Employers, Retirees With Drug Coverage Question Implications of Medicare Drug Benefit

The marketing season has begun, with sellers of the new Medicare Part D drug benefit aggressively promoting plans to potential customers. There is potential for confusion, and experts are advising consumers to read and think carefully before making a choice on how to get the best coverage for their prescriptions.

The problem is particularly complex for retired Californians who already have some coverage from their former employers.

“It is really unclear what is best for you to do,” Margaret Kray — senior communications consultant for the Segal Company, an employee benefits consulting firm — said. “If you have good coverage with your previous employer and it is not terribly expensive, you are probably better off not doing anything.”

In other words, stay put and ignore advertisements for dozens of available prescription drug plans, which will be available under Part D. Medicare drug coverage will begin on Jan. 1, 2006.

Guaranteed Right To Get Part D

Medicare officials say beneficiaries — people ages 65 and older and people with disabilities of all ages — have the unquestioned right to enroll in a Part D program, even if they already are covered by their former employer. And this generates great possibilities for mistakes.

The Part D drug coverage, the biggest single expansion of Medicare since its creation in 1965, is a voluntary benefit. You can choose to enroll in a plan or simply do nothing and continue with the drug coverage you already have. There is a penalty for delay, however. For those who decide to enroll at a later date, after May 15, 2006, the monthly premium will increase by 1% of the average national premium for each month of delay.

Take the case of CalPERS — the giant conglomerate of California state and local government workers and retirees — which has 142,000 Medicare beneficiaries enrolled in its health plans. CalPERS will send notices advising them to disregard advertisements from insurers marketing Part D coverage.

“Presently, we’re telling enrollees that their coverage is equal or superior to what’s offered under Medicare Part D ,” Clark McKinley, CalPERS spokesperson, said.

There will be a wide range of offerings under the Medicare drug benefit, with various copayments and deductibles. The basic standard would be a charge of about $30 monthly — $25.41 on average in California — a $250 annual deductible and a 25% copay for the next $2,250 of prescriptions. After that, there is a “doughnut hole” with no coverage until the Medicare consumer has used $5,100 worth of pharmaceuticals for the year. (This means out-of-pocket spending totaling $3,600, including the initial premiums, copays and deductibles). Anything over $5,100 and the consumer pays just 5% of the costs.

The California market will have more than 100 different plans, with dramatic variations possible in premiums, copays and deductibles.

But there are exceptions. The 2003 Medicare law includes special financial help for low-income people. Individuals with income below $14,355 a year and couples with incomes below $19,245 will get their coverage virtually free, with extra financial help to pay the monthly premiums, deductibles and copays.

There are probably just a handful of such people in the CalPERS system — fewer than 2,000 have been identified so far — but CalPERS doesn’t collect data on income and isn’t sure if there may be others. Outside of CalPERS, there may be several hundred thousand individuals in California who would qualify for extra financial help.

Some Employers Eligible for Subsidies

The 2003 Medicare law was designed to encourage companies that provide health coverage for retirees to continue to provide this benefit. To get the subsidy, a firm needs to get an audited report that its drug coverage is at least as valuable in financial terms as the standard new Medicare benefit. If this is the case, the company will get a subsidy of $28 for every $100 it now spends for prescriptions for its retirees.

The subsidy is available for any employer, and larger employers with significant numbers of retirees are expected to go through the auditing and certification process to get the money.

CalPERS, for one, is planning to take advantage of the employer subsidy, which requires a complex set of record keeping and analysis to figure out how much was spent on each retiree and get 28% of that amount from the federal government. The subsidy will apply to actual drug costs between $251 and $5,000 a year. If someone had $3,000 in drug spending, for example, the federal subsidy would be $840.

But there’s a special wrinkle here: Who should get the cash that goes to employers? CalPERS members are a collection of state and local government agencies. The federal government “has preliminarily indicated that CalPERS is the plan sponsor and eligible for the subsidy,” according to a memo prepared by CalPERS staff for the board’s health benefits committee.

But CalPERS outside lawyers aren’t so sure. They say the money might have to go to the treasuries of the state of California and the local governments participating in the CalPERS system. The ownership of millions of dollars would be at stake.

The issue hasn’t been resolved. The only thing certain is that CalPERS plans to apply for the subsidy.

Confused enough already? Consider that CalPERS — the third-largest purchaser of health care in the U.S., after the federal government and General Motors — remains puzzled about exactly what is going to happen.

And CalPERS has a sophisticated staff and access to lots of high-priced experts. Think of the even greater confusion and uncertainty sure to develop in the executive offices of much smaller enterprises, firms whose leaders must decide whether to seek the federal subsidy. Before doing so, they will need certification from an actuary, a technical affirmation that the firm’s coverage is good enough to qualify for the subsidy.

Enrollment Starts Next Month

Open enrollment for the Medicare benefit for 2006 starts Nov. 15 and runs through May 15. There will be plenty of time for study among employers as well as Medicare beneficiaries.

“There are so many options and so many scenarios,” Kray of the Segal Co. said.

The only thing unequivocal, Kray said, is that Medicare beneficiaries who don’t have any coverage from their former employers, should enroll for this insurance, just as they would sign up for fire insurance on their homes. Although low-income retirees without drug coverage will get significant financial help from the new drug benefit, the government reports a modest response.

The Social Security Administration has mailed letters to more than 20 million people asking them to consider if they might be eligible for extra financial help in getting the drug coverage. Only three million have sent back the applications.

There is lots of money on the table, with the federal government expected to spend more than $700 billion over the next decade on the Medicare drug benefit. However, it’s not clear how many people will understand or enroll in the benefit and how much money will be left on the table, unclaimed.

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