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Guest Article

(From the April 18, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Medicare Part D Actuarial Guidance

The Centers for Medicare and Medicaid Services' (CMS) "Medicare Part D Guidance on the Actuarial Equivalence Standard for the Retiree Drug Subsidy," dated April 7, 2005, provides additional guidance on how to calculate the "actuarial equivalence" of employer plans in comparison to the Medicare Part D drug benefit. This new guidance is intended to clarify and supplement guidance the CMS published in final regulations earlier this year.

Spreadsheet and Sample Calculations

Perhaps the most valuable part of the guidance is CMS's accompanying Excel spreadsheet with sample calculations for establishing actuarial equivalence. This includes an "AE Test" tab to demonstrate the mathematics, and the formulas are stated in the spreadsheet. The spreadsheet is available at www.cms.hhs.gov/medicarereform/pdbma/employer.asp. CMS has not indicated whether it will accept comments on or update the spreadsheet.

"Clarifications" to the Regulations

The new guidance covers several points.

An employer plan, offering a drug benefit plan and also offering a supplemental plan (such as a wrap around plan to retirees who enroll in Medicare Part D), may recognize the reduction in the value of the Part D benefit caused by the effect of the wrap around benefits. Because amounts paid by insurance, including employer-provided insurance for retirees who enroll in Part D, will not count towards the threshold spending required before individuals become eligible for Part D catastrophic coverage, such retirees may pay "more" than those retirees covered only by Medicare Part D. Consequently, these employer plans covering retirees not enrolled in Part D can take into account the resulting reduced value of the Part D coverage (the "Medicare Supplemental Adjustment") when comparing the Part D net value to the employer plan net value. But this Medicare Supplemental Adjustment can only be included in calculations if, in fact, the employer actually supplements Part D for those retirees enrolled in Part D.
In the second prong of the actuarial equivalence test, when comparing the net value of Part D, the national average Part D beneficiary premium can be used to determine the beneficiary premium or the beneficiary premium can be calculated by multiplying the gross value of Part D by 25.5 percent.
When calculating the net value, plans do not need to average in plan beneficiaries who are eligible for reduced premiums (or enhanced benefits) through low income subsidies.
Benefit options include varying plan designs, categories of benefits or cost sharing arrangements that occur within a group health plan. In testing, submitting and attesting to actuarial equivalence when applying the net value test, the sponsor (working with the actuary) can submit all options meeting the gross value test or one or more of those options. But if the sponsor combines two or more options, the sponsor cannot claim the subsidy for those options excluded from the net value calculations, even if those options meet the gross test.
The guidance seems to give the actuary more freedom and more responsibility by noting it will be within the actuary's discretion to determine the applicability of plan experience across benefit options when testing options separately or aggregating options for testing. The actuary may determine that aggregate plan experience is not relevant to a specific option or may decide to use aggregate experience for selected options, if experience or data are not available or unreliable for a specific option.

Plans with Integrated Health and Drug Benefits

The guidance indicates that under the final regulations, sponsors' health plans that cover both health and drug benefits (integrated benefits) with a single premium "have complete discretion and flexibility to allocate any portion of the premium to the drug coverage for the purpose of the net value test of actuarial attestation." But the guidance goes on to state "an actuary must be able to reasonably estimate and allocate the cost-sharing provisions and cost of benefits for prescription drugs." The guidance also requires that the allocation be based on actual plan costs or projected costs. Based on this drug expense allocation, the drug coverage must pass the gross value test. This language considerably narrows the actuary's "discretion and flexibility" in determining how much of the blended premium should be allocated to drug benefits and how much to health benefits. Based on this new guidance language, the attesting actuary should be prepared to justify the allocation based on actual plan data or suitable proxies for such data.

Normative Data Sets

As promised in the CMS's preamble to the final regulations, this guidance also recognizes that plans may not have reliable plan data for comparison with the Part D plan. The actuary determines whether the plan has such data. If the actuary concludes the plan does not have "reasonable and credible" plan experience, the calculations should be based on "reasonable actuarial methods," taking into account the demographics and other risk factors of the group. CMS describes two possible "normative data sets" to use in calculations:

The accepted normative data set tools of the industry provided that the data reflect the demographics and other risk characteristics of the group and are appropriately segregated; or
The vendor "block of business" data set.

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

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.