Employers Could Receive ‘Windfall’ From Medicare Drug Coverage Subsidy Provision

In proposed regulations released Monday governing the new Medicare law, CMS expressed concern about the possibility of employers receiving "windfalls" from subsidies intended to encourage them to maintain retiree prescription drug coverage, the Wall Street Journal reports (Schultz/Francis, Wall Street Journal, 7/28).

Under the proposed rules, employers who retain private retiree drug coverage would receive annual subsidies from the federal government equal to 28% of eligible drug coverage costs -- ranging from $611 to $940 per covered retiree. To qualify for the subsidy, employers would have to demonstrate that their drug benefits are equal or superior to the Medicare drug benefit (California Healthline, 7/27).

Critics of the Medicare law have "blasted" the subsidy provision, noting that it allows employers to collect subsidies based not just on the cost to employers for providing the coverage, but also on retirees' expenses, according to the Journal (Wall Street Journal, 7/28). In announcing the rules on Monday, CMS Administrator Mark McClellan emphasized that CMS would only "provide [subsidies] to employers that pass [them] along to retirees. No windfalls" (California Healthline, 7/27).

However, in the "86 pages of technical language pertaining to employer subsidies deep within the more than 1,300" pages of proposed rules released Monday, CMS officials expressed concern that the law as written would enable employers to take advantage of the subsidy program, the Journal reports. In its draft regulations, CMS said that the subsidies paid to employers can include amounts paid by retirees for drug coverage, as well as money paid by family members and charitable organizations to assist retirees in their cost-sharing obligations. CMS said that as a result, "an employer theoretically could impose the full cost of the benefit package on the employee through employee premiums, and still be eligible for a subsidy payment." In addition, employers could receive a windfall by collecting more money from the federal government than they pay for retiree drug benefits, the draft regulations said. CMS included several recommendations to prevent such outcomes but also questioned the "adequacy of the legal basis underpinning" some of the approaches.

The draft regulations also said that the government will have difficulty overseeing the subsidy program. Under the rules, the government will subsidize only the cost of retiree benefits after employers have accounted for rebates and discounts negotiated with pharmaceutical companies. Administrative costs will not be subsidized, meaning that employers could "improper[ly] shif[t] ... costs in order to inappropriately maximize subsidy amounts" by asking pharmaceutical companies for discounts on administrative costs instead of on drugs, according to the regulations. As a result, retirees or taxpayers would be responsible for higher drug costs and employers would benefit. CMS also warned that some retirees could receive inadequate drug coverage because of a rule allowing employers to collect subsidies based on the "average" benefits offered; employers could offer some retirees more generous benefits than others, the Journal reports.

In the draft regulations, CMS officials asked for feedback on the methods for preventing employers from receiving windfalls and on their legal questions pertaining to those methods. Employers, consultants, unions and the public have until Oct. 4 to submit comments. An unnamed CMS spokesperson said that the Bush administration's intent with the final regulation is to prevent employers from receiving windfalls or subsidies based on amounts retirees pay themselves. "We're taking steps to ensure that there is no windfall," he said (Wall Street Journal, 7/28).