Weighing the Options for Retiree Drug Coverage

Many trends in the health insurance industry are prompting employer groups to re-examine the prescription drug coverage they offer to their retirees, with cost savings at the top of their minds.

There are many ways to achieve cost savings. Some employer groups are shifting more responsibility to their members, in the form of higher premiums and larger co-payments or percentage of coinsurance. Groups are also adopting multi-tiered benefit designs, a reduction of the number of specialty medications included in formularies and a greater push to encourage use of generic medicines.

Companies are also establishing Voluntary Employees Beneficiary Associations, or VEBAs, to administer healthcare benefits to retirees. These trusts move the liability of retiree benefits off the balance sheet, which is becoming a very attractive option for employers. GM and Ford recently established VEBAs to administer their retiree benefits, and MemberHealth administers benefits to a VEBA trust for retirees of a major airline. We expect to see the establishment of more VEBA trusts in the future.

Another trend is the outsourcing of the benefits management to a qualified company. Employers are finding that they can save money and have better health outcomes for their retirees if they do so. The industry is moving from evaluating plans simply on dollars and cents and to evaluating plans on how well they prevent chronic disease and catastrophic mishaps by teaching people how to take their medications properly.

In short, there are various ways for retiree groups to realize cost savings.

Alternatives to Using the Retiree Drug Subsidy
The Retiree Drug Subsidy (RDS) Program is offered by the Centers for Medicare & Medicaid Services (CMS) to reimburse municipalities, unions and private employers for a portion of their eligible expenses for retiree prescription drug benefits. The goal of the subsidy is to give employers and unions a method to help them continue to provide high-quality prescription drug coverage – coverage that must be better than what is provided through Medicare Part D. The subsidy paid back to employer groups is $668 each year per Medicare enrollee.

While many employers like the idea of receiving the cash subsidy, many find the subsidy does not offset the costs of administering the prescription drug program and the required paperwork associated with it. The administrative costs of filing for the subsidy, including cash flow, may reduce the value of the subsidy by 20 percent, according to Milliman and Associates. As a result, many employers are looking at alternatives to the RDS.

According to research conducted by the Kaiser Family Foundation and Hewitt Associates (Retiree Health Benefits Examined, December 2006), 82 percent of the employer groups surveyed accepted RDS in 2006, and 78 percent planned to use RDS again in 2007. According to the survey results, by 2010, only 54 percent of employers believe they will still be using RDS.

Under the options presented by Medicare Part D, employers have several alternatives to the RDS:

• “wrapping” their current prescription program with a Part D drug plan;
• developing, implementing and operating their own PDP under Medicare’s Employer Group Waiver Program (EGWP);
• outsourcing these activities to one of the government’s certified Medicare Part D PDP sponsors under Medicare’s Employer Group Waiver Program (EGWP).
• eliminating coverage for their retirees due to rising plan costs – a drastic move.

For most companies, eliminating coverage is not a viable option because most want to offer their retirees high-quality prescription drug coverage. Many are doing so by using the EGWP and outsourcing the administration of their prescription drug benefits to pharmacy benefits management companies, like MemberHealth, which is authorized by Medicare to administer EGWP plans.

Why is that a good strategy? The waivers were designed to provide the most flexibility. Waivers simplify plan design, communication, administration and billing. Using a pharmacy benefits management company, like MemberHealth, will not only save time and money by providing the administrative relief associated with applying for the Retiree Drug Subsidy (RDS), it will also provide groups with an advantage in cash flow management over inconsistent and untimely reimbursements. As a Medicare PDP, MemberHealth is able to obtain the Employer Group Waivers on behalf of the employers and plan sponsors. This partnership allows groups to focus more on their core businesses instead of on having to administer a PDP. The bottom line? Groups will have more staff hours and more cash available to them.

When selecting an outsourcing partner, employer groups should look for a company that can administer their benefits and process their claims and that can also be a partner in their retirees’ health care.

Unlike other PBMs, MemberHealth differentiates itself in the market by encouraging strong relationships between patients, pharmacists and physicians. This relationship building enables patients to learn how to take their medicines correctly, stay healthy and save money. As a result of communications to beneficiaries suggesting lower-cost medicines, people enrolled in MemberHealth’s Part D plans in 2006 saved a total of $1.1 million a month in co-pay costs by switching from brand-name to generic medicines.

In addition to Prescription Drug Plans, employer groups can, through the EGWP, provide comprehensive healthcare benefits and prescription drug benefits through Medicare Advantage Prescription Drug Plans (MA-PDs). Because MemberHealth was recently acquired by Universal American Financial Corp., a company that sponsors Medicare Advantage plans, the company can offer PDP or Medicare Advantage Prescription Drug Plans (a Private Fee-For-Service healthcare plan with integrated prescription drug coverage) to employer or union groups using the EGWP.

One advantage to MA-PD plans is that they offer groups a comprehensive and holistic strategy regarding a spectrum of healthcare needs. MA-PD plans provide for healthcare services above and beyond basic Medicare, including durable medical equipment and other services. Working with a qualified PBM will ensure employer groups find the best plan – whether it is a PDP or an MA-PD – to suit their needs.

Another option for coverage, known as “wrap-around” coverage, is when an employer or plan sponsor contracts with a private Medicare PDP as a way to provide secondary coverage for individual plans. Wrap plans provide retirees with a specific Medicare Part D program and cover expenses that would not be covered under Medicare Part D PDPs, such as coinsurance and deductible costs that are typically the responsibility of the beneficiary and go toward the retiree’s True Out-of-Pocket Maximum (TrOOP). In this scenario, however, plan sponsors are still involved in the logistics of Medicare Part D administrative functions and are continuing to work with a prescription benefit manager to administer claims for the “wrap-around” coverage. MemberHealth also works with employer groups to provide this type of coverage.

Managing GASB 45
GASB 45 is the Governmental Accounting Standards Board’s statement on “Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions.” It is a rule designed to address the growing concern over government employer obligations for retiree benefits by measuring and reporting the financials associated with providing retiree benefits, other than pensions.

GASB 45 applies to the financial statements issued by government employers that offer retiree benefits and that are subject to GASB accounting standards. It requires the following disclosures on financial statements:

1. Information about the retiree benefits, including what the benefits are, who is eligible for the benefits, how many employees and retirees are covered, etc.
2. The actuarially determined liability for retiree benefits and the assets (if any) that are available to offset the liability.
3. The portion of the liability that must be reported as an annual accounting expense on the employer’s financial statements, and a cumulative accounting of the extent to which the plan sponsor actually makes contributions to offset its annual expense.

To minimize the retiree benefits costs reported on their balance sheets, many entities are outsourcing the administration of prescription drug benefits. By December 15, 2008, all affected employers will need to comply with the rules of GASB 45. As a result, affected entities should be looking at fully insured Part D solutions that minimize impact of fully insured retiree plans.

The cost of funding post-employment benefits can be expensive. MemberHealth works with groups to help offset the costs associated with GASB 45 by developing customized prescription drug solutions to reduce their liability.

Why should employers care about reducing their prescription drug benefits liability?
Having the liability on their books affects their bond rating and their ability to raise money for capital building projects and other needs.

By using the EGWP and outsourcing their prescription drug benefits to a Medicare-approved vendor – which is recognized as an off-set – employers would recognize savings immediately.

Although it can vary widely based on group demographics and/or plan design, reduction in GASB liability can be as great as 20 to 30 times the value of the single year Retiree Drug Subsidy by adopting a fully insured PDP solution, according to Milliman and Associates.

MemberHealth works directly with employer groups to design customized solutions to meet the requirements of GASB 45 and help groups realize immediate cost savings. Talking with a qualified group sales pharmacy benefits consultant, such as those at MemberHealth, can help you to make the right choice for your retirees – and your bottom line.

Contact our Group Sales Department at (001) 877 285 8759 or visit us at www.mhrx.com for more information.