After a two-year wait, on Tuesday more than 40 million Americans eligible for Medicare can start to sign up for Medicare Part D, the program's voluntary prescription drug benefit. And by Tuesday, a quarter of those people, some 10 million retired American workers, will find out something more specific: whether their former employers will continue to pay for their prescription drug benefits in 2006.
Tuesday is the deadline for employers to say "yes," "no" or, perhaps, "maybe."
This group of retirees includes my wife, Sara, and me. In our case, we were waiting for a letter from General Electric Co., where Sara worked for 23 years. When she retired, she signed up for a GE retiree prescription drug plan, which pays 70 to 85 percent of our drug costs. We get our medications by mail and pay $25 for a 90-day supply. It's a benefit we did not want to lose.
We began to worry about whether GE would continue its drug benefit when Congress voted in 2003 to let Medicare pay for prescription drugs, which opened the door for some companies to drop their retiree coverage.
The new voluntary drug benefit begins Jan. 1 and is expected to be of financial help to many seniors who have no drug coverage.
Part D allows people on Medicare to get their drugs in one of two ways: by buying an individual drug policy or by signing up with a Medicare Advantage managed care plan. The new drug plans are being offered by private health insurance companies.
Retirees who have approved drug coverage from former employers will not need to buy a Part D plan. So Sara and I were relieved when we received a "yes" letter from GE, telling us that our drug coverage would continue without change. One of the reasons for our concern was that our out-of-pocket drug expenses under the GE plan last year were $1,685. But if we had been in a standard Medicare Part D plan, our expenses would have been about $5,000. We did not want to go there. The new Medicare drug benefit, expected to cost more than $724 billion over 10 years, is being regulated by the Centers for Medicare and Medicaid Services (CMS).
To encourage employers to retain their retiree prescription coverage, Congress offered them a 28 percent tax-free subsidy of the cost of that coverage. But the question was: Would employers keep their drug plans and take the subsidy, or would they dump their plans to save money, knowing that retirees could now get prescription coverage from Medicare Part D?
The speculation seemed reasonable. The number of corporate employers offering retiree health benefits has declined steadily for 15 years. Part D could have provided an escape hatch for employers who wanted out.
In addition, employers had to jump through some difficult regulatory hoops to prove to CMS that their plans were as good as the standard Part D drug plan. Developing the proof turned out to be a costly, time-consuming process that required employers to hire a small army of actuaries and consultants.
Employers who passed the CMS tests were able to claim they had "creditable coverage," a requirement for getting the 28 percent subsidy.
When Sara and I got our letter from GE, it said:
"GE has determined that the prescription drug coverage offered by the GE Pensioners' Prescription Drug Plan is, on average for all plan participants, expected to pay out as much or more than the standard Medicare prescription drug coverage will pay in 2006."
In Medicare-speak, that meant that GE had passed the CMS tests, would take the subsidy from the government and would continue to provide our prescription coverage. Enclosed in the GE packet was a "Certificate of Creditable Coverage," suitable for framing. GE said we should keep it in a safe place.
The reason for the caution is that people who do not sign up for a Part D prescription plan by May 15 will face a 1 percent per month premium penalty if they sign up later. The penalty will be waived for those who can show they already had "creditable coverage" when the deadline passed.
GE, of course, was not the only employer to face a decision on whether to continue its retiree health coverage. Thousands of corporations and state and local governments had to make similar choices.
While most retirees are getting "yes" letters, others will not be so fortunate. If you receive a "no" letter -- meaning your employer's plan is not as good as the standard Medicare plan -- and you want to buy better coverage, you will have to sift through dozens of Medicare drug plans offered by health care companies.
If you receive what is, in essence, a "maybe" letter, it may say that your former employer will continue to pay for some of your retiree drug benefits, at least for a while, but that you may have to move into a Part D plan.
How many employers are staying, how many going?
The CMS says it is too soon to provide a scorecard. But Mark McClellan, CMS administrator, in an interview predicted: "The vast majority of employers will take the retiree subsidy." And that means, he said, that millions of retirees will continue to get drug coverage from former employers in 2006.
Meanwhile, several retired friends told me they, too, had received "yes" letters from their former employers. One friend, Thelma A. Salus of Silver Spring, a retired senior administrative specialist at International Business Machines Corp., received her letter as part of a package of information about Part D and IBM's various health plans. "I was confused," Salus said.
But Salus's confusion was cleared up by IBM's letter, which told her, "If you want prescription drug coverage from IBM in 2006, do not sign up for a Medicare prescription drug plan for 2006."
Another friend, Romeo J. Fagiolo of Silver Spring, a former accounting manager at GMAC, received a "yes" letter from General Motors Corp., which provides his health and drug benefits. The letter said retirees who want to keep their coverage should not join a Medicare Part D plan.
Fagiolo said he likes his GM health benefits and was happy not to have to join a Part D plan.
I also talked with people at Lockheed Martin Corp. in Bethesda. The company has about 50,000 retirees eligible for prescription drug benefits, according to spokesman Thomas C. Greer.
Lockheed Martin, he said, will maintain its benefits, take the government subsidy and send out notices to retirees by the Tuesday deadline. "We feel it is important to keep our plans unchanged to ensure stability for our retirees during introduction of Medicare Part D. . ." Greer said.
In some cases, the subsidy will allow employers to lower retiree premiums in 2006. For example, Dow Chemical Co. said it would share its Medicare subsidy money with retirees on a 50-50 basis. As a result, said Janet C. Boyd, director of government relations, "We expect that our eligible Medicare retirees' 2006 premium will be reduced by about $20 a month." The decision to share rather than keep the subsidy money, Boyd said, was not only good for the retirees but also helped increase the company's contribution to the retiree drug plan. By doing that, she said, it made it easier for the company to qualify for "creditable coverage."
Meanwhile, IBM said it would share one-third of its subsidy with retirees. The action will help reduce scheduled premium increases by $13 a month for individuals, $26 for couples.
The Medicare employer subsidy applies to retiree drug expenses between $250 and $5,000 a year in 2006. The average subsidy is estimated to be $668 a year. By comparison, Medicare will contribute an estimated $1,200 a year per person for people who sign up for Part D stand-alone drug plans and Medicare managed care plans.
Thus Medicare will save money if employers can be persuaded to take the subsidy -- which by itself will cost $41 billion over 10 years. I couldn't immediately find employers who sent "no" or "maybe" letters. But the Fresno Bee reported that retailer J.C. Penney Co. had decided to discontinue all health benefits for 9,500 retirees who are 65 and older. "The fact that Medicare was implementing prescription drug coverage in 2006 was the impetus for the change," said spokesman Tim Lyon. J.C. Penney will help retirees enroll in an AARP plan and will pay 55 percent of the premium for one year, he said.
However, dropping out is not going to be widespread, said Jon Gabel, vice president of the Center for Studying Health System Change in Washington. Dropping a retiree health benefit, he said, is "the very last thing employers want to do." They know, he added, "that it will lead to all kinds of public relations problems."
But employer enthusiasm for the subsidy may be temporary, predicted John Gorman, president of Gorman Health Group, a District consulting firm. "In 2007," he said, "you're going to start to see an exodus of employers and unions from their own plans in order to move their retirees into Part D options." Many employers, Gorman added, view the subsidy as "putting a Band-Aid on a shotgun wound."
"It will slow down the bleeding . . . but it is not going to stop it."
Meanwhile, leaders of public employee unions are advising their retirees: "If you have creditable coverage, it's okay to sit still," said Steven Kreisberg, collective bargaining director of the American Federation of State, County and Municipal Employees. There are between 300,000 and 400,000 retired public employees around the country, he noted.
What does Kreisberg think will happen in 2007? The labor leader said he thought that some employers might begin to look for "creative solutions," in which they would give up the subsidy in order to set up their own prescription drug plans or Medicare Advantage managed care plans, or find other ways to partner with Part D plans. If employers decide to move to Part D options, bringing more people and more premiums to the plan, Kreisberg said, it may give retirees "a bigger bang for their buck" because the additional federal dollars could provide better benefits.
Stan Hinden can be reached at email@example.com.