The Centers for Medicare & Medicaid Services expects employers to have more financial incentives to fund "wrap-around" Medicare drug coverage for their retirees rather than to accept the direct federal subsidy.

"Many employers and unions may be better off if they go this route, being a secondary payor to provide comprehensive coverage for Part D benefits, rather than getting the retiree drug subsidies directly," CMS Administrator Mark McClellan said Aug. 19 during an "open door" forum.

Under the Medicare Modernization Act, employers who choose to preserve contributions to their retiree health plans will receive a federal subsidy for each Medicare-eligible retiree covered.

Subsidy payments will equal 28% of drug costs between $250 and $5,000 for each beneficiary. In its proposed rule on implementing Title I, CMS projected those subsidies will amount to roughly $600 per beneficiary during the first year. The rule was released July 26 (¹ Also see "Medicare Rx Implementing Regs Open For Comment" - Pink Sheet, 2 August, 2004., p. 15).

The rule also outlined three additional ways for employers to provide enhanced retiree coverage. "Under these approaches - where Medicare benefit is the 'primary' and the retiree coverage is the 'secondary' - employer or union costs are reduced dollar for dollar by the amount Medicare subsidizes Part D plans," a CMS discussion paper states.

Those options include using the savings to offer retiree drug programs that qualify as Part D plans; subsidizing drug premiums for retirees who enroll themselves; and providing wrap-around drug coverage to complement the federal benefit.

According to CMS, "the value of the subsidy that employers can receive by providing comprehensive drug coverage for their retirees through one of these secondary coverage mechanisms can be worth a lot - about $900" per beneficiary, McClellan said.

By that estimate, the savings available to employers through the secondary options would amount to an additional $300 per beneficiary over the direct federal subsidy option.

The CMS discussion paper notes that the secondary coverage options should be particularly attractive to public sector employers exempt from taxation. The agency estimates those employers cover at least 60% of individuals with retiree benefits.

"Wrapping around the standard Medicare drug benefit may also be attractive in that it is more similar to how employers already augment Part A and Part B Medicare coverage," the discussion paper states.

CMS is seeking comments to refine its estimates and help the agency determine how best to present and implement the options.

The agency is specifically interested in how it should use its waiver authority "to facilitate the widespread availability of attractive secondary insurance options," the discussion paper states.

One possible use of the waiver policy would be to allow sponsors to offer drug coverage coordinated with Medicare on a national basis and limited to a specific retiree group, CMS suggested.

Such a sponsor would have to participate as a Medicare prescription drug plan in at least one region of the country; have a nationwide pharmacy network; and obtain an enrollment waiver that allows the PDP to serve only the employer's retiree group, and only on a national basis.

CMS noted that the waiver process would build on one already in place for Medicare Advantage.

Health plans such as UnitedHealth Group were supportive of that use of the waiver policy during the open door forum. UnitedHealth's Tom Paul suggested that CMS "focus a little bit on the definition of who would have access to those waivers in order to ensure a greater level of participation."

The AFL-CIO recommended that CMS include in its final regulation a process for third parties to challenge employers' attestation that their plans are actuarially equivalent. The final rule should also include safeguards to ensure that subsidies are used to preserve retiree benefits rather than for non-health care uses, the union said.

Medicare Wrap-Around Coverage May Be Best Option For Employers – CMS

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