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Grappling with Retiree Health

Human Resource Executive...August 2010

While it’s still too soon to tell exactly how healthcare reform will affect retiree health, here are a few known facts—pro and con—to base a few predictions on.

The primary rationale for the health-insurance-reform bill Congress passed in March was to provide medical, hospital and drug care for the employed uninsured—meaning the self-employed and workers in small companies whose employers did not offer insurance.
But the provisions in the Patient Protection and Affordable Care Act, which kick in first, focus on retirees who already have insurance through their employers. Moreover, the two provisions that got out of the gate first take off in opposite directions: One is a boon to many companies and their retirees; the other is a bust, albeit with a possible silver lining.
The two PPACA provisions include the elimination of a tax deduction for corporations that provide non-Medicare Part D drug coverage for retirees and the establishment of a $5 billion federal fund companies can tap into, either to reduce the subsidies the company pays for healthcare for early retirees—ages 55 to 64—or for the premiums and co-pays the early retirees pay themselves.
Companies that have been providing drug coverage to retirees through private, non-Medicare plans have been receiving 28-percent subsidies for every retiree’s costs from the federal government, and have been able to deduct from corporate taxes what amounts to a $600-per-retiree drug subsidy. The loss of deductibility of the $600 subsidy happens in 2013; but the PPACA provision caused immediate corporate heartburn because accounting rules require employers that receive an RDS and deduct it to record an accounting charge in their first-quarter 2010 financial results to reflect the impact of the change in RDS tax status.
External sources estimated these charges cumulatively at more than $14 billion nationally. So that provision drew blood immediately.
“That had a major impact on many of the companies affected. It was real money and [would] show up in their tax bill,” says Mike Thompson, a principal at PricewaterhouseCoopers.
Medco Health Solutions estimates that, starting in 2013, when the RDS tax liability kicks in, the cost to the average taxable RDS plan sponsor will be in the range of $14 to $21 per member per month (assuming a 35-percent tax rate)—which, for a typical plan, means millions to tens of millions of dollars in lost value annually. The estimated 1,400 U.S. companies that will be affected have a number of options including moving retirees into one of the Medicare Part D options. Most companies, however, are taking a wait-and-see approach. Says Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health: “No one is rushing to make an immediate decision.”
Some company retirees are already in Part D, perhaps receiving a corporate subsidy for premiums, perhaps not, but with the former employer subsidizing a “wrap-around” supplemental drug plan that kicks in when the retiree enters the so-called “doughnut hole.” Medicare subscribers who spend $2,830 on subsidized prescription drugs must then pay the full amount on all their prescriptions until they reach the next threshold of spending, which begins at $4,550—called the “catastrophic coverage” level. The PPACA gives seniors affected by the coverage gap a $250 rebate in 2010. From 2011 on, those reaching the “doughnut hole” will receive a 50 percent discount on their prescription-drug costs.
As a result, employers are likely to end subsidization of supplemental Part D plans. So that will be a net corporate savings. The filling of the doughnut hole is also another reason—there are actually multiple reasons—why companies with non-Medicare retiree-drug plans will undoubtedly move retirees into Medicare Part D drug coverage, which offers at least four permutations: (1) a conventional prescription drug plan purchased directly by the individual; (2) an employer-group-waiver plan (also known as an EGWP or “egg whip”), by which the employer contracts with a PDP on behalf of retirees; (3) a plan in which the employer sets up its own EGWP and administers it (very few companies have done this); and (4) a plan in which the employer contracts with a Medicare Advantage-Prescription Drug plan, which provides both medical and drug benefits.
EGWPs seem to be the popular choice for companies seeking to move retirees into a Part D option. The advantage of an EGWP is that an employer can shape that drug plan to look exactly like its current retiree drug plan. Employers can often provide as much or as little per-employee subsidies as they want, as long as the benefits are equal to those in an individual PDP. Employers also get federal subsidies for retirees in EGWPs. However, instead of a per-retiree subsidy based on claims incurred by the individual under an RDS, which is up to a $600 subsidy, under a Part D EGWP, the employer gets a subsidy up front based on a “national-average” subsidy set by the government. That “prospective” EGWP subsidy is then adjusted based on the demographics of the group members, etc.
The benefits of the EGWP, according to Steve Wogen, vice president of Medco Retiree Solutions, are that the value of the per-retiree subsidy to the employer may very well exceed the value of the RDS subsidy once RDS tax deductibility is lost in 2013. Moreover, in some cases, employers will lose that $600 subsidy completely in the 2013-2014 period because their per-retiree contributions will have reached a ceiling, causing them to fail the gross- and net-benefit tests employers have to meet to qualify for the RDS subsidy.

On the Plus Side …
To the extent that the loss of RDS tax deductibility means higher corporate costs, at least on its face, the availability of a new $5 billion federal Early Retiree Reinsurance Program means higher corporate revenue. The money ostensibly became available as of June 21, 2010. But the Department of Health and Human Services won’t actually be dispensing payments until companies submit claims, which won’t be for some time. Reinsurance reimbursements will be issued on a per-retiree basis, for 80 percent of the medical, surgical or drug costs between $15,000 and $90,000 in a given year. Companies can use those payments to lower health-insurance costs for employees or to reduce corporate subsidies paid to the early retirees for premiums, co-insurance and deductibility requirements.
While the funds look enticing, not all eligible companies will apply. “Companies will make a decision on whether to apply based on the number of early retirees they have. If they have a small number of pre-65 retirees, the claims submissions, audits and other requirements for the program may not make applying worth it,” PwC’s Thompson says. He adds, however, that companies that do apply, and are accepted into the program, would generally expect to receive somewhere between 30 percent and 35 percent of their expenditures back. How that money is distributed is up to the company; the HHS has apparently set no requirements one way or the other. However, the retirees’ essential benefits cannot be reduced.
The concern has been that the $5 billion won’t last until 2014, when the fund disappears. The Employee Benefit Research Institute threw gasoline on that fire with a report in June saying $2.5 billion of the available $5 billion would be exhausted in the first year of the program—that is, in the year beginning June 21, 2010. No money would be left by the time 2012 rolled around, EBRI hypothesized.
But Paul Fronstin, director of the EBRI health research and education program, admits his prognostication rests on assumptions that very well may not bear out. In calculating the drawdown of the $5 billion, assuming all companies that are eligible to apply would apply, they would be approved and they would be reimbursed at the maximum for each early retiree’s eligible costs.
“Is it reasonable to expect that?” says Fronstin. “Probably not.” He admits the HHS could cap per-individual payments, or company payments, or allot $1.25 billion in each of the four years Congress says money could be available. The HHS has not tipped its hand on any of that yet. The department has said that the $5 billion will be available on a first-come, first-served basis, and that has created anxieties in the corporate world, especially among companies that, for whatever reason, could be laggard applicants.
Companies have to meet a number of requirements in order for the HHS to approve an application. First and foremost, a company must have in place a cost-containment plan for high-cost chronic diseases. That could be a diabetes-management program, for example. The key language here is that the HHS expects employers to “take a reasonable approach when identifying such conditions and selecting programs and procedures to lower the cost of care.” The HHS will audit these measures, and companies will have to prove—and there is some wiggle room here—that their cost-containment measures “have generated or have the potential to generate savings,” the HHS literature reads.
Although the program started on June 21, companies with calendar-2010 plan years can use costs incurred by an employee between Jan. 1, 2010 to June 21, 2010 toward the $15,000 floor. But only costs incurred after June 21, 2010 are eligible for 80 percent reimbursement. Those eligible expenditures must be “net” any negotiated rebates from the health-insurance company or any drug rebates. Those rebates are often paid after the plan year. So the HHS will specify the form and manner of such disclosures in future guidance.