Medicare RX Drug Bill's Impact on Retirees

Fact Sheet

The Medicare Modernization Act (MMA) will likely leave millions of retirees with less, not more, prescription drug coverage. The law discourages employers from maintaining their current prescription drug coverage to their retirees by (1) penalizing retirees whose employers help them pay the out-of-pocket costs for drugs, (2) allowing employers to substantially cut retiree benefits and still get Medicare subsidies; and (3) providing less Medicare assistance per beneficiary to employer-sponsored plans, particularly tax exempt entities, than to Medicare prescription drug plans or HMOs. Of the 12 million retirees that currently have employer-sponsored coverage, the Congressional Budget Office estimates that two to three million retirees (nearly one in five Medicare beneficiaries with retiree coverage) will lose that coverage. Of those losing coverage, over half will have incomes below $30,000. Before the drug benefit begins in 2006, however, retirees will be eligible to sign up for the drug discount card, provided they are not Medicaid eligible.

MMA discourages employers from continuing to provide the generous health plans they do today in three ways:

(1) True out-of-pocket cost or "TROOP" provision. This provision applies to retirees who leave their current retiree plan and enroll in the Medicare prescription drug plans or Medicare HMOs. Under the new law, only the amounts paid by the retiree himself, his family, or a State Pharmaceutical Assistance Program count toward spending required to reach the catastrophic benefit. Thus, each retiree must spend $3,600 out-of-pocket to reach the catastrophic benefit, and any money an employer pays to help with drug co-payments and cost sharing or filling in the retiree's donut hole will not count towards this $3,600. This discriminatory treatment of retirees who receive assistance from employers will delay, potentially indefinitely, the retiree's ability to reach catastrophic protection.

(2) Subsidy for Retiree Plans. Under the new law, employers and multi-employer groups may receive a tax-free subsidy from Medicare for the purpose of maintaining some prescription drug coverage for their retirees if the coverage they provide is of equal or greater value than the coverage under Medicare Part D. Because most employers are providing coverage that is much more generous than the coverage under the Medicare bill, employers could slash their benefits to the Medicare level and still qualify for the subsidy.

The subsidy is 28 percent of allowable drug costs up to $1,330 per retiree. An employer gets the 28 percent subsidy regardless of how much it contributes and how much it requires the retiree to pay in co-payments and other cost sharing mechanisms -- so long as the overall coverage is equal to or better than what Medicare provides. Thus, an employer could reduce its contribution -- shifting more costs to the retirees -- yet still receive the benefit of receiving 28 percent of what it and the retiree spends together. Coupled with the long-standing tax provision that permits employers to deduct their healthcare costs, some companies could actually make money while providing their retirees a reduced package of prescription drug benefits. As a result of all these laws, companies such as Lucent Technologies, Dow Chemical, and SBC Communications are expected to show big accounting gains, while retiree benefits erode; SBC already announced it would reduce benefits.

(3) Discrimination in the Employer Subsidy. The new law discriminates against employer-sponsored plans compared to Medicare prescription drug plans offered by PPOs and HMOs. Employers will only receive a 28 percent subsidy while the PPOs and HMOs will receive about a 73 percent subsidy in 2006 for their prescription drug plans. This is despite the fact that currently many employer-sponsored plans have more generous benefits than the prescription drug plans expected under the Medicare law. The law further discriminates against state and local governments, multi-employer groups, and non-profit organizations offering employee prescription drug coverage. Eighteen billion dollars of additional funding was added at the last moment by exempting the 28 percent Medicare employer subsidy from tax liability. This was done to protect employer- sponsored retiree coverage; however, it is useless to those with no tax liabilities. As a result, teachers, firefighters, police officers, construction workers, and others with no tax liabilities will not receive a dime of the $18 billion to help them continue to offer retiree prescription drug coverage.

Interaction with Specific Types of Plans:

Currently, retirees enrolled in FEHB use Medicare as their primary coverage and FEHB pays the cost sharing. When Medicare expands to cover drugs, the FEHB program could continue with Medicare as primary and pay the cost sharing; however, if FEHB decides to continue to offer the full prescription drug benefit, it can receive the 28 percent subsidy.

Teachers' union retirees receive their health benefits in various ways, including, collectively bargained agreements, through the state employee health programs, or through employer agreements. The Medicare prescription drug plan will interact differently with the different plans. However, the vast majority of teachers' health plans require the retiree to buy into Medicare benefits and the plan pays the cost sharing. When Medicare expands to provide drugs, the health plans will likely continue to require the retiree to buy into Medicare. If the plans are collectively bargained or employer plans, the plan administrator has the option of renegotiating the agreement to continue to provide the full benefit and receive the 28 percent subsidy or require them to enroll in Medicare. In state plans, the state legislatures would have to act to do the same.

The UAW provides health benefits through various contracts and retirees will be affected differently depending upon the particular contract. A retiree could be forced to buy into the Medicare prescription drug plan if the contract states that a retiree must enroll in all available Medicare benefits and the plan will provide cost sharing. It is unknown whether some of these contracts will be renegotiated to allow retirees to retain their prescription drug coverage through the plan.