Medicare and Prescription Drug Benefits ABA Annual Meeting Section of Labor and Employment Law August 9, 2005 Kathryn Bakich Phyllis Borzi Chip Kerby The Segal Company O Donoghue & O Donoghue McDermott, Will & Emery kbakich@segalco.com borizph@gwu.edu ckerby@mwe.com (202) 833-6494 (202) 530-2312 (202) 756-8160
Agenda What is Medicare Part D? How does it affect health plan sponsors? Implications for all health plan sponsors Implications for retiree health plan sponsors Kaiser/Hewitt survey results Communication challenges and opportunities Update on Erie County issues Next steps 1
What is Medicare Part D? New Medicare Part D will provide partial coverage for drugs Voluntary program, available January 1, 2006 Standard drug benefit (or actuarial equivalent) Benefit provided by prescription drug plans (PDPs) or Medicare Advantage prescription drug plans (MA-PD plans) Sponsors of PDP & MA-PD plans receive payments from CMS Enrollees pay premiums Low-income individuals receive subsidies Retiree health plan sponsors may elect to receive subsidies 2
Part D Standard Drug Benefit Drug Costs Cost-Sharing Catastrophic Coverage Zone $5,101 + 95% plan payment Greater of 5% enrollee payment or $2/$5 co-pay No Coverage Zone Basic Coverage Zone $2,251-$5,100 $251 - $2,250 $0 - $250 100% enrollee payment ($2,850) Enrollee must pay $3,600 out of pocket before additional coverage is available ($250 + $500 + $2,850 = $3,600) 75% plan payment 100% enrollee payment ($250) 25% enrollee payment ($500) Plan payment Enrollee payments toward TrOOP These cost thresholds apply for 2006. The $250, $2,250 and $3,600 thresholds are indexed each year based on the projected rate of growth in per-capita drug spending for the Medicare population. 3
True Out of Pocket (TrOOP) Rules TrOOP the amount Part D enrollees must spend on Part D drugs before getting catastrophic coverage ($3,600 in 2006) Payments from insurance, group health plans or other third party payers don t count towards TrOOP Payments from HSAs, health FSAs and Archer MSAs count towards TrOOP (but payments from HRAs don t count) A Part D enrollee must disclose existence of group health plan coverage and consent to release of information 4
Delivery of Part D Drug Benefit CMS Contracts Payments PDP/MA-PD Plan Sponsors Enrollment and Part D premiums Rx Plan Rx Plan Rx Plan Drug Manufacturers Contracts Enrollees Drugs Retail & Mail Order Pharmacies 5
Implications for Health Plan Sponsors All health plan sponsors must provide new notices of creditable prescription drug coverage Notices must be provided to Medicare-eligible individuals no later than November 15, 2005 Retiree health plan sponsors must decide whether and how to integrate retiree health benefits with the new Part D benefit Plan design and communication decisions need to be made in advance of this Fall s open enrollment Plan sponsors applying for the subsidy must submit applications by September 30, 2005 6
Notices of Creditable Rx Coverage Individuals who fail to enroll in Part D when first eligible are subject to late enrollment penalties But late enrollment penalty doesn t apply if individual has creditable Rx coverage from date of first eligibility until date of enrollment (without coverage gaps of 63 days or more) Notice of creditable Rx coverage helps individuals avoid late enrollment penalties by letting them know whether their health plan coverage is creditable 7
Notices of Creditable Rx Coverage Drug coverage is creditable if actuarial value of plan s drug coverage actuarial value of standard Part D coverage Test is based on whether expected amount of paid drug claims under the plan equals or exceeds expected amount of paid claims under standard Part D coverage Two approaches for determining creditable status May be actuarially determined May be determined in accordance with CMS safe harbor 8
Notices of Creditable Rx Coverage CMS safe harbor says drug coverage is deemed creditable if Includes brand and generic scripts Provides reasonable access to retail providers Pays on average at least 60% of drug costs under CMS safe harbor For plans with non-integrated Rx/medical coverage, plan must have no annual benefit max (or annual benefit max of at least $25k), or be expected to pay at least $2k per individual in 2006 For plans with integrated Rx/medical coverage, plan must satisfy three requirements Annual deductible can t exceed $250 No annual benefit max, or annual benefit max of at least $25,000 Any lifetime benefit maximum must be at least $1,000,000 9
Notices of Creditable Rx Coverage Notices must be provided to all Medicare-eligible individuals (e.g., active, retired, disabled, ESRD) (or to all plan enrollees) by November 15, 2005 Notices must indicate Whether coverage is (or isn t) creditable What creditable coverage means, and why it is important Consequences of gaps in coverage and late Part D enrollment CMS has issued two model notices Notices may be included with other disclosures (such as enrollment materials or SPDs), if prominently displayed Notices must be provided upon an individual s request and at other specified times (notices provided at least once per year will comply) 10
Retiree Health Plan Options Continue plan benefit and apply for federal subsidy Coordinate plan benefit with Part D benefit Contract with PDP and/or MA-PDP Contract directly with CMS (retiree health plan becomes a PDP) Implement defined contribution plans Pay retiree premium for Part D coverage Reduce or eliminate retiree health coverage Note that options are not mutually exclusive 11
Option #1 Retiree Drug Subsidy Policy subsidy encourages employers and trust funds not to drop coverage because of the Part D benefit Eligibility plans are eligible only if plan s drug coverage has actuarial value actuarial value of Part D coverage (must satisfy both gross and net value tests) Amount for each qualifying retiree, sponsor receives 28% of allowable retiree costs between $250 and $5,000 12
Eligible Plans and Sponsors Subsidy is available for employment-based qualified retiree prescription drug plans, but only if the plan provides drug coverage with an actuarial value the actuarial value of the Part D standard drug benefit Examples include ERISA plans (single employer, multiple employer and multi-employer), church plans, governmental plans and certain account-based plans such as health reimbursement arrangements (HRAs) Subsidy is paid to plan sponsor (employer or joint board of collectively-bargained trust fund) 13
Application Procedure Application is required each year Application must be filed By September 30, 2005, for plan years ending in 2006 90 days before the beginning of each subsequent plan year Sponsors may request one 30-day extension each year Application must include required data, required documentation and actuarial attestation Application must be submitted electronically 14
Required Data Sponsor must provide information for each qualifying covered retiree (full name, SSN or HIC, birthdate, gender, relationship, dates plan coverage begins and/or ends) Qualifying covered retiree is a Part D eligible individual who is a participant (or spouse or dependent of a participant) in the sponsor s plan and not enrolled in a Part D plan. Note that a person is not a retiree if the person s coverage is based on current employment under the MSP rules. Sponsor must also provide periodic updates of this information Alternatively, sponsor may elect to participate in a voluntary data sharing agreement (VDSA) with CMS 15
Required Documentation Sponsor must have written agreement with CMS acknowledging that application information is being provided to obtain Federal funds Sponsor must have written agreements with subcontractors requiring subcontractors to acknowledge that information provided via subcontracts is being provided to obtain Federal funds Sponsor must have written agreement with health insurance issuer or group health plan requiring disclosures to CMS Sponsor must provide notice of creditable prescription drug coverage to Part D eligible enrollees 16
Actuarial Attestation Attestation must include assurances that: Actuarial gross value of the retiree coverage is actuarial gross value of Part D standard coverage (gross value test) Actuarial net value of the retiree coverage actuarial net value of Part D standard coverage (net value test) Attestation must be made and signed by a qualified actuary (member of AAA), must be based on generally accepted actuarial principles and must include a statement of veracity Attestation must include acknowledgement that information provided is being used to obtain federal funds See Appendix A for additional details on the gross and net value tests 17
Collecting the Subsidy Subsidy payment is 28% of allowable retiree costs, and sponsors may elect to receive payments monthly, quarterly, on an interim annual basis, or annually Allowable retiree costs include amounts paid for drugs by the retiree (e.g., deductibles, co-pays and co-insurance) and by the plan sponsor (net of rebates, discounts and price concessions), but don t include plan administrative costs. Note that drugs include only Part D covered drugs. Sponsors may submit estimated cost data for interim payments (or allocable premiums for insured plans), but must submit actual cost data within 15 months after end of plan year Sponsors must maintain records of allowable retiree costs for 6 years after the plan year in which costs were incurred 18
Option #2 Coordinate with Part D Context Retiree health plan can pay secondary, and coordinate plan benefits with Part D benefit (just as most plans now coordinate with Parts A and B) Benefit Coordination reduces the amount paid by the plan, especially for drug costs between $250 and $2,250 Issues Benefits paid by the retiree health plan don t count against the true out of pocket ( TrOOP ) limit, which may delay the availability of Part D catastrophic coverage CMS has provided limited guidance on TrOOP 19
How Plans Coordinate with Medicare Coordination Exclusion Carve-Out total expense $1,100 total expense $1,100 total expense $1,100 retiree pays Medicare pays $600 Medicare pays $600 $100 deductible balance $500 balance $500 plan pays $500 retiree pays retiree pays $100 deductible $200 copayment balance $1,000 balance $400 balance $800 retiree pays $80 copayment Medicare pays $600 balance $320 balance $200 plan pays plan pays $320 $200 Medicare $600 plan $500 Medicare $600 retiree $180 plan $320 retiree $300 Medicare $600 plan $200 20
Coordination with Medicare Part D CMS will expand existing trading partner processes, now known as the coordination of benefits agreement (COBA) program, to collect additional claims information from group health plans that coordinate with Medicare Part D CMS will also establish a new COB system by January 1, 2006, that will provide real time, point-of-sale coordination between Medicare Part D and supplemental plans such as employer and union-sponsored plans 21
Option #3 Contract with Part D Plan Context Sponsor contracts with PDP or MA-PD plan to provide drug benefits to retirees Benefit This approach shifts risk to PDP or MA-PD plans (and to the federal government), in return for fixed premium Issues Many PDPs will be available nationally, but questions remain about market volatility; benefits paid by PDP or MA-PD plans may qualify for federal reinsurance CMS guidance provides waivers for PDPs and MA-PD plans that want to contract with retiree health plan sponsors 22
CMS Waiver Guidance For sponsors that contract with Part D plans PDPs/MA-PDPs may establish retiree-only plans PDPs/MA-PDPs may offer benefit designs for retiree-only plans that are less generous than standard Part D basic coverage PDPs/MA-PDPs may offer different pharmacy access for retiree-only plans PDPs/MA-PDPs may satisfy alternative disclosure requirements (e.g. ERISA disclosure requirements) 23
Option #4 Contract with CMS Context Certain large retiree health plan sponsors may want to contract directly with CMS to establish a PDP for their retirees Benefit This approach permits sponsor to receive payments from the federal government like any other Part D plan, including reinsurance if retiree exceeds TrOOP limit Issues Notice of intent was required by March 23, 2005, and formal application was required by April 18, 2005 CMS guidance provides additional waivers for retiree health plan sponsors that contract directly with CMS 24
CMS Waiver Guidance For sponsors that contract directly with CMS Governmental entities may sponsor a PDP for retirees Sponsors may cover retirees wherever they reside Sponsors are not required to be state licensed, but must satisfy federal solvency requirements Sponsors are not required to have policy-making bodies to exercise oversight if other requirements (e.g. ERISA) apply Sponsors are subject to modified reporting requirements 25
Other Options Option #5 Some sponsors may consider using defined contribution alternatives for retirees, such as HRAs, HSAs and health FSAs, instead of traditional defined benefit coverage Option #6 Some sponsors may consider paying all or a portion of Part D premiums, to encourage retirees to enroll in Part D (these payments are not taxable) Option #7 Some sponsors may consider reducing or terminating retiree health plan coverage, if plan documents, bargaining contracts and other legal constraints permit 26
A Word on the False Claims Act The retiree drug subsidy and direct contracting options involve the submission of claims to the Federal government and raise issues under the False Claims Act The False Claims Act imposes potentially significant liability for those who submit false or fraudulent claims, and the availability of qui tam provisions encourages litigation CMS regulations require a considerable amount of precision for these claims, increasing potential for errors; risk can be managed by carefully establishing responsibilities, and by instituting compliance plans to confirm accuracy of claims See Appendix B for additional details on the False Claims Act 27
Kaiser/Hewitt Survey Results Strategies firms are likely to choose under the Medicare drug law: Don t Know 4% Other Among employers who plan to continue coverage and accept 28% subsidy: Discontinue Rx Coverage 8% 13% 58% Retain Current Benefit Levels 85% 17% Offer Rx Coverage as Supplement to Medicare Drug Plan* Continue to Offer Rx Coverage and Accept 28% Subsidy Match Standard Benefit 7% Don t Know 8% Note: Based on responses from private-sector firms with 1,000 or more employees offering retiree health benefits. Applies to plan with the largest number of Medicare-eligible retirees. SOURCE: Kaiser/Hewitt 2004 Survey on Retiree Health Benefits, December 2004. 28
Kaiser/Hewitt Survey Results Likelihood of Employers Providing Educational Materials About the Medicare Drug Benefit Very Likely 32% Somewhat Likely 40% Very Unlikely 7% Somewhat Unlikely 21% Note: Based on responses from private-sector firms with 1,000 or more employees offering retiree health benefits. SOURCE: Kaiser/Hewitt 2004 Survey on Retiree Health Benefits, December 2004. 29
Communication Challenges Conflicting messages from multiple sources CMS publications and media spots will advertise new Part D benefit and November 15 initial enrollment period PDP/MA-PD plans will advertise new plans, and try to recruit individual enrollees Retiree health plan sponsors must develop effective communication strategies to respond 30
Communication Opportunities Compare retiree health coverage to Part D coverage Send appropriate messages Encourage retirees to enroll in Part D (if sponsor favors coordination option) Discourage retirees from enrolling in Part D (if sponsor favors subsidy option) Provide retirees with useful information about Part D plans that plan sponsor contracts with Notices of creditable Rx coverage should complement other messages 31
CMS Resources for Plan Sponsors For general information on the retiree drug subsidy (http://www.cms.hhs.gov/medicarereform/pdbma/employer.asp) For general information on the RDS center (http://rds.cms.hhs.gov) To join CMS mailing lists to receive information (http://www.cms.hhs.gov/mailinglists/default.asp?audience=15) (http://www.cms.hhs.gov/mailinglists/default.asp?audience=16) For information on VDSA (http://www.cms.hhs.gov/medicare/cob/employers/emp_vdsa.asp) For information on COBA (http://www.cms.hhs.gov/medicare/cob/coba/coba.asp) 32
Update on Erie County Issues AARP sued to prevent EEOC from issuing a regulatory exemption designed to overturn Erie County decision District Court permanently enjoined EEOC from issuing its regulatory exemption; Judge Brody constrained by 3rd Circuit decision EEOC intends to appeal Congress may intervene with legislative fix Sponsors with Erie County problems continue to monitor litigation but make few design changes 33
Next Steps All health plan sponsors must determine how to implement notices of creditable prescription drug coverage Retiree health plan sponsors must work with their actuaries, third-party administrators and prescription benefit managers to evaluate the costs and benefits of different plan design options, and decide which option(s) to implement CMS will provide additional guidance on certain issues (e.g., actuarial equivalence, TrOOP coordination and direct contracting) 34
Questions 35
Appendix A Actuarial Attestation What are the gross values of retiree and Part D coverage? Gross values of retiree coverage and Part D coverage are the expected amount of claim payments (or plan payments) for the plan year Gross values must be determined based on claims experience and demographic data for Part D eligible participants in sponsor s plan If sponsor s data isn t credible, gross value may be determined based on CMS normative databases 36
Appendix A Actuarial Attestation What are the net values of retiree and Part D coverage? Net value of retiree coverage is the gross value, less expected premiums of Part D eligible participants Net value of Part D coverage is the gross value, less beneficiary premiums expected to be paid Further reduction permitted if sponsor s plan provides drug coverage that would delay Part D catastrophic coverage (e.g., sponsor s plan pays 100% after $2,000 out-of-pocket limit) But further reduction is available only if sponsor actually provides drug coverage for individuals who enroll in Part D (i.e., can t exclude retirees who enroll in Part D) 37
Appendix A Actuarial Attestation Gross and net value tests may be determined plan-wide, or for each benefit option for which subsidy is requested (note that each benefit option must satisfy gross value test) Plan is defined by reference to COBRA regulations Benefit option means a specific design, benefit category or cost-sharing arrangement Example. Assume plan has three benefit options A, B and C. If plan doesn t pass plan-wide, then test each option separately. Each option must satisfy gross value test and net value test. If option C doesn t pass gross value test, don t request subsidy for option C. If options A and B pass gross value and net value tests, then request subsidy for options A and B. 38
Appendix B False Claims Act Subsidy requests and direct contract payments are claims for federal funds, and FCA risks may arise because these programs assume precise determinations of qualifying costs for each retiree FCA prohibits submission of false or fraudulent claims, and causing the submission of false or fraudulent claims for payment to the United States Can reach third parties who don t actually make the claim, but who supply data used in the claim A false claim has been held to be one with data or assertions that are false, or that implicitly certifies compliance with requirements related to claim 39
Appendix B False Claims Act Standard of proof Individual must have actual knowledge of falsity or act in reckless disregard; no intent to defraud required Reckless disregard is vague standard, and can be interpreted as failure to have system in place that produces accurate data Penalties include treble damages, plus $5k to $11k per claim Qui Tam provision allows private parties to file FCA lawsuits on behalf of the United States Reward is up to 30% of the recovery, plus attorneys fees Creates strong incentive to file lawsuits 40