Guest Article

(From the August 2, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

CMS Releases Proposed Retiree Drug Benefit Rules

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Proposed rules implementing the new Medicare Part D prescription drug benefit offer employer retiree medical plan sponsors monthly subsidy payments. But these proposed rules have few details on issues such as calculating the important concept of "actuarial equivalence" in their more than 1,300 pages. Certainly, these proposed rules have spawned the best new acronym in a long time-- TrOOP-- true out-of-pocket costs, which refers to the total annual Medicare Part D $3,600 amount a participant must spend for prescription drugs before he or she becomes eligible for additional assistance for catastrophic drug costs. The TrOOP definition, discussed below, which has the effect of expanding the period of noncoverage by Part D, may well change the design of employer-provided retiree prescription drug plans, more than any other single change made by the Medicare Modernization Act (MMA).

The proposed regulations are available at www.cms.hhs.gov/medicarereform/. Page numbers referenced in this article are to the pdf version available at that site. The following discussion focuses only on the issues of greatest concern to employer retiree plans. And it does not address the Medicare Advantage plan regulations which were released at the same time.

Four Alternatives Available to Employers

The Medicare Part D proposed rules outline four alternatives available to employers to encourage employers to continue offering retiree prescription drug coverage. These include employer choices of:

the explicit statutory language providing employers with a 28 percent subsidy of the permitted drug costs of the employer's retiree health plan for each employer plan participant eligible for, but not enrolled in, Medicare Part D; the statutory authority to use the employer plan as a wrap around to Part D; simply subsidizing the monthly beneficiary premium for any Medicare Part D prescription drug plan (PDP) or Medicare Advantage-Prescription Drug (MA-PD) plan chosen by the retiree or his or her dependent; or providing a prescription drug plan or MA-PD plan either under contract with a PDP sponsor or Medicare Advantage (MA) organization or by directly sponsoring a PDP or an MA-PD (P. 384) plan.

Obviously, most employers still have a fifth option, dropping retiree prescription drug coverage or medical coverage entirely, but CMS does not address this option directly. However, there are also employers who may be bound by collectively bargained agreements or other contractual or legal agreements to continue their plans.

28% Subsidy Option

Retiree prescription drug plans that are actuarially equivalent or better than the Part D benefit are eligible for a subsidy for each plan participant who could enroll in Medicare Part D or an MA- PD plan but instead is covered under the employer plan. The subsidy is 28% of the amount between $250 and $5,000 per participant based on gross cost of the drugs paid by both the employer and by or on behalf of the participant. "Gross costs" is defined to include dispensing fees and is calculated net of discounts and rebates. (CMS notes its concern about and intention to closely monitor these rebates, discounts, etc.) (P. 611) The subsidy would be based on calendar year amounts. (P. 608) CMS acknowledges it has four goals for the employer subsidy program - maximizing the number of retirees covered, avoiding windfalls, minimizing administrative burdens for all affected parties, and minimizing subsidy costs to the government.

Subsidy Calculation-- Allowable Costs

The subsidy calculation is complicated by the fact neither the statute, nor the proposed rules, define some of the most basic terms involved in calculating the subsidy. For example, the MMA is silent on the definition of "dispensing fees," one of the critical elements in determining the "allowable retiree costs" on which the 28 percent subsidy will be based. However, the preamble to the proposed rules offers three alternative definitions of dispensing fees-- (1) the cost of transferring the drug from pharmacy to beneficiary, (2) expenses of option 1, plus any expenses required to effectively administer the drug, or (3) expenses of option 2 plus ongoing services needed to administer the drug, such as skilled nursing visits or pharmacy monitoring. CMS asks for comments on these issues. (Pp. 91-94)

Actuarial Equivalence

Actuarial equivalence is a critical concept for the administration of the new law and the MMA requires the CMS to define "actuarial equivalence" standards for several different purposes under the Act. The MMA itself does not define "actuarial equivalence" for any of those purposes. The following discussion will focus on the definition of "actuarial equivalence" with respect to employer plans qualifying for the 28 percent subsidy offered under the new SSA sec. 1860D- 22(a), created by the MMA. For this purpose, the plan sponsor must submit an attestation of the plan's actuarial equivalence once a year, 90 days prior to the calendar or plan year, and prior to any material changes to the plan. The actuarial attestation must be conducted according to CMS actuarial standards and certified by a member of the American Academy of Actuaries. The definition of actuarial equivalence will affect each of the above cited CMS goals for the employer subsidy program. The preamble does indicate CMS intends to use the COBRA definition of plan, that presumes all group health plans are one plan unless the plan documents clearly show such plans are separate, when calculating actuarial equivalency. Beyond that the proposed regulations do not include the CMS actuarial standards, but CMS promises to provide future information on the standards. Currently CMS is considering the following guidelines:

• Specifying, as either recommended or required, data sources, methodologies, assumptions, and other techniques in accordance with generally accepted actuarial principles; requiring that the actuarial attestation be provided, verifying that the attestation was signed by a qualified actuary, selecting a random sample of attestations to provide quality control review, and including a detailed review of the actuarial attestation in the auditing process.
• Allowing retiree plan sponsors to use qualified outside actuaries in their processes, defining a qualified actuary as a member of the American Academy of Actuaries, because such members must meet not only educational and experience requirements, but also a code of professional conduct and standards of practice and are subject to the Academy's disciplinary action for violations of the code and standards. (Pp. 616-620)

Payment Methodology

CMS proposes to pay the subsidy on a monthly basis. By the 15th of the following month, plan sponsors are to submit the amount by which the gross drug spending limit exceeded the cost threshold. CMS would pay the plan sponsor that amount by the end of that month. Not later than 45 days after the calendar year, the plan sponsor would submit a final reconciliation (but for outstanding rebates), which would require further payments by CMS or refunds by the plan sponsor. Monthly payments also could be adjusted as the plan received rebates or chargebacks for past periods. The preamble also discusses alternative payment procedures and seeks comments on each methodology. CMS acknowledges, regardless of the payment approach, the plan sponsor will need to submit substantial data on each qualified plan participant.

Wraparound Plan Option

In discussing wraparound plans and the very important definition of "incurred costs" in determining the retiree's eligibility for catastrophic coverage, CMS's proposed rules flatly state: We have defined the term "insurance or otherwise" consistent with our policy goal of reducing incentives for current employers, other insurers, and government programs to reduce their current levels of coverage and replace that coverage with Part D wrap-around benefits. The use of the term "insurance or otherwise" in section 1860D-2(b)(4)(C)(ii) of the Act suggests that the Congress understood that programs other than insurance programs would be helping beneficiaries pay for covered Part D drugs. (P. 108) CMS refers to "true out-of-pocket"-- TrOOP-- costs as the measure for "incurred costs."

"Incurred Costs" or TrOOPs for Meeting the Catastrophic Limit Unfortunately, CMS's policy appears to discount the fact many employer retiree medical plans use wraparound coverage today. Employer drug plan coverage will not count as "incurred costs" for purposes of meeting the participant's $3,600 out-of-pocket limit required to trigger catastrophic coverage enabling participants to again begin receiving drugs under Medicare Part D. And CMS warns:

we note that any arrangements pursuant to which a charitable organization pays a Medicare beneficiary's cost-sharing obligations must comply with the Federal fraud and abuse laws, including the anti-kickback statute, section 1128B(b) of the Act, as well as the civil monetary penalty provision at section 1128A(a)(5) of the Act. We are considering whether assistance in paying enrollees' out-of-pocket cost-sharing obligations provided through prescription drug patient assistance program sponsored by pharmaceutical manufacturers would be allowed under the aforementioned Federal fraud and abuse laws. (P. 77)

The good news for the future is the fact CMS is inclined to treat any payments from HSAs as part of the Part D participant's incurred costs, apparently regardless of how the HSA was originally funded. Consequently, individuals currently funding HSAs for use in retirement would not be penalized for saving those amounts. CMS also seeks comments on the treatment of amounts in flexible spending accounts and MSAs. The definition of "incurred costs" would also include contributions by "persons" and charitable institutions, not affiliated with employers or other payors. (P. 10)

Difficulties with the TrOOPs

CMS is also to coordinate the Part D plan with state pharmaceutical assistance programs (SPAPs), Medicaid, the FEHBP, military plans, and occasionally, other Part D plans. Elements of this coordination would include, in addition to premium payments, file sharing, payment processing and other processes. This coordination will be especially critical for determining TrOOP. (Pp. 392-393) But at best the authority for tracking TrOOP costs in employer wraparound plans is unclear. (P. 422) CMS has proposed two options for tracking these costs: (1) leaving it solely to the PDPs and MA-PDs or (2) selecting a TrOOP facilitation contractor to act as a single source to receive data from primary and secondary payors. Payors would be required to send the information to the TrOOP facilitator, but CMS acknowledges such reporting probably will have to be voluntary. While CMS would prefer a system that coordinates adjudication of claims in real time, they do not believe it can be created by January 1, 2006.

Option Four-- The Employer's Own PDP or MA-PD

In discussing the employer's option to provide a prescription drug plan or an MA-PD plan, either directly or under contract with a PDP sponsor or an MA organization, CMS notes the plan could consist of enhanced alternative coverage (defined in the regulations) or drug coverage that is more generous than that offered under the standard prescription drug coverage under Part D. As with other PDP or MA-PD arrangements, Medicare in effect subsidizes the cost of this coverage through direct and reinsurance subsidies as calculated in the proposed regulations. At the option of the employer, it also may elect to subsidize the monthly beneficiary premium. These arrangements would be similar to those many employers already have with Medicare Advantage plans.

While the CMS proposals do not specifically address the issue, the employer-created plan presumably also could encompass "alternative prescription drug plans" provided for by MMA in a new Social Security Act sec. 1860D-2(c)(2). Additionally, the "alternative plans" could offer "basic alternative coverage" or "enhanced alternative coverage." (Pp. 125-127) (However, employers, like other PDP sponsors offering alternative coverage, also would have to offer a "basic" plan as well.)

Employer Waivers

As another option, employers potentially could turn their prescription drug plan into a managed prescription drug plan that qualifies under Medicare Part D rules. The employer could manage the plan directly or contract with PDP or MA-PD plans. The employer operated plan described in option four, once qualified as a Medicare Part D plan, could then seek waivers under the special "waiver authority" patterned after the waiver authority granted for Medicare Advantage plan designs.

However, in the proposed rules, CMS has already stated there are waiver approaches "we specifically would not permit related to employer group retiree coverage under the authority provided in section 1860D-22(b) of the Act." Waivers the CMS specifically stated it will not permit include the following:

• One in which the statutorily defined Part D premium could be different for employees or retirees than it is for individuals enrolled in the same PDP plan. Thus, the combined Part D premium contributed by the employee or retiree and the employer group would need to be identical to the premium charged to an individual enrolled in the same PDP plan.
• A waiver that had the effect of changing the definition (in Subpart C of the proposed rules) for incurred costs (which are defined for purposes of calculating the true out-of- pocket threshold -- TrOOP).
• A waiver that would increase the premium subsidy.

CMS also notes that waiver authority applies only to PDP plans authorized and approved by CMS under Prop. Reg. sec. 423.272 and does not apply to wraparound plans. Consequently, CMS would have not authority to consider a waiver for wraparound plans. (Pp. 380-381)

Part D Plans and Coordination with Other Drug Plans

Under the MMA, retiree drug plans would also be subject to Medicare Secondary Payor rules to the extent the covered individual is still in the work force or otherwise covered by insurance other than Medigap policies. Consequently, the PDP may charge both the group health plan and the individual for any drugs the PDP provided. Any costs the covered individual incurred for Part D drugs would not be considered "incurred costs" for purposes of reaching the annual deductible or the out-of-pocket threshold under Part D's payment formula. (P. 389)

Late Enrollment and Creditable Coverage

According to CMS Deputy Administrator Leslie Norwalk, one of the primary and hottest topics for questions in CMS's public meetings is the late penalty imposed on Part D premiums for eligible individuals who do not enroll in Part D when first eligible. This penalty will be the greater of the amount CMS finds is actuarially sound for each uncovered month or 1 percent of the Part D premium for each uncovered month. (P. 60) This penalty would be reduced for each month the individual had "creditable coverage" during the period he or she was eligible for, but not covered by, Part D. Consequently the determination and communication of "creditable coverage" is a significant item among retirees.

For determining creditable coverage, CMS would consider the "actuarial value" of the participant's previous plan to be the value of the plan "to the average individual under the plan, as opposed to the sponsor of the plan." (P. 77) Thus for purposes of determining creditable coverage, CMS proposes to weigh the actuarial value of the alternative coverage by means of a single test applied to all coverage. That test would treat the former coverage as actuarially equivalent if the expected plan payout on average under the former coverage is at least equal to the expected plan payout under the standard benefit. Sponsors of group health plans must determine the actuarial equivalency of each group health plan and compare the plan to the standard coverage. If, on average, the actuarial value of enrollee drug coverage under the plan as a whole is at least equal to the actuarial value of standard prescription drug coverage under Part D, the enrollee would be determined to have creditable coverage and thereby avoid the premium penalty. (This approach also is used in the Subpart R payment methodology concerning payments to sponsors of retiree prescription drug plans.)

Also beneficiaries should be apprised of any subsequent changes in the creditable status of his or her coverage. Given that beneficiaries will usually have a limited time in which to make decisions about their Part D coverage without facing a penalty, the notice of creditable status also should be provided in a timely and conspicuous manner.

Creditable Coverage Notices

Under the proposed rules any entity seeking to offer creditable prescription drug coverage must attest to its actuarial equivalence (or non-equivalence) in their notice to Medicare beneficiaries and in a submission to CMS, and must maintain documentation of the actuarial analysis and assumptions supporting the attestation. CMS does not require its approval of the analysis, but would require that it be submitted to CMS and made available to participants upon request. CMS intends to describe the process for providing this disclosure, including guidance on the content, placement, and timing of the disclosure.

CMS is concerned about the potential administrative burden imposed by these creditable coverage notice requirements and is soliciting comments on the format, placement, and timing of such notices. CMS is considering several approaches, including incorporating the required disclosure into materials such as SPDs that plan sponsors routinely distribute to Part D eligible beneficiaries. CMS is considering standard language for the inserts. CMS also seeks comments regarding the types of materials that should contain the notices and ways to ensure that the notice is conspicuous and readily identified by recipients, particularly where the coverage is not creditable. Alternatively, a plan administrator could issue a separate notice to each Part D eligible enrollee. Because beneficiaries are subject to financial penalties for the failure to maintain creditable coverage when they enroll in Part D, CMS indicates a separate notice may better inform beneficiaries and ensure that they take appropriate action to avoid such penalties. (Pp. 79-80)

CMS proposes that the notices be provided at least on the first Annual Coordinated Enrollment Period for Part D, which begins November 15, 2005, to ensure that beneficiaries have this information when making decisions regarding their Part D coverage or at the end of the first Part D initial enrollment periods and the annual coordinated election period, both of which end May 15, 2006. Thereafter beneficiaries should be informed about any change in the creditable status of existing coverage before such a change becomes effective so that they have sufficient time to decide whether to obtain Part D coverage. The notice should also be provided at the request of the beneficiary. CMS also must be informed of creditable coverage status. CMS seeks comments on whether it would be a significant administrative burden for group health plans and other sponsors to include in disclosures an indication of the value of their drug benefit, the total amount of the annual premium for their drug benefit, and the amount of the annual drug benefit premium that the beneficiary will be required to pay.

The statute also allows individuals who did not receive correct information about his or her prescription drug creditable coverage to apply to CMS to have such coverage treated as creditable coverage to avoid the late penalty. CMS also seeks comments on this procedure. (Pp. 77-83)

Data Collection

CMS concedes the Medicare Part D program will require significant data exchanges among employers, other insurers, Part D plans, pharmacy benefit managers, and drug suppliers -- regardless of whether the Part D participant is part of an employer plan. CMS seeks input on the most efficient method for gathering and using such data. Also, CMS recognizes-- as Congress did not-- that existing federal agencies such as the Department of Labor or the IRS do not have lists of all the individuals covered by retiree medical plans. Certainly, the plan sponsors seeking the 28 percent rebates will have significant data submission requirements and CMS intends to use those to cross match with any Part D or MA-PD enrollees. CMS would require each plan sponsor to submit cost data for each of their qualifying covered retirees, including information about the period of time when these costs were incurred. CMS is considering three alternatives relating to the level of detail of this cost data: 1) submission of aggregate allowable costs data, 2) submission of beneficiary-level total allowable costs data, and 3) submission of actual claims data. Under the aggregate data submission, plan sponsors would be required to maintain the individual data for confirmation. (Pp. 995-997)

Other Items

The proposed rules would require that alternatives to the catastrophic cost sharing structure of the higher of 5 percent coinsurance or a $2 generic/$5 brand copayment also be actuarially equivalent to that cost structure. Also such cost structures would be reviewed to prevent discrimination against certain Part D beneficiaries. (P. 121)

For PDP plans, annual enrollment would begin November 15, 2005, and end on May 15, 2006. Thereafter enrollment periods would run from November 15 to December 31 for coverage beginning on the following January 1. Special enrollment periods (SEPs) are available for Deloitte Global Employer Rewards Washington Bulletin August 2, 2004 involuntary losses of coverage, including employer coverage. CMS also proposes to permit other SEPs comparable to Medicare SEPs.

PDP enrollments are "evergreen"-- the participant need not affirmatively enroll each year. However, CMS would permit a participant's involuntary disenrollment for nonpayment or disruptive behavior and require disenrollment at the participant's death, loss of Part A or B coverage, misrepresentation of other drug reimbursements, or moving out of the PDP's region. CMS seeks comment on whether moving out of region should be a required disenrollment event. (Pp. 57-58)

Next Steps

Given the length and complexity of the proposed regulations, an in-depth analysis of them will take more time, which neither CMS nor retiree plans may have. Comments on the rule will be due 60 days after publication in the Federal Register, currently scheduled to be published on Tuesday, August 3.

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The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Tom Brisendine 202.879.5365, Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955. Copyright 2004, Deloitte.

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