Guest Article

(From the February 28, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

More on Medicare Part D Actuarial Equivalence Discount for TrOOP

One of the significant changes in the final Medicare Part D regulations, 70 FR 4193 (January 28, 2005), permits the calculation of employer plan actuarial equivalence to recognize that the value of the standard Part D plan to the individual is reduced by the value of supplemental coverage provided by the employer. This reduction in value reflects the fact that any benefits paid by an employer wrap-around plan are not included in the participant's "true out-of-pocket" (TrOOP) calculation under the Part D plan. Under the standard Part D benefit, a Part D beneficiary cannot receive "catastrophic" drug coverage until the member has spent $3,600 (in 2006) out of his or her pocket. Any amounts paid by an employer plan or other insurance are not counted toward this $3,600 amount. Consequently, a Part D participant with employer supplemental coverage will have to generate more prescription drug expenses than a Part D participant without such coverage.

But according to Centers for Medicare and Medicaid Services (CMS) presentations, this reduction in the actuarial value of the Part D benefit calculation is not a theoretical reduction. The employer can recognize this reduction in the Part D plan's actuarial value only if the employer does, in fact, offer those retirees who enroll in Part D, rather than in the employer plan, a wrap around benefit.

Background

In the final Part D rules, there is a two-prong test for determining actuarial equivalence. Under the first prong, the actuarial gross value of the employer plan, using actual claims experience and demographic data of the employer plan's Part D eligible individuals, must be at least equal to the actuarial gross value of the Part D plan. The second prong is a "net value test" in which the values of both the employer plan and the Part D plan are reduced by premiums paid by the participant. For purposes of this second prong, the standard Part D plan value is also reduced by the value of supplemental coverage provided by the employer, i.e., by the effects of an employer wrap-around benefit on the participant's TrOOP calculation under the Part D plan.

Effect on Plans

Obviously, this interpretation will not affect those employer plans that do not need to include this "TrOOP effect reduction" to achieve actuarial equivalency in the net value test. But for those plans that would need to use the TrOOP effect reduction to pass the second prong net value test, the effect could be significant. One of the big advantages to using the subsidy approach is that the employer does not have to be part of the Medicare payment coordination and reimbursement process. But if the employer has to offer coordination with Part D in addition to its own Part D plan, much of this advantage will be lost. Various interest groups continue to discuss this interpretation with CMS. Washington Bulletin will keep you posted on the outcome.

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: Robert Davis 202.879.3094, Bart Massey 202.220.2104, Elizabeth Drigotas 202.879.4985, Diane McGowan 202.220.2077, Taina Edlund 202.879.4956, Martha Priddy Patterson 202.879.5634, Laura Edwards 202.879.4981, Tom Pevarnik 202.879.5314, Mike Haberman 202.879.4963, Tom Veal 312.946.2595, Stephen LaGarde 202.879.5608, Deborah Walker 202.879.4955, J.D. Lutz 202.879.5366 Copyright 2005, Deloitte.