Guest Article

(From the June 23, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Momentum Building for Medicare Prescription Drug Benefit

For years, the debate over adding a comprehensive prescription drug benefit to Medicare has been more about talk than action. But a seismic shift in the political landscape has occurred during the past few weeks. House and Senate leaders are now racing to pass comprehensive Medicare reform proposals that would make a universal prescription drug benefit available through the program before Congress adjourns for its annual July Fourth recess. At the current pace, Congress may send a final bill to President Bush before the end of the summer.

Current and future Medicare beneficiaries obviously stand to benefit the most from the proposed Medicare prescription drug benefit, which is expected to cost at least $400 billion over the next ten years. But employers may end up bearing a significant part of the costs of the new benefit in the form of higher payroll taxes, particularly if anticipated savings from other proposed reforms to the Medicare program fail to materialize.

The impact of a Medicare prescription drug benefit on employers' group health plans-- and especially on retiree medical plans-- is not clear. Before discussing the possibilities in more detail, it may be helpful to review the basics of the Senate and House proposals. (The following summaries are based on the best information currently available about the bills reported by the Senate Finance Committee and the House Ways and Means Committee. The provisions in the respective bills are still subject to change.)

The Senate's Medicare Prescription Drug Benefit Proposal

The Senate bill (S. 1, "The Prescription Drug and Medicare Improvement Act") would guarantee a prescription drug benefit option to beneficiaries who stayed in traditional fee-for-service Medicare and for those who enroll in a new Medicare Advantage plan. (Medicare Advantage plans would use preferred provider organizations, among other things, to provide integrated health benefits-- including prescription drug benefits-- to participants. These plans would replace Medicare+Choice plans.) Both traditional fee-for-service Medicare and Medicare Advantage plans would have to offer a "standard" prescription drug benefit or actuarially equivalent coverage.

The standard coverage monthly premium would be $41. The annual deductible would be $275, and beneficiaries would be required to pay 50 percent of their drug costs between $276 and the initial coverage limit of $4,500. The program would not cover a beneficiary's drug costs in excess of the initial coverage limit until her out-of-pocket drug costs for the year reached $3,700. After that, Medicare would pay 90 percent of the beneficiary's drug costs for the rest of the year. (Additional assistance would be available to beneficiaries with incomes below 160 percent of the poverty level.)

The House's Medicare Prescription Drug Benefit Proposal

The House bill (H.R. 2473, the "Medicare Prescription Drug and Modernization Act") likewise would guarantee a prescription drug benefit option to all Medicare beneficiaries, regardless of whether they stayed in traditional fee-for-service Medicare or enrolled in a new Medicare Advantage plan or Enhanced Fee-for-Service plan. (Enhanced Fee-for-Service plans could provide either fee-for-service or preferred provider coverage.)

As with the Senate bill, each type of plan would have to offer a "standard" prescription drug benefit or actuarially equivalent coverage. But the standard coverage under the House bill would be different in several ways, including--

• a monthly premium of $35 (instead of $41);

• an annual deductible of $250 (instead of $275);

• an initial coverage limit of $2,000 (instead of $4500);

• a 20 percent coinsurance rate (instead of 50 percent) for prescription drug costs between $251 and the initial coverage limit; and

• no cost-sharing requirements for catastrophic coverage.

Finally, the House bill would provide additional subsidies to beneficiaries with incomes below 150 percent of the poverty level.

Effect on Employers

A new Medicare prescription drug benefit could affect employers in a number of different ways. These range from possible payroll tax increases to higher overall prescription drug prices to adverse selection problems for retiree medical plans that continue to offer prescription drug benefits.

Medicare Payroll Taxes

According to the Congressional Budget Office, the Senate's proposed prescription drug benefit would increase direct spending by $408.1 billion over the next 10 years, but various other proposed changes to the Medicare program would offset about $18.3 billion of that increase. The CBO also estimates the bill would increase tax revenues by $21 billion over that same period.

Even without a comprehensive prescription drug benefit, the Medicare program is expected to begin running a deficit in 2012, and the Medicare trust fund is expected to be depleted by 2026. Unless Congress finds other ways to control Medicare spending or raise revenues, this new benefit could exacerbate Medicare's financial problems. As a result, Congress may have no alternative but to increase the Medicare payroll tax rate for employers and employees in the near future.

Prescription Drug Prices

A new Medicare prescription drug benefit also could make it more expensive for employers to provide prescription drug benefits to its non-Medicare eligible workforce. If and when 41 million Medicare beneficiaries become eligible for prescription drug coverage, the overall demand for prescription drugs almost certainly will increase. And higher demand generally leads to higher prices.

Additionally, the size of the Medicare program will give private plans that offer Medicare prescription drug benefits substantial leverage to negotiate favorable drug prices with pharmaceutical manufacturers, pharmacists, and others. Unfortunately, the drug industry might try to make up the difference by giving less favorable deals to other purchasers-- including employer plans.

Retiree Medical Plans

Finally, a new Medicare prescription drug benefit could create an adverse selection problem for retiree medical plans that continue offering a prescription drug benefit to Medicare eligible participants. If the retiree medical plan's drug benefit is more generous than the Medicare benefit, participants that need prescription drugs the most probably will prefer to stick with the employer plan. Participants that use fewer prescription drugs almost certainly will opt for the less expensive plan, which may be Medicare in these circumstances.

Both the House and Senate bills include provisions that would authorize Medicare to subsidize certain retiree medical plan sponsors for each Medicare eligible participant that chooses to stay in the plan rather than enroll in the Medicare prescription drug benefit. Such subsidies should help offset some of the costs associated with this adverse selection problem.

Of course, the availability of a Medicare prescription drug benefit could encourage some employers to drop prescription drug coverage from their retiree medical plans before adverse selection becomes a problem. In fact, the CBO estimates 37 percent of retirees with employer-sponsored coverage would lose it if the Senate Finance Committee bill were enacted. According to media reports, some Members of Congress are concerned about those estimates and are exploring ways to encourage or compel employers to continue providing prescription drug coverage to Medicare eligible retirees.

Even if their efforts prove unsuccessful, dropping prescription drug coverage for Medicare eligible retirees may be easier said than done for many employers. Some will have to deal with collective bargaining agreements. And even those that don't may face legal challenges and other problems if they try to eliminate a prescription drug benefit that is more generous than anything available through Medicare.

Outlook

The Senate Finance Committee approved S. 1 by a 16-5 margin on June 12, and the entire Senate started debating the bill last week. President Bush is pushing the Senate to pass a final bill by the end of this week.

The House Ways and Means Committee approved H.R. 2473 by a 25 to 15 margin on June 17. The House Energy and Commerce Committee, which also has jurisdiction over H.R. 2473, approved a version of the bill on June 19. Like the Senate, the House hopes to pass the bill sometime this week.

Although it seems likely the House will pass H.R. 2473, the outcome is by no means guaranteed in the Senate. Senate Democrats apparently are offering amendments to S. 1 that would raise its total ten-year cost over the $400 billion threshold established by the Congressional budget resolution. If any of those amendments are accepted, it may take 60 votes to stop debate on the bill and bring it to a final vote. Even though S. 1 enjoys some bipartisan support, it is not yet clear if there is enough bipartisan support to clear this substantial hurdle.

Watch Washinton Bulletin for future updates.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.