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Seniors with retiree health plans face big decision on Medicare Part D

One of the biggest questions this fall facing retirees is whether they should maintain coverage under their former employer’s health plan (if they have coverage) or enroll in the new Medicare Part D prescription drug program.  The new Medicare Part D benefit rolling out January 1, 2006 is designed to keep existing retiree drug plans in operation rather than supplant them.

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The average premium for the standard plan is about $32 per month, although some are charging less than $20.

Individuals will have from November 15, 2005 until May 15, 2006 to sign up for Medicare Part D. If individuals wait until after May 15th to enroll they run the risk of being required to pay a penalty for coverage later on. The penalty amounts to 1% of the average national premium for every month of delayed enrollment. If a person waits to enroll until January, 2007 they will be required to pay a 7% penalty for each month enrolled thereafter in addition to their plan premium. However, there is no penalty for those who stay enrolled on a creditable plan and then switch to Medicare Part D with less than a 63 day break in coverage.

Seniors with or without creditable coverage health plans have plenty of time to investigate all possible avenues and avoid making quick decisions. If seniors have a creditable coverage health plan that provides good benefits for the prescriptions they need with minimal premium contribution, it may be best to maintain the status quo.

Medicare enrollees who receive drug coverage through their former employer should have recently received a letter informing them how their current plan compares to the federal plan. The statute required Medigap issuers whose policies include prescription drug coverage to have sent a special notice, before November 15, 2005, to their policyholders. One part of this notice will inform policyholders whether their drug coverage is or is not creditable coverage. If the letter states that the plan is “creditable” (meets Medicare standards) you don’t need Part D if you’re happy with the plan. If you join anyway, about half the plans will drop your retiree coverage, including the medical insurance too, says health-care expert Kathryn Bakich of the Segal Company.

If your former company decides to drop its drug plan then you’ll need to investigate the best alternatives for you under Medicare Advantage, Medigap plans and stand-alone Medicare Part D plans.

Here is the standard coverage that all plans must meet or exceed to participate in Medicare Part D:

  • The average premium for the standard plan is about $32 per month.
  • The recipient pays the first $250 (deductible) of drug costs.
  • The Medicare program then covers 75 percent of the drug costs up to $2,250 in total drug spending.
  • The recipient then is responsible for 100 percent of the costs until out-of-pocket expenses reach $5,100, a gap in coverage often referred to as the ‘doughnut hole.’
  • After $5,100 of drug costs Medicare pays 95%

Thus enrollees pay $3,600 toward the first $5,100 of drug costs they incur in 2006 for covered drugs under the plan. This does not include the monthly premium.

All Medicare enrollees must complete and submit a form on Medicare Part D, even if they have drug coverage through an employer, union or retiree plan. These individuals must complete the form to formally decline the Part D coverage if they decide that their prescription drug coverage is at least as good as the Medicare "Part D" prescription coverage.

If an individual does not enroll in Medicare Part D prescription drug coverage when they are initially eligible, they may pay a higher premium of 1% for each month that elapses before they are enrolled.

If an individual does not enroll in Medicare Part D prescription drug coverage when they are initially eligible, they may pay a higher premium of 1% for each month that elapses before they are enrolled. However, months when the individual had other "creditable" coverage do not count in calculating the premium increase as long as the individual does not have a 63-day break in creditable coverage. This is why the rules require employers to give notices.

The new program provides a 28-percent subsidy to employers for drug spending by eligible beneficiaries in the range between $250 and $5,000, but only if the retiree plan matches or exceeds the new Medicare drug benefit.

The rules contain a simple method employers can use to determine if their prescription coverage is at least as good as Medicare Part D prescription coverage. Coverage will be considered creditable if it satisfies each of these elements:

  • Coverage is for brand and generic prescriptions
  • Participants have reasonable access to retail providers; and
  • The plan is designed to pay on average 60% of participants' prescription drug expenses, and one of the following is met:
    • There is no annual benefit maximum on the prescription coverage, or a maximum annual benefit is at least $25,000, or
    • The subsidy is paid even if firms offload some (but not all) of their costs onto retirees through increased deductibles and copayments.

Although firms are likely to reduce the value of their retiree drug coverage somewhat, fewer firms will drop that coverage completely. The Congressional Budget Office projects that the subsidy will cost taxpayers $81 billion in the first decade, but that some 2.7 million Medicare beneficiaries will nonetheless lose their retiree drug coverage as a consequence of the new program.

Employers retiree health plans survey results

A Kaiser Family Foundation survey found a steep decline in the share of employers who offer retiree health benefits. Between 1988 and 2004, that share declined from 68 percent to 34 percent. Yet in 2005, one in three people on Medicare still rely on employers for supplemental coverage, and it has remained at that level for a relatively long period of time.

Even though there has been an erosion in the share of employers offering coverage, those decisions have mainly affected active workers (future retirees) instead of current retirees. That’s not to say that current retirees are insulated from rising health care costs, but they do seem to be shielded from outright terminations unless they’re associated with distressed industries.

A Kaiser Permanente/Hewitt 2004 Survey found that the majority of large employers surveyed– 69 percent – said their firm’s current drug benefit is more generous than the standard drug benefit. When asked about their likely course of action in the future, more than half thought they would be likely to continue their drug benefit and apply for the subsidy when the Medicare benefit goes into effect. Only 8 percent said they would discontinue their drug coverage altogether.

Of course, all of this could change as employers gain knowledge about and experience with the Medicare benefit. The same could be said for a retiree’s decision-making as well.

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