Large Companies Likely To Benefit From Subsidies in New Medicare Law for Retiree Prescription Drug Coverage

Large companies that provide health benefits to retired employees likely will "post big earnings gains" in 2003 or 2004 as a result of a provision in the new Medicare law (HR 1) that provides subsidies to companies with retiree prescription drug coverage to encourage them to retain such coverage, the Wall Street Journal reports. About 65% of large companies currently provide retiree health benefits, and some experts have raised concerns that the addition of a prescription drug benefit to Medicare would prompt such companies to drop prescription drug coverage for retirees. In response to the concerns, a provision in the Medicare law calls for the federal government in 2006 to begin to provide subsidies for companies to cover 28% of the cost of prescriptions that exceed $250 for each retiree; the companies can receive as much as $1,330 per retiree each year. The subsidies -- which the government cannot tax -- "will be significant" for companies with large numbers of retirees who qualify for Medicare because prescription drug costs account for a large part of their retiree health benefit costs, the Journal reports. In addition, a "little-noticed" provision in the Medicare law allows companies to collect subsidies based on both employer and employee contributions toward prescription drug costs. As a result, the subsidies in some cases could "erase the entire cost of prescription drugs for retirees, or even turn a profit from a drug plan," because the companies can shift more of the cost of prescription drug coverage to retirees and continue to receive the subsidies, according to the Journal. Benefits consultants have begun to develop employer-sponsored prescription drug coverage plans that will allow companies to shift more of the cost to retirees.

Rep. Bernie Sanders (I-Vt.), an opponent of the provision, said, "It is unconscionable for companies to receive billions of dollars in corporate welfare courtesy of the American taxpayer by slashing prescription drug coverage and retiree health benefits." However, Mark Beilke, director of employee benefits research at the benefits consulting company Milliman USA, said that most employers will not use the provision to reduce prescription drug coverage for retirees. The provision will "keep employers offering whatever it is they offer now and possibly more -- or offering plans where there aren't any" today, Beilke said (Schultz/Francis, Wall Street Journal, 1/8).