Thomas Onusko

Sunday, 21 November 2004 19:00

New options

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 made a number of changes to the Medicare program, including the new optional Medicare prescription drug benefit (Part D), which becomes effective Jan. 1, 2006. Employers that provide health benefits to their retirees have options in light of the new Part D benefit.

Once a Medicare beneficiary enrolls in Part D, pays the $35 monthly premium and meets a $250 annual deductible, Medicare will pay the next $2,000 of covered prescription drug costs. The beneficiary must pay the next $2,850 of such costs (totaling $3,100 out-of-pocket expense to the beneficiary for $5,100 of covered expenses). Medicare will pay for 95 percent of such costs above $5,100.

Beneficiaries at 100 percent of the federal poverty level will only pay $1 for generic and $3 for name brand prescription drugs, and those at 150 percent of the federal poverty level will pay $2 for generic and $5 for name brand prescription drugs.

Beginning in 2006, the act provides for a tax-free federal subsidy to employers that provide prescription drug coverage to retirees, which is equivalent to, or better than, Part D coverage. The federal subsidy is 28 percent of the cost for covered prescription drugs above $250 per retiree to a maximum annual subsidy of $1,330 per retiree based upon what the employer and retiree spend on prescription drugs.

The subsidy could enable employers to provide retirees with drug coverage at little or no cost. For example, if, in a given year, an employer pays $1,000 toward a retiree's covered drug costs of $2,550, the employer receives a tax-free subsidy of .28 x $2,300 or $644, and the employer can deduct the $1,000 it actually paid which, assuming a corporate tax rate of 35 percent, results in a cost of $650, yielding a net cost of $6 to the employer.

Financial Accounting Standards Board rules allow the employer to book the value of the anticipated government payment on its 2003 and 2004 financial statements if the company believes that it can accurately predict the effect of the subsidy.

The greatest challenge to qualify for the federal subsidy will be for an employer to demonstrate the "actuarial equivalence" of its retiree drug coverage to Part D. The act does not define actuarial equivalence, but the government has promised to provide information in the future as to the actuarial standards that will have to be met.

Another alternative is for employers to coordinate their retiree medical plans with Medicare by a wraparound augmenting Medicare benefits and covering retiree co-payments and deductibles. However, because of the doughnut hole in Part D coverage between $2,250 and $5,100, every dollar the employer pays above the $2,250 widens the hole, costing both the retiree and the employer additional money. Plan design can help reduce, but not eliminate, such additional costs.

Employers can also create their own prescription drug plan or Medicare Advantage Prescription Drug Plan (MA-PD), either directly or under contract with a prescription drug plan sponsor or Medicare Advantage organization. These plans could consist of enhanced alternative coverage that is more generous than that offered under the Part D standard prescription drug coverage.

In these employer plans, Medicare, in effect, subsidizes the cost of the plan through direct and reinsurance subsidies as calculated in proposed regulations. The employer may also elect to subsidize the monthly beneficiary premium.

Choosing the most advantageous approach in light of the new Part D incentives for employee retirement medical plans is a sophisticated and complex process. Employers and retirees should confer with a qualified benefits consultant in choosing their options.

Thomas Onusko is of counsel in the Cleveland office of Vorys, Sater Seymour and Pease LLP, practicing in the health care group. He has more than 20 years experience in the representation of health care providers and in tax-exempt bond financing, including hospital revenue bonds and industrial development bonds. He is also an adjunct professor in health care law at Case Western Reserve University School of Law and the Cleveland State University School of Business. Reach him at (216) 479-6175 or