MGBS Autumn 2003 Legal Report

This is one in a series of reports on recent changes in the law, provided as a service by Mooney, Green, Baker & Saindon, P.C.

A. Changes Under the Act – The most far reaching change made by the Act is the establishment of the new Medicare prescription drug benefit, which is described in Sections II through XI. The potential impact of the new drug benefit on employer-provided retiree health benefits (including multiemployer plans) is discussed in Section XI. Other changes to the Medicare system are briefly described in Sections XII through XIV.

1. Currently, Medicare primarily pays benefits through its “fee for service” program. Coverage falls into two broad categories, Part A and Part B.

c. Financed through a Medicare Health Insurance Trust Fund, which is funded primarily through a payroll tax of 1.45% payable by employees in the U.S., matched by an additional 1.45% payable by employers.

d. When people talk of Medicare running out of money, they are referring to this Medicare Health Insurance Trust.

e. The largest part of Medicare, with expenditures of approximately $141 billion during 2002.

c. Financed through a premium payable by enrolled participants that is established to cover 25% of the cost of the program, with the remaining 75% paid out of the general treasury of the United States.

d. Although, unlike the trust fund that finances Part A, it cannot run out of money, it will become an ever increasing drain on the federal treasury.

a. Although Medicare covers prescription drugs that are prescribed as part of a hospital stay, it generally does not cover outpatient prescription drugs.

(1) drugs used in immunosuppressive therapy (such as cyclosporin) following discharge from a hospital for a Medicare covered organ transplant;

(2) erythropoietin (EPO) for the treatment of anemia for persons with chronic renal failure who are on dialysis;

(3) drugs taken orally during cancer chemotherapy providing they have the same active ingredients and are used for the same indications as chemotherapy drugs which would be covered if they were not self-administered and were administered as incident to a physician’s professional service;

(4) hemophilia clotting factors for hemophilia patients competent to use such factors to control bleeding without medical supervision, and items related to the administration of such factors;

(5) supplies (including drugs) that are necessary for the effective use of covered durable medical equipment, including those, which must be put directly into the equipment (e.g., tumor chemotherapy agents used with an infusion pump); and

(6) pneumococcal pneumonia vaccines, hepatitis B vaccines, and influenza virus vaccines.

B. Benefits are provided either in the form of Standard Coverage (see Section III) or Alternative Coverage (see Section IV).

C. Offered through private insurers known as “Plan Sponsors” (see Section VI), either as a stand-alone plan or as part of a Medicare Advantage plan (see Section XII).

c. Covers roughly 26% of total projected cost of program, with balance payable from the general treasury of the United States.

(1) $250 annual deductible. This amount is adjusted annually for all years beginning in 2007 (see Section X).

(a) 25% coinsurance (i.e., after the deductible is satisfied, the Part D benefit covers 75% of the cost of prescription drugs, and the individual pays the remaining 25%).

(b) A Medicare Part D plan may provide different cost sharing structures, such as tiered copayments, as long as they are consistent with the 25% cost sharing requirement.

(3) Benefit tops out with covered prescription costs of $2,250 (including the $250 deductible and the 25% copayment, for a total maximum Medicare outlay of $1,500). This amount is adjusted annually for all years beginning in 2007 (see Section X).

(4) Copayments and deductibles are paid by the Medicare participant at the same discounts available to the Medicare provider.

(1) Kicks in when out of pocket prescription drug expenses reach $3,600. This amount is adjusted annually for all years beginning in 2007 (see Section X).

(2) Once the catastrophic coverage starts, it pays the full cost of prescription drugs, subject to copayments equal to the greater of:

(a) $2 for a generic drug or preferred multiple source and $5 for any other drug; or

(3) “Out of pocket” expenses that count toward the $3,600 cap only include actual personal expenditures for covered prescription drugs. Out of pocket expenses do not include:

(a) expenses reimbursed through a group health plan or other third-party arrangement (including employer-provided health coverage);

(d) expenses paid by anyone other than another person, such as a family member, on behalf of the individual or a “State Pharmaceutical Assistance Program” or as part of the low income assistance program under Part D.

A. May be offered by both Medicare Advantage providers and prescription drug-only providers.

C. May provide different cost sharing structures than those available under the Standard Plan, as long as they are consistent with the 25% cost sharing requirement, such as tiered copayments.

D. Overall, must provide same percentage of coverage up to initial coverage limit, and catastrophic protection must kick in at a threshold no higher than a Standard Plan.

A. May be offered by any carrier already providing basic coverage in the same area.

B. May offer reduced copayments and/or deductibles, as well as coverage of drugs not covered under Basic Coverage.

a. Bidding is by region, although a would-be Plan Sponsor is permitted to provide benefits in more than one region.

b. Bids must specify proposed plan of benefits; actuarial value of coverage for a beneficiary with an average risk profile; basis for value determination; portion of bid attributable to basic coverage and portion for supplemental coverage (if any); service area; and level of risk to be assumed by the sponsor.

c. Terms and conditions of the bid are subject to negotiation with Center for Medicare and Medicaid Services.

d. May only be approved if proposed plan and benefit structure are not likely to discourage enrollment by particular groups of beneficiaries.

e. Generally, bidders must assume the standard level of risk (see Section VI.D). A bidder seeking limited risk may only be approved if necessary to have the required number of available plans in a region. Priority is given based upon the greater the level of risk assumed, and all Sponsors must agree to bear some risk.

f. Sponsor must either be an insurance company licensed in the state or a company that meets the solvency standards established by CMS.

C. Federal subsidy targeted at 74% of total cost, with remaining 26% to be made up by premiums.

1. Contractor absorbs all risk (and realizes all rewards) if actual costs fall between 2.5% (the “first threshold”) above or below the expected expenditure level for the region. To the extent actual costs exceed 2.5% above (or fall more than 2.5% below) the target, the government will increase its payment to the plan sponsor (or require a refund from the plan sponsor) of 75% of excess, up to 5% from target. Above (or below) 5% (the “second threshold”) from target, additional payment (or amount of refund) amounts to 80%.

2. During first two years, if 60% or more of all participating plans representing at least 60% of covered beneficiaries had allowable costs that were more than 2.5% above the target (i.e., that exceeded the first threshold), risk corridor payments would equal 90% of any spending greater than 2.5% of the target but below 5% of the target.

3. For 2008-2011, the first threshold increases to 5% (from 2.5%) above or below target, and the second threshold increases to 10% (from 5%). From 5% to 10% above or below target (i.e., between the first threshold and the second threshold), the government will reimburse 50% (or require a 50% refund), and above (or below) 10% from target (the second threshold), the government will reimburse 90% (or expect a 90% refund).

4. After 2011, CMS would establish risk corridors, provided the first threshold risk percentage could not be less than 5% above or below target expenditures and the second threshold risk percentage could not be less than 10%.

6. Administrative costs are separately negotiated, and not subject to risk corridors.

E. Each area must have at least two qualifying plans to chose from, at least one of which is a prescription drug-only plan (as opposed to a Medicare Advantage plan with prescription coverage). The two plans must be offered by different sponsors, and a plan only qualifies under this requirement if it either offers basic prescription coverage or qualified prescription drug coverage as long as there is no additional premium.

F. Where two qualifying plans are not offered in a region, beneficiaries are provided the opportunity to enroll in a “Fallback Plan.”

5. Premiums are uniform, and equal 26% of the average cost of providing benefits (including administrative costs).

A. Plan Sponsors are expected to create networks of prescription drug providers:

1. A Plan Sponsor must admit into its network any pharmacy willing to accept its rates.

2. A Plan Sponsor must comply with TRICARE access standards (90% of enrollees in urban areas must have access to a member pharmacy within 2 miles; 90% of suburban enrollees have access within 5 miles; 70% of rural enrollees have access within 15 miles).

3. Must include retail pharmacies in network (i.e., cannot be mail order only).

4. Must permit enrollees to obtain 90-day supplies of maintenance drugs from retail pharmacies, albeit by paying the difference in cost.

3. Must cover non-formulary drugs as formulary if prescribing physician determines formulary would not have same therapeutic effect, subject to “exceptions process.”

D. Dispute Resolution – All plans must have meaningful mechanisms for resolving grievances.

B. At age 65, open for 6 months, consistent with existing Part B enrollment periods.

C. Transition rule–Enrollment period will open for 6 months beginning Nov. 15, 2005 (same period as for Medicare Advantage Plans).

1. A late enrollment penalty will be assessed if an individual goes at least 63 days without “creditable coverage,” beginning on the date the individual’s initial eligibility period expires.

3. Coverage under Medicaid, an employer plan (including a retiree plan) military coverage, Medigap prescription coverage, etc. count as “creditable coverage” as long as the benefit is equivalent to or greater than the Part D benefit.

B. If under 135% of poverty level with assets under $6,000 ($9,000 for a couple)

1. Will receive a subsidy equal to the lesser of the actual basic coverage premium or the “low income benchmark premium” amount for the region (i.e., the weighted average premium for basic coverage in the region).

2. Will be automatically enrolled in a plan that has a premium below the level of the premium subsidy.

3. Late enrollment penalty also subsidized at 80% for first 60 months and 100% thereafter.

X. The annual percentage increases for the various dollar limits for a year are equal to the annual percentage increase in average per capita aggregate expenditures nationwide for covered part D drugs for the 12-month period ending in July of the previous year.

XI. Special Provisions for Employer-Based Retiree Health Plans (Including Multiemployer Plans)

A. The Medicare System will provide sponsors of qualifying private employer retiree health plans a subsidy.

B. To receive the subsidy, the plan must provide drug coverage that is at least actuarially equivalent to the standard prescription plan.

C. Amount of subsidy is 28% of “allowable retiree costs” in excess of “cost threshold” up to amount of “cost limit.”

1. For 2006, per individual cost threshold is $250 and cost limit is $5000. For later years, cost threshold and limit is adjusted, as per Section X.

2. Allowable Retiree Costs include all covered prescription costs actually paid, including dispensing fees and other related costs, but excluding administrative costs, net of rebates, chargebacks, discounts, etc.

3. No subsidy is paid for retirees who are enrolled in Medicare prescription drug coverage.

2. In the case of a single employer plan (including a jointly-administered Taft-Hartley plan, provided it is primarily financed by contributions from that employer), the employer.

E. Alternatively, an employer or plan may enroll retirees in a Medicare prescription drug plan (or Medicare Advantage Plan), or otherwise pay for the premium.

1. Medicare prescription drug coverage would be primary to employer-provided retiree coverage.

2. Benefits paid by an employer-sponsored plan do not count toward the out of pocket expenses for purposes of triggering catastrophic coverage under a Medicare prescription drug plan.

F. It appears likely that an employer or multiemployer plan would be permitted to contract with a Medicare Part D Plan Sponsor to provide an alternative level of benefits that would increase the level of the Medicare Part D federal subsidy that could be used to offset the plan’s costs. This remains entirely theoretical, however, since no Part D Plan Sponsors yet exist, and no enabling regulations have yet been written.

G. New procedures will be developed to enable employer plans to better coordinate the payment of benefits with Medicare.

A. Replaces the failed Medicare+Choice program that, in turn, replaced the failed Medicare HMO program.

3. Will create head-to-head competition between traditional Medicare and private MA Plans.

4. Not only will the premiums charged by the MA Plans vary, so too will the premiums charged by the traditional Medicare plan, depending upon its relative costs compared to the regional MA Plans. Any changes in the traditional Medicare premium will be phased in over five years to prevent large annual fluctuations.

5. Demonstration projects are limited to no more than 6 Metropolitan Statistical Areas.

A. Beginning in 2007, seniors earning over $80,000 (individual) or $160,000 (married couple filing a joint return) will be required to pay a higher premium for Part B coverage.

B. Currently, money from the federal treasury covers 75% of Part B Medicare costs, with the remaining 25% coming from individual premiums paid by Medicare Part B recipients.

C. For an individual, the share paid by the government would decrease, and the amount that would have to be made up by an increase in the premium would increase, as follows:

D. For a married couple filing joint returns, the share paid by the government would decrease, and the amount that would have to be made up by an increase in the premium would increase, as follows:

Year	Percentage Applied
2007	20%
2008	40%
2009	60%
2010	80%
2011 and thereafter	100%

A. Funding Warning – If it is projected that dedicated Medicare funding (such as payroll taxes and individual premiums) will fall below 65% of total Medicare expenditures for two consecutive years, a “funding warning” is declared, and the President is required to introduce legislation to resolve the funding warning.

1. Under the new law, prescription drugs may be imported (or reimported) from Canada, provided the Food and Drug Administration (“FDA”) certifies their safety. The FDA has already indicated, however, that it will not do so. Moreover, since 2000, the FDA has had the power under existing law to authorize the reimportation of drugs from Canada, but has refused to do so.

2. Knowing that the FDA would not certify the safety of reimported drugs from Canada or anywhere else, Congress has required that the FDA conduct a study on drug importation and reimportation. Among other things, in the study the FDA is required to consider the cost savings that drug reimportation may achieve, the problems associated with drug reimportation, and how best to overcome those problems.

C. The existing Medicare Prescription Drug Discount Card program will be continued, with some modifications, until the Part D prescription drug benefit becomes effective on January 1, 2006.

D. Retiree plans that coordinate with Medicare sometimes require that all claims be submitted to Medicare before the plan will consider them for payment. The new law prohibits plans from requiring that dental claims (which are not covered by Medicare) be submitted to Medicare prior to payment by the plan.

E. Medigap policies may be continued into 2006 and beyond, provided they cease offering prescription drug benefits.

F. The Federal Trade Commission is to look at conflicts of interests of Prescription Benefit Managers (“PBMs”) that own mail order pharmacies, to determine whether mail order pharmacies owned by PBMs:

G. The law restricts the ability of brand-name drug manufacturers to delay the introduction of generic drugs.

H. Changes in payment rates and payment methodologies for medical practitioners and suppliers who provide goods and services to Medicare-eligible individuals are also included, particularly increases for payments to rural providers.

Adjusted Gross Income	Percentage of Cost Paid by Participant	Percentage of Cost Covered by the U.S. Treasury	Percentage Increase in Part B Premium
Up to $80,000	25%	75%	0%
More than $80,000 but not more than $100,000	35%	65%	40%
More than $100,000 but not more than $150,000	50%	50%	100%
More than $150,000 but not more than $200,000	65%	35%	160%
More than $200,000	80%	20%	220%