With the enactment of Medicare Part D, employers were provided an incentive rebate to retain coverage for their retirees with the goal of saving the federal government money.
The Patient Protection Affordable Care Act changes the rules so that the rebate provided (now suddenly described as a tax loophole) to employers is no longer tax deductible thereby adding substantial bottom line costs for the employer. This is causing employers to evaluate alternatives to providing this benefit to millions of retirees. One alternative is to simply eliminate the coverage thereby requiring the retiree to fend for himself in finding and paying for prescription coverage, but there are alternatives. Another option is to set up an employer sponsored Medicare prescription plan open only to the retirees of an employer group. This allows the employer sponsored plan to collect Medicare subsidies, but gets the employer out of the process and tax implications of receiving the retirees drug rebate that is part of the original Part D program.
Employers are actively looking at their options although with the changes caused by the PPACA not effective until January 2013, there is time to act. However, because of accounting rules, employers will likely announce any changes in 2010 to reverse the tax impact of changes in the law.
In any case, retirees are likely to see significant changes in their coverage including less involvement by their former employer, increased out of pocket costs and less flexibility in terms of which drugs are available for thier use.
Medicare Part D and the Plan Sponsor: What You Don’t Know Can Hurt You and Your Bottom Line Excerpts
By Erin Costell, Managing Partner, Global Pharmaceutical Solutions HR Management Article: Medicare Part D and the Plan Sponsor: What You Don’t Know
One such alternative is the establishment by the plan sponsor of its own Medicare Prescription Drug Plan (PDP), known as a direct-contract Employer Group Waiver Plan (EGWP). With a direct-contract EGWP, the employer enters into a contract with CMS to provide plan benefits and receives payment directly from the government. Plan sponsors with large Medicare-eligible populations may find this to be financially superior to the RDS approach. Under the direct-contract EGWP approach, the pre-tax federal subsidy is set at the national average monthly bid amount less the Part D base beneficiary premium, with the national bid being $80.43 and beneficiary premium being $27.35 in 2007. Unlike the RDS option, the direct subsidy available through the direct-contract EGWP plan includes subsidization for administrative costs and profit margins based on the national average of commercial plans. The direct subsidy payments are also adjusted based on the health risk status of the beneficiary. Direct subsidy payments alone are almost equivalent to the average subsidies provided under the RDS program. In addition to direct subsidy payments, direct-contract EGWPs also receive low-income subsidy payments, as well as “catastrophic” reinsurance payments that provide reimbursement for 80% of eligible drug costs that exceed a beneficiary’s maximum out of pocket limit, with the out of pocket limit being $3,850 in 2007. The total value of the direct contract EGWP subsidies can exceed that of the RDS by as much as $400 to $500 (pre-tax) per year for each covered Medicare beneficiary. The subsidy is estimated to be 35% or more of the plan sponsor drug spend for Medicare beneficiaries, far exceeding the estimated 20% average subsidy yielded under RDS. For large plan sponsors, this additional savings can amount to millions of dollars per year.
Another alternative option for plan sponsors is the purchase of an Employer Group Waiver Plan from a third party Part D Sponsor, known as an “800 Series” EGWP. Under this arrangement, the employer or union does not contract directly with CMS. Instead, a third party Part D Sponsor contracts with CMS to offer this benefit to the employer or union plan sponsor on CMS’s behalf. This arrangement alleviates much of the employer’s or union’s administrative burden because they have no direct obligations to CMS. Under an “800 Series” plan the third party Part D Sponsor receives the direct subsidies, low income subsidies and reinsurance payments for the employer’s or union’s approved beneficiaries, like the payments available under the direct contract EGWP. The employer or union realizes these savings through either reduced premiums or a pass-through of CMS payments from the third party Part D sponsor back to the employer or union sponsor. However, since the administrative and regulatory burdens fall on the third party Part D sponsor under this arrangement, third party sponsors typically charge additional fees to cover these expenses.
Click Here An illustration of how the EGWP works.
“If you like the plan you have you can keep it.” Who was it that said that over and over, seems like it was someone who should have known.
Make sure to join the Facebook Group “What the heck are they doing with my employee benefits?”
blogsurfer.us
QUINNSCOMMENTARY 