
benefit.
17 Kaiser Family Foundation and Hewitt, Prospects for Retiree Health Benefits as Medicare
Prescription Drug Coverage Begins — Findings from the Kaiser/Hewitt 2005 Survey on
Retiree Health Benefits; Dec. 2005, at [http://www.kff.org/medicare/med120705pkg.cfm.].
18 Some employers with multiple plans provided multiple responses. As a result the total
exceeds 100%.
19 See CRS Report RL32944, Health Insurance Coverage for Retirees, by Hinda Ripps
Chaikind and Fran Larkins.

CRS-13
Over time these considerations may become a bigger issue. As the baby boom
generation ages into retirement, employers will continue to reexamine their
contributions to health benefits for both current and future retirees. Some employers
may elect to drop their contribution to retiree health benefits entirely while others may
reduce their contributions for future retirees.
A key concern for policymakers is whether the MMA provisions will encourage
employers to continue to provide retiree health coverage. It will be several years
before we have a more complete picture of how employers have responded to the
law’s incentives. Further, whatever actions employers take should be viewed as part
of the larger response to rapidly increasing health care costs, both for active workers
and for retirees