Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.

Options for Employers to Provide Retiree Coverage Post-Implementation of Medicare Part D

Union Forum Call

March 23, 2006

Kathryn Bakich, The Segal Company

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Understanding Part D

Plan Sponsors have spent significant time and effort to understand the Retiree Drug Subsidy program, but may be unfamiliar with the details of the Medicare Part D program

Consequently it may be difficult to know the ramifications for retirees if a plan sponsor proposing switching from traditional retiree drug coverage to coverage under a Part D plan

Understanding the plan sponsor options for 2007 and beyond means understanding how the Part D market and benefit plan designs have evolved and are being implemented

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Medicare Enrollment Numbers

According to CMS, the overall drug benefit enrollment figures as of February 13, 2006 total almost 27 million, broken down as follows:

o Stand-alone Prescription Drug Plans: about 4.9 million (1.3 million since January 13)

o Medicare/Medicaid: 6.2 million (including 560,000 in Medicare Advantage plans)

o Medicare Advantage: 4.7 million plus 560,000 in Medicare/Medicaid

o Retiree coverage: About 6.4 million retirees are enrolled in the Medicare retiree subsidy

o Another 1 million retirees are in employer coverage that incorporates or supplements Medicare’s coverage. Another estimated 500,000 retirees are continuing in coverage that is as good as Medicare’s.

o TRICARE/ FEHBP retirees: 3.1 million

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Plan Sponsor Options

Retiree Drug Subsidy

Contract with a PDP

Become a PDP

Wrap Arounds

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Plan Sponsor Benefit Designs

Plan Sponsors are permitted to:

Provide a prescription drug benefit that is actuarially equivalent to the Medicare standard benefit, without regard to the benefit design and network access requirements of a PDP or Medicare Advantage plan and take the Retiree Drug Subsidy

Pay all or part of the Medicare PDP or Medicare Advantage Part D premium for their retirees

Provide a supplemental insured or self-insured benefit to Part D that pays all or part of retiree cost sharing, such as coinsurance and deductible (Plan payments would not count toward the retiree’s out-of-pocket maximum)

Contract with a private PDP or Medicare Advantage plan for an employer-specific plan

Become a PDP

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What are Most Plan Sponsors Doing in 2006?

Most plan sponsors signed up to receive the 28% employer subsidy from Medicare in 2006 because it is the easiest decision and does not require plan redesign

Many plan sponsors will contract with stand-alone Prescription Drug Plans (PDP)

Some plan sponsors will contract with a Medicare Advantage HMO

A few plan sponsors will offer a supplemental benefit to Part D (a “wrap”) plan

Fewer than a dozen governmental employers and very large employers and unions direct-contracted with CMS to offer a Part D program

Some plan sponsors terminated retiree prescription drug coverage

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Cost Implications of the Medicare Options for 2006

Retiree Drug Subsidy estimated by CMS to be $668 per retiree per year – actual numbers unknown

For 2006, a group health plan that contracts with a Part D plan for the standard benefit package would have costs offset approximately $720 from Medicare

Offering a supplemental benefit to Medicare means that the plan pays after Medicare pays. Cost savings will depend on the design of the supplemental plan

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Targeted Employers

Medicare Prescription Drug Plans are likely to target certain employers and attempt to sell them a Part D product

Non-profits, including state and local governments, because they do not receive the tax benefits from the Retiree Drug Subsidy and because of GASB

Plans that do not meet the “actuarial equivalence” standard and therefore are not eligible for the Retiree Drug Subsidy

Due to caps on retiree contributions, the number of employers who do not meet the actuarial equivalence standard may increase over time

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A Few Critical Factors in Decision Making

Is the Retiree Drug Subsidy producing expected returns?

Are there collective bargaining restrictions on benefit modification?

Is benefit redesign acceptable to the trustees and the retirees? Can it be effectively communicated?

Are medical and drug benefit administration currently linked in a way that adding a separate drug plan is impractical?

Are there local Medicare HMOs that might provide alternatives?

What kind of formulary is currently used for the retiree drug benefit and how much disruption can the plan tolerate?

How stable is the Part D market?

Are there enough retirees (e.g. over 5,000) to make it worthwhile to consider becoming a Medicare prescription drug plan?

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Retiree Drug Subsidy Implementation/Due Diligence

Retiree Drug Subsidy

Payments can be requested beginning July 1, 2006

Interim one-time payment can be requested in April 2006

Reconciliation required within 15 months after the end of the Plan Year

Ongoing issues regarding how to treat retirees who signed up for Part D (terminate coverage or pay secondary to Part D)

Next steps

Plan sponsors must complete the application, payment process

Contracting with PBMs regarding RDS services, charges

Reconciliation Audits of payment requests

Send Notices of Creditable Coverage and file Disclosure Notice with CMS by March 31, 2006

Assure that plan sponsor monitors deadlines for submission of RDS application for the plan year ending in 2007

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Understanding the Part D PDP

We’ll review several issues important to understand when considering implementing a Part D Prescription Drug Plan

Benefit design

Formulary

Network

Cost

For PDPs that contract with a group health plan, all of the above are negotiable

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Prescription Drug Plan Regions

DRAFT

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Stand-Alone Prescription Drug Plans

There are 2,190 stand-alone PDP options in the US

There are 10 companies offering stand-alone PDPs in every state:

Aetna Medicare

CIGNA Health Care

Coventry AdvantraRx

Humana

Medco

MEMBERHEALTH

PacifiCare

SilverScript

United Healthcare

WellCare

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What kind of Benefits/Network will Plans Offer?

PDPs may offer the standard benefit design, an actuarially equivalent benefit, or a supplemental benefit (additional premium could be charged)

Individuals must be able to use the PDP’s negotiated discounts even if they are not eligible for a benefit (e.g., before the deductible is met)

Low Income Subsidies are available for individuals with incomes under 150% FPL. Subsidies increase benefits and offset premiums

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Out-of-Pocket Maximum

“True Out-of-Pocket” (TROOP) rule: Only individuals or another person (e.g., family member) can pay out-of-pocket amounts and have that payment count toward the out-of-pocket maximum

Payments from a group health plan, insurer or other third party arrangement toward beneficiary cost sharing do not count toward the individual’s out-of-pocket maximum

Costs are not considered toward out-of-pocket maximum if they are for non-formulary prescription drugs or drugs purchased from outside the US

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Medicare Rx Standard Benefit Design – 2006

5% Beneficiary95% Medicare

“Coverage Gap”

$5,100

100% Beneficiary

25% Beneficiary75% Medicare

$2,250

$250 Deductible 100% Beneficiary$250

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Coverage Gap Issues

The coverage gap is the hole in coverage between $2,250 and when the individual reaches their out of pocket maximum of $3,600

Some Medicare PDPs offer coverage in the gap, and others do not

A PDP might fill the gap with generics or brand, or both, or could leave the gap empty

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Sample High and Low Part D Plans

Low Benefit Plan

$250 Deductible

Tiered Copay: $5 generic; $20 preferred brand; $40 non-preferred brand

Extra Coverage in the Coverage Gap? No

Number of Top 100 Drugs on Formulary: 85

Mail Order offered

High Benefit Plan

$0 Deductible

Tiered Copay: $5 generic; $20 preferred brand; $40 non-preferred brand

Extra Coverage in the Coverage Gap? Yes, for generics

Number of Top 100 Drugs on Formulary: 99

Mail Order offered

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Formulary Issues

Medicare Prescription Drug Plans must file a formulary with CMS that lists the drugs covered under the plan

Drugs not listed are not paid for by the PDP and do not count toward an individual’s TROOP

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Formulary Issues

Retirees who move from an employer-sponsored plan to a Medicare PDP may see a change in the covered drugs

A new formulary may replace an old one (or even no formulary)

A displacement analysis determining how many retirees will be affected by the formulary change is important

Under Medicare Part D, if the retiree’s drug is not on the new formulary they can switch drugs, ask for a formulary exception, or pay for the old drug out of their pocket

Medicare required a 90-day fill for prior drugs in 2006, but that rule is not likely to continue in 2007

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Network Issues

Medicare Prescription Drug Plans must satisfy certain network rules, but the network might be different than that currently in place for a group health plan

PDPs can offer a nationwide pharmacy network to employer group plans. However, to do so the PDP must offer an individual product in the area where the employer has most of its employees

Consequently, displacement analysis regarding whether the PDP network is appropriate for the group of retirees is important

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Eligibility and Enrollment–Part D

Entitled to or enrolled in Part A or enrolled in Part B and live in a Part D region

Voluntary Enrollment

Employers can Group-Enroll their retirees into a PDP

Annual Open Enrollment, beginning November 15, 2005

Right to change elections annually

Special enrollment periods (e.g., an individual may specially enroll if they lose actuarially equivalent employer-sponsored coverage)

Penalties for late enrollment are 1% per month (minimum)

Penalties are not imposed if individual had Creditable Coverage

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Group Enrollment in a Prescription Drug Plan

Employer Group Health Plans (EGHP) have several options for enrolling retirees in a Prescription Drug Plan on a Group Enrollment basis

Annual Open Enrollment

Special Election Periods

– For individuals enrolling in or disenrolling from an employer/union-sponsored Part D plan

– No limit

– May be used when an employer would otherwise allow coverage changes

Group enrollment

– No individual enrollment form needed for each beneficiary

– Provide notice of group enrollment not less than 30 calendar days before effective date

– Permit retirees to decline; include information about consequences

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Let’s Talk Timetables

Trustees need to know the time frames for decision making and program implementation

Time tables will differ for each Medicare option

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What will CMS do Next??

March - April 2006 – Approximate time for release of Part D deductible, coinsurance, OOP max for 2007

April 17, 2006 – Formularies must be submitted to CMS

May 1, 2006 – CMS issues renewal/non-renewal notices to PDPs

June 5, 2006 – PDP bids due to CMS

September 15, 2006 – Approximate date for final PDP approval for 2007 benefit year

October 1, 2006 – Plans may begin to market to individuals

October 15-30, 2006 – Medicare & You handbooks mailed

November 15-December 31, 2006 – Annual Election Period

January 1, 2007 – Part B Premium indexed based on income and phased in over 3-year period

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Retiree Drug Subsidy Timetable

Subsidy applications must be submitted 90 days before the beginning of the Plan Year for which the subsidy is requested

Calendar year plans – September 30, 2006

Non-calendar year plans need to monitor timeline for their plan years; e.g. July 1 plans have a March 31 filing date

Notices of Creditable Coverage are required every year

Disclosure of Notice of Creditable Coverage required on March 31, 2006, and 60 days after the beginning of the plan year for subsequent years

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PDP Contracting Timetable

We know what companies are offering PDPs in regions and nationally

We will know the benefits and formularies this spring

Plan sponsors won’t know how much the Medicare plans are getting paid until August or September each year

Unknown payment terms leaves a short window for negotiating the benefits and premiums with a Part D plan

Unknown payment means implementation must occur in October/November/December

Similar time frames if contracting with a Medicare HMO or PPO

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Becoming a Prescription Drug Plan

Application deadline was March 20, 2006

Option is available for 2008 if the 2007 deadline was missed

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Helpful Acronyms

CMS = Centers for Medicare & Medicaid Services

MA-PD = Medicare Advantage Plan with Prescription Drugs

MMA = Medicare Modernization Act

PDP = Prescription Drug Plan

RDS = Retiree Drug Subsidy

TROOP = True Out-of-Pocket

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More Information

CMS website has further information on the Part D program and the employer subsidy

For more information about employer-sponsored plans and Part D go to http://www.cms.hhs.gov/EmplUnionPlanSponsorInfo/

Retiree Drug Subsidy information is available at http://rds.cms.hhs.gov/

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QuestionsKathy: 202-833-6494 kbakich@segalco.com