Medicare Compliance & Reimbursement

Businesses' wait-and-see approach to reitiree drug coverage could be the calm before a storm.

Most large-scale private employers will continue to offer coverage as good as or better than the new Medicare Part D drug plan--for now. But industry experts and beneficiaries still fear that employers will drop prescription drug coverage for retirees once Medicare Part D goes into effect, a recent survey says.

"Most employers are accepting government subsidies and taking a wait-and-see attitude on the drug law. The widespread dropping of drug benefits that some had feared has been averted so far as businesses figure out what their longer-term response should be," says Drew E. Altman, Kaiser Family Foundation president and CEO.

Medicare Subsidies Buy Time For Employers

Medicare subsidies have enabled many large employers to continue managing their own drug plans--good news for many qualified participants. Employer-sponsored drug plans are typically more generous than the standard Medicare drug package, notes Tricia Neuman, KFF vice president and director of the Medicare Policy Project.

Employers can choose from four retiree coverage options under the Part D plan: (1) continue separate coverage; (2) supplement Medicare coverage; (3) contract with Medicare to become a health plan; or (4) discontinue drug coverage for retirees. A recent survey from KFF and Hewitt Associates, which polled 300 of the nation's largest private-sector employers, revealed the following trends:

• 79 percent of employers plan to provide subsidized coverage that is "actuarially equivalent" to the Part D plan. Under this option, Medicare will subsidize employers 28 percent of allowable expenses, or $5,000 maximum per retiree.

• 10 percent plan to supplement Part D coverage without the Medicare subsidy.

• 2 percent plan to contract directly with Medicare to become an approved drug plan.

• 9 percent plan to discontinue retiree drug coverage.

Transition--And Attrition--May Be Inevitable

Despite the fact that most surveyed employers plan to continue offering drug coverage through 2007, there is still deep-rooted concern that this will change dramatically within the next few years. "For many reasons, taking the retiree drug subsidy is the strategy of choice for large companies in 2006, but they will continue to reassess their strategies moving forward as more experience develops with Medicare drug plans," says Frank McArdle, research manager for Hewitt Associates and study co-author.

"Unfortunately, retiree health-cost pressures remain intense," McArdle adds. Only 50 percent of employers consider themselves "likely" to continue subsidized drug coverage for retirees in 2010, the survey notes. Another 22 percent went so far as to say it's "unlikely" that they'll offer coverage by that time. But McArdle does offer some reassurance: "This doesn't necessarily mean that all those employers will be dropping their coverage. Employers are going to continue to look at their options, particularly as the marketplace evolves."

As evolution takes its course, McArdle expects employers to transition toward supplemental drug coverage rather than maintaining their own plans. Businesses that have opted to supplement Medicare coverage stand to realize an average $826 in savings per retiree during 2006, the report estimates. In contrast, businesses choosing to accept subsidies and maintain coverage will save an average $626 per retiree.

Further, within the next three years, more than half of the survey participants will have fulfilled their financial obligations for Medicare-eligible retiree health benefits. When employers reach their spending caps, they'll begin shifting more coverage costs to retirees and Medicare, says Neuman. Seventy-one percent of businesses KFF surveyed have raised retirees' premium contributions over the past year. Plus, many employers already enforce restrictions that cause retirees to lose their employee-sponsored medical and drug coverage when they enroll in a Part D plan, the report finds.