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Business and Policy Areas
Business and Policy Areas

Final Rules Released for Medicare Part D Subsidy Eligibility

May 18, 2005

When the new Medicare legislation becomes effective on January 1, 2006, it will represent some of the most dramatic changes to the US health care system in decades. A key piece of this legislation offers employers, including colleges and universities that provide health-care benefits to their retirees the opportunity to receive a subsidy to offset prescription drug costs.

Under the Medicare Prescription Drug, Improvement & Modernization Act of 2003, employers that provide prescription drug coverage for retirees are eligible to receive a tax-free contribution from the government equal to 28 percent of the employers annual drug costs between $250 and $5,000 per beneficiary. To qualify for the subsidy, employers must prove that their prescription drug benefit is at least actuarially equivalent to the benefit that retirees receive from Medicare Part D (the component of Medicare through which prescription drug benefits will be offered). 

Employers must pass a two-pronged test to ensure that actuarial equivalence has been met:

1. “Gross” value test -- Based on claims data, employers must show that their expected amount of paid claims for Medicare beneficiaries covered by the sponsor must be at least equal to the expected amount of paid claims for the same beneficiaries under Part D. If the average expected costs of the employer’s plan exceed those of Part D, the employer’s plan is considered more valuable and therefore passes the first part of the test.

2. “Net” value test – To arrive at the net value of the sponsor’s retiree plan, subtract the expected retiree premium from the expected amount of paid claims under the sponsor’s prescription drug program. This net value must be at least equal to the net value of the Part D standard drug benefit.

If, after both calculations, the net cost of the employer plan is at least equal to Part D, then it would pass the two-prong test and the employer would be eligible to receive the Medicare subsidy.  Employers will have the option of receiving the subsidy monthly, quarterly, or annually. 

Employer retiree prescription drug plans are typically more generous than Medicare Part D, because a hole in Medicare does not cover prescription drug expenses between $2,250 and $3,600 – a gap rarely found in employer provided plans.

Beginning later this year, all employers that provide so-called “credible coverage” for any Medicare eligible employee and their beneficiaries must notify employees of that coverage.  If retirees are not aware that their employer-sponsored programs provide such coverage, they may sign up for the new Part D benefit, thereby rendering employers ineligible for the subsidy. The employer will risk losing their subsidy for 2006, and the retiree may face penalty fees of their own. 

The deadline for filing an actuarial attestation to receive the subsidy for 2006 is September 30, 2005.  The Centers for Medicare & Medicaid Services (CMS) plans to publish additional guidance on actuarial equivalence, the subsidy application process, and other issues at a later date.