Proposals to expand Medicare prescription drug coverage for beneficiaries could help employers, current employees, and retirees by offering some financial relief from drug costs and by improving the quality of health care.
In a new report, prepared for The Henry J. Kaiser Family Foundation, Hewitt Associates analyzes the current state of retiree health benefits and the potential effects of alternative prescription drug proposals.
The report examines the administrative and financial impacts on employer-sponsored retiree health plans and retirees of two general approaches to providing prescription drug coverage for Medicare beneficiaries:
- A new prescription drug program, which would be called "Medicare Part D." This program would offer standardized prescription drug coverage and Medicare would contract with one private entity per region to administer the benefit.
- A "Premium Support" model, where Medicare-eligible retirees could purchase drug coverage through private, high-option plans. These private sector plans would compete with each other and could vary their drug benefit design, as long as it met certain standards.
Hewitt evaluates five potential employer design options in response to a Medicare Part D and Premium Support plan. These design options reflect the results of a previous Hewitt survey that asked employers how they would "most likely" respond to the Clinton Administration's Medicare drug benefit proposal (Medicare Part D).
In this survey, employer reactions broke down into five different categories.
- Eighty percent would retain drug coverage, of which:
--53 percent would wrap around Medicare (in other words, those 53 percent would keep their employee drug benefit but have the Medicare benefit as the primary benefit).
--25 percent would continue and accept a Medicare subsidy if available, and
--2 percent would wrap around Medicare and pay the retiree premium.
- The remaining 20 percent would eliminate drug coverage, of which five percent would pay for the retiree premium.
Current state of retiree health benefits
Employer-sponsored retiree health plans are the largest source of prescription drug coverage for Medicare-eligible beneficiaries, providing almost one-third of beneficiaries with coverage. This drug coverage is typically more generous than the drug benefits currently offered through Medigap, Medicare+Choice, or in proposed Medicare reforms.
The percentage of large employers sponsoring age 65+ retiree health plans declined from 80 percent in 1991 to 66 percent in 1999.
In a survey conducted by Hewitt, large employers (1,000+ employees) indicated they would seriously consider significant changes to retiree medical coverage over the next 3-5 years: 30 percent said they would seriously consider prospective termination of retiree health coverage and 40 percent said they would consider cutting back on prescription drug coverage.
Employer spending for retiree drug benefits has comprised 40-60 percent of age 65+ retirees' health care costs after accounting for Medicare. Hewitt estimates that prescription drug spending will represent as much as 80 percent of employer age 65+ retiree health costs in 2003, based on recent cost trends.
Total employer spending for prescription drug coverage for age 65+ retirees is estimated in the Hewitt report at $22.5 billion in 2003, rising to $37.1 billion in 2009, absent any change in law and assuming employers continue current coverage.
Financial savings for employers
Under both proposals (Medicare Part D and Premium Support), employers would experience significant financial relief on their prescription drug costs for retirees. Total savings for employers would range between $5.1 billion (22%) and $8.5 billion (38%) in 2003 and between $10.1 billion (27%) and $15.0 billion (40%) in 2009. Comparable savings for employers would be achieved under Medicare Part D and Premium Support approaches.
By 2003, employer savings per retiree could range from 5-8 percent if the employer "wraps around" the new Medicare drug plan and pays the retiree premium, to 80 percent if the employer terminates coverage
Employers would achieve large savings from wrapping around Medicare
For those employers who elect to continue coverage, the largest savings would derive from wrapping around the Medicare Part D or the high-option Premium Support drug benefit, with employer savings per retiree ranging between 23-29 percent in 2003. In this scenario, retirees would in most cases assume new premiums for the Medicare Part D or high-option coverage. "Baseline" health care costs per retiree are estimated at $2,473 in 2003. See chart on Employer Savings per Retiree.
Stop-loss (catastrophic benefit) would boost savings to employers
A stop-loss provision would further expand employer savings. For example, if a Medicare Part D program included a stop-loss benefit for drug costs that exceed $4,000 per retiree, savings (per retiree) to employers that wrap around the new Medicare benefit would increase from 23 percent to 34 percent.
Majority of large employers would not terminate coverage
Most large employers (80 percent) would not eliminate retiree drug coverage in the short-term (3-5 years) solely in response to the enactment of expanded prescription drug coverage for Medicare beneficiaries. Under both proposals, most large employers currently providing drug benefits would continue coverage by wrapping around the new prescription drug coverage.
The financial savings to employers would be even higher if the employer were to drop drug coverage altogether. Establishment of an underlying Medicare drug benefit for retirees where one does not currently exist may induce some employers to terminate coverage if they are leaning in that direction.
However, financial savings would have to be considered against potentially negative impacts on retiree and employee relations, recruitment, retention of mid-career employees, and the retirement age.
Retiree out-of-pocket costs
Under the most likely employer response option (wrap around), retirees would experience increased out-of-pocket costs for the premiums of the new prescription drug program (unless the employer pays for the premium). Estimated premiums would be lower under Medicare Part D than under Premium Support because the beneficiary subsidies are higher in Medicare Part D proposals.
Under Premium Support in 2003, Hewitt estimates a net retiree annual premium of $600, nearly twice as much as the estimated Medicare Part D premium ($312 by Administration estimates). However, the benefit level under Premium Support is higher than under Medicare Part D in the initial years of the program.
Implications for employers
Despite the high visibility of the debate over prescription drug coverage, Congress is more likely to act next year rather than in the short time remaining in this session. Both presidential candidates have stated their intent to expand coverage for Medicare beneficiaries, using different approaches; and the large federal budget surplus will create an opportunity for the next President and the Congress to act.
If that happens, the reform could potentially provide significant financial relief to employers offering retiree health benefits and also relief to retirees that do not have drug coverage. The financial relief for employers, however, will hinge on a number of key technical details in the design of any new program and the manner in which it would coordinate with retiree health coverage.
For these reasons, the Hewitt report recommends that policymakers pay close attention to the interactions of Medicare and retiree health plans and also consider novel approaches to facilitate coordination of employer retirement and health plans with any new Medicare coverage.