New Duties For Employers With Prescription Drug Benefits:

Key Medicare Part D Dates Approaching

The new Medicare Part D prescription drug benefit, enacted as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), will be available starting January 1, 2006. This new benefit will provide prescription drug coverage under Medicare to individuals who are eligible for Medicare benefits due to age, disability, or end-stage renal disease. However, the new law also potentially affects all employers who provide prescription drug coverage under their group health plan, even if only active employees are covered.

New Notice Requirements for Employers

What is the Notice and why is it important?

All employers that provide prescription drug benefits to active or retired employees must provide an annual notice to Medicare-eligible Part D participants stating whether the employer-sponsored prescription drug coverage is equal to or better than the coverage under Medicare Part D. Coverage that meets this requirement is known as "creditable coverage." A "Medicare-eligible Part D participant" is generally someone who is entitled to Medicare Part A benefits (hospital insurance) and/or enrolled in Medicare Part B coverage (supplemental insurance).

This new "Notice of Creditable Coverage" will allow Medicare-eligible Part D participants to make informed and timely prescription drug coverage choices. They may now choose to enroll in Medicare's prescription drug benefit or to remain covered by their employer's plan. If these individuals do not enroll in Medicare Part D when they are first eligible, and if their employer's coverage is not "creditable," Medicare will impose penalties for late enrollment in the form of higher Part D premiums. The Notice contains key information necessary to allow the Part D-eligible individuals to decide whether to enroll in Part D.

What is "creditable coverage?"

Prescription drug coverage is considered "creditable" if its actuarial value equals or exceeds the actuarial value of the standard prescription drug coverage provided under Part D. To be creditable, the employer-sponsored plan's expected amount of paid claims for drugs must be at least as much as the expected amount of claims paid by Medicare Part D. In some cases, the employer must engage an actuary to certify whether the coverage is creditable. However, no actuary is needed if coverage is deemed to be creditable based upon the following criteria:

· The coverage provides coverage for brand and generic prescriptions;

· The coverage provides reasonable access to retail providers and, optionally, for mail order coverage;

· The coverage is designed to pay on average at least 60% of participants' drug expenses; and

· The coverage satisfies one of the following:

§ The prescription drug coverage has no annual drug maximum or an annual drug maximum of at least $25,000;

§ The coverage 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 not less than a $1,000,000 lifetime combined benefit maximum.

For guidance on creditable coverage, see the Centers for Medicare and Medicaid Services (CMS) Web site.

When and how must the Notice be provided?

The Notice may be distributed with other plan participant materials such as summary plan descriptions or plan enrollment materials. A single Notice may be provided to the covered Medicare-eligible Part D participant and all Medicare-eligible dependents covered under the employer's plan who live at the same address. In addition, employers must disclose their plans' creditable coverage status to CMS annually.

The Notice must be provided to Medicare-eligible Part D participants at the following times: (1) prior to an individual's initial enrollment period for Part D; (2) annually prior to November 15; (3) prior to the effective date of a Medicare-eligible Part D participant's enrollment in the employer's prescription drug coverage; (4) when the employer's prescription drug coverage ends or changes so that it is no longer "creditable" coverage; and (5) upon request by an individual. If the Notice is provided to all plan participants, items 1 and 2 will be considered to have been met. While recent guidance from CMS provides detailed requirements about the content of the Notice, further guidance is expected.

Money From the Government? The Part D Subsidy for Retirees

Now that Medicare provides a prescription drug benefit, some employers might consider reducing or eliminating retiree drug coverage. The MMA created a new "retiree drug subsidy" to encourage employers to continue providing high quality prescription drug coverage to Medicare-eligible individuals. An employer that continues to provide prescription drug coverage to retirees may apply to CMS for a tax-free subsidy if the employer's drug benefit is actuarially equivalent to the Medicare Part D standard prescription drug benefit. The subsidy will be equal to 28% of the plan's allowed costs of providing prescription drug coverage to retirees who are eligible for, but not enrolled in, Medicare Part D. Only costs in excess of a $250 deductible and less than $5,000 per person will be eligible for the subsidy. As a result, the maximum subsidy is $1,330 per enrollee ($4,750 x .28). It is estimated that the subsidy will average $611 per retiree in 2006.

CMS released the subsidy application on June 7, 2005. Employers who wish to apply for the subsidy must submit the application electronically by September 30, 2005. Unlike the actuarial equivalence test for "creditable coverage," an employer applying for the subsidy must provide an actuary's certification that the employer's plan is actuarially equivalent to Medicare Part D. For purposes of the subsidy, the actuarial equivalence test takes into consideration the expected amount of drug claims under the employer's plan, as well as the amount an employer contributes to the cost of the coverage.

Instead of applying for the subsidy, an employer may consider other options such as:

· Providing retiree prescription drug coverage that is not actuarially equivalent to Medicare Part D and not applying for the subsidy.

· Arranging with a prescription drug vendor to provide a benefit that is actuarially equivalent to Part D ("base coverage"), or better than Part D ("enhanced coverage"), and negotiate sharing of some or all of the government subsidy with the vendor.

· Amending the group health plan to simply supplement Part D coverage. Due to the complexity of the Part D coverage, this may be administratively challenging. (This approach will require the employer to advise participants that the plan's coverage is not creditable).

· Discontinuing drug coverage under the plan (and perhaps pay part or all of the Part D premium – approximately $37/month). (This relieves the employer of the creditable coverage notice requirements).

· Becoming a Private Prescription Drug Plan sponsor. (This is a complex process, and the deadline to apply for 2006 has passed.)

Key Dates

· June 7, 2005 – CMS released retiree drug subsidy application.

· September 14, 2005 – CMS to release list of approved drug vendors for each region.

· September 30, 2005 – Deadline for plan sponsors to apply for the 2006 retiree subsidy.

· October 1, 2005 – Private drug plans and Medicare Advantage drug plans may begin marketing their Part D plans to Medicare beneficiaries; Part D enrollment begins.

· October 21, 2005 – CMS to advise applicants for retiree subsidy of acceptance or rejection of their subsidy application.

· November 15, 2005 – Deadline for plans covering Medicare beneficiaries to notify those beneficiaries and CMS if its prescription drug coverage is creditable.

· November 15, 2005 through May 15, 2006 – Enrollment period for Part D coverage

· February 2006 – Retiree drug subsidy payments begin for monthly filers.

If you have questions about this new law and how it may affect your group health plan, please call or e-mail your contact in Ice Miller's Employee Benefits Group. The Benefits Group's Web page is at www.icemiller.com/service_detail/mainid/5/id/100/index.aspx. If you do not have a contact, please call Linda Rowings (linda.rowings@icemiller.com or 317-236-2343), Chris Sears (christopher.sears@icemiller.com or 317-236-5891), or Stephanie Smithey (stephanie.smithey@icemiller.com or 317-236-2141) at Ice Miller.