Effect of Medicare Part D on Employer-Sponsored Health Plans
The Medicare Prescription Drug, Improvement and Modernization Act which was enacted into law on December 8, 2003 created a new prescription drug benefit (Medicare Part D) which will become effective on January 1, 2006. Medicare Part D will cover the costs associated with obtaining outpatient prescription drugs and associated supplies for administering such drugs. Persons who are eligible to receive benefits under Medicare Part A or who are enrolled in Medicare Part B (i.e., due to age, disability or end stage renal disease) will also be eligible to enroll and receive benefits under Medicare Part D, regardless of whether such individuals also receive prescription drug coverage under an employer-sponsored health plan. Individuals who are eligible to receive benefits under Medicare Part D are initially required to enroll for such benefits during the period from November 15, 2005 through May 15, 2006 and from November 1 through December 31 of each subsequent year. Thus, the initial enrollment period for Medicare Part D benefits beginning in 2006 will begin on November 15, 2005.
As with Medicare Part B, there is a penalty applicable to individuals who are eligible to receive Medicare Part D benefits who fail to enroll in Medicare Part D in a timely manner. If an individual who becomes eligible to receive Medicare Part D benefits does not timely enroll for Medicare Part D benefits, he or she will have to pay a higher premium for such benefits if he or she chooses to subsequently enroll for Medicare Part D benefits. However, an exception applies if the eligible individual continues to work and is covered by an employer-sponsored health plan which provides "creditable" prescription drug coverage to such individual. Therefore, it is important for an individual who is Medicare Part D-eligible and who is covered under an employer-sponsored health plan to be notified as to whether the plan provides them with "creditable" prescription drug coverage.
In light of this issue, the Centers for Medicare and Medicaid Services ("CMS") has issued regulations which provide rules to determine whether prescription drug coverage under employer-sponsored health plans is "creditable" coverage for the purposes of Medicare Part D. Under these regulations, CMS provides various methods to determine whether prescription drug coverage under employer-sponsored health plans is "creditable" coverage. Generally under the CMS regulations, coverage under an employer-sponsored health plan is deemed to be "creditable" if the actuarial value of the prescription drug benefits provided under the plan equal or exceed the actuarial value of the standard Medicare Part D benefits under generally accepted actuarial practices. In order to comply with this method, an employer will be required to hire an actuary to determine whether the amount of expected paid claims under the employer-sponsored health plan for prescription drug benefits will be at least as much as the expected paid claims under Medicare Part D for the same individuals.
Employers who plan to apply for a special tax subsidy for continuing to offer prescription drug benefits for retirees must use the method for determining whether their plan provides "creditable" coverage as described above. However, plan sponsors which do not intend to apply for such subsidies or which do not provide separate prescription drug benefits for retirees will be allowed to use a simpler method for determining if their prescription drug coverage is "creditable" coverage. Under this simplified method, an employer-sponsored health plan will be deemed to provide "creditable" prescription drug coverage if coverage is provided for both brand name and generic drugs, participants will have reasonable access to retail drug providers, the plan is designed to pay on average 60% of the participant's prescription drug expenses and meets one of the "maximum benefits" tests. These "maximum benefits" tests are met depending upon whether the prescription drug benefits are provided on a stand-alone basis or are "integrated" with other health benefits (i.e., provided under a plan with health/dental benefits in addition to prescription drug coverage). If the prescription drug benefits are provided under a separate health plan, the "maximum benefits" test is met if either (i) the plan is expected under actuarial principles to provide at least $2,000 in benefits for each participant who is eligible for Medicare Part D benefits or (ii) has an annual maximum prescription drug benefit limit of not less than $25,000. If the prescription drug benefits are "integrated" with other health benefits under the plan, the "maximum benefits" test is met if (x) the plan has a deductible of not more than $250, (y) has an annual maximum benefit limit of not less than $25,000 and (z) has a lifetime maximum benefit limit of not less than $1,000,000.
The CMS regulations also specify the notification requirements for participants who are eligible to receive Medicare Part D benefits. These rules require that the notice include three items: (i) an explanation of the meaning of "creditable" prescription drug coverage, (ii) a statement of whether the employer-sponsored health plan meets these requirements and (iii) an explanation that the failure to enroll in Medicare Part D when the employer-sponsored coverage is not "creditable" may require the plan participant to pay a higher premium for Medicare Part D coverage. CMS also recommends that this notice explain the rights of employees, their spouses or dependents to receive a "creditable coverage notice" and when the employer sponsoring the plan is required to send such notices, a discussion of the plan participant's options when he or she becomes eligible to receive Medicare Part D benefits and whether he or she can continue to receive prescription drug benefits under the plan once eligible to receive or enroll for Medicare Part D benefits, an explanation of the circumstances under which he or she could re-enroll in the employer-sponsored prescription drug coverage if he or she drops such coverage to enroll in Medicare Part D and a disclosure of whether the plan participant will be eligible to receive other health coverage under the plan if he or she elects to receive Medicare Part D benefits rather than employer-provided prescription drug coverage.
Under the CMS regulations, this "creditable coverage notice" must be sent by the employer sponsoring a plan which provides prescription drug coverage to employees, their spouses and dependents who are eligible to receive Medicare Part D benefits prior to the individuals' "initial enrollment period" (i.e., November 15), prior to the employee's initial enrollment in the employer-sponsored health plan which provides prescription drug benefits, at any time when the plan's prescription drug benefits cease to be "creditable" coverage or upon a request by any plan participant. The "creditable coverage notice" can be sent via regular mail or via electronic means in, only very limited circumstances. However, the plan sponsor is only required to send a single notice to the plan participant who is eligible for Medicare Part D benefits and any "medicare-eligible beneficiaries" of such participant unless the employer knows certain of the "medicare-eligible beneficiaries" live at a different address. In lieu of sending a separate notice, the CMS regulations provide that the notice requirements can be met by incorporating the required notice provisions into other plan-related documents (i.e., a summary plan description, enrollment materials, etc.) as long as the provisions relating to Medicare Part D are "prominently and conspicuously" identified within such other plan communications.
Although the regulations issued by CMS do not provide any penalties for an employer's failure to notify the plan participants who are eligible to receive Medicare Part D benefits, general fiduciary concepts under ERISA and common law would dictate that employers that sponsor health plans which cover individuals who may qualify for Medicare Part D benefits should be required to notify their plan participants whether the prescription drug coverage under the plan would be considered "creditable" coverage under Medicare Part D and the CMS regulations. Therefore, we recommend that any employer which sponsors a welfare benefit plan which provides prescription drug benefits to its employees comply with the notice requirements under the CMS regulations. Since most employers may not currently be tracking which employees, their spouses or dependents are currently eligible for Medicare Part D benefits, we would suggest that an initial notice regarding Medicare Part D benefits be sent to all of the participants and their spouses and dependents in plans which provide prescription drug benefits before November 15, 2005 which is the beginning of the initial Medicare Part D enrollment period.
The CMS Regulations also contained a requirement that employer-sponsored health plans and certain other entities which provide prescription drug coverage notify CMS whether such coverage is "creditable" or "non-creditable" prescription drug coverage. Although the regulations did not describe how to comply with this notice requirement, CMS was directed to provide plan sponsors with additional information concerning these additional disclosure requirements.
In January, 2006, CMS published guidance on its website which provided information on the form, manner and timing for prescription drug coverage sponsors to provide "creditable coverage" disclosures to CMS as required by the regulations. This guidance provides that the required notices to CMS must be provided electronically by using the form available on the CMS website at http://www.cms.hhs.gov/creditablecoverage. This form requires some basic information about the plan sponsor, including the name, address and EIN# of the entity providing the prescription drug coverage (but not the name of the insurance carrier or TPA of the plan), the type of prescription drug coverage, estimates of the number of participants eligible for Medicare Part D benefits and dates upon which participants received creditable coverage notices from the plan sponsor. The guidance provides that plans which provide multiple benefit options which provide prescription drug coverage (i.e., PPOs, HMOs, etc.) can aggregate the data for each benefit option and submit one form to CMS. However, entities which sponsor more than one plan that provides prescription drug coverage to participants must submit a separate disclosure form to CMS for each plan.
The guidance provides that the disclosures to CMS on the "creditable coverage" status of employer-sponsored health plans and other entities which provide prescription drug coverage be made on an annual basis within 60 days of the end of each plan year and within 30 days after a change in the plan's "creditable coverage" status or the termination of prescription drug coverage. In addition, initial disclosures to CMS for the 2006 plan year must be made by March 31, 2006. Therefore, employers which sponsor health plans that provide prescription drug coverage must comply with this notice requirement prior to March 31, 2006 and must subsequently implement procedures to ensure that the required disclosure forms are submitted to CMS on an annual basis or when their prescription drug coverages change.
If you have any questions regarding the Medicare Part D notice requirements or need assistance in making your "creditable coverage" determinations and preparing the required notices, please contact a member of our Employment Practice Group.
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