Article: Companies will get federal windfalls to keep drug plans for retirees

Companies will get federal windfalls to keep drug plans for retirees

By Michael Wagner
Triangle Business Journal
Updated: 7:00 p.m. ET Dec. 25, 2005

RALEIGH - Once the new Medicare prescription drug program goes live Jan. 1, some Triangle employers will receive a federal, tax-free windfall - in most cases worth millions - for doing absolutely nothing.

The largest local payment will go to the State Health Plan, which has applied for an estimated $63 million. The payment is a subsidy the federal government will pay in exchange for an organization maintaining its own drug program and not relying on Medicare.

Among private employers, Duke University could receive as much as $1.8 million, GlaxoSmithKline $3.3 million, and IBM $6.6 million based on their number of Medicare-eligible retirees and the estimated $660 average annual payment per retiree.

Some employers may opt to drop their retiree drug benefits altogether, in which case they would not receive a subsidy payment. It's not clear yet how many will go that route, but the U.S. Centers for Medicare & Medicaid Services will release more detailed information in January.

The subsidy is meant to give employers an incentive not to drop their existing drug coverage and foist their retirees onto the backs of federal taxpayers.

It's the only way to make the program work, says Michelle Kitchman Strollo, a senior analyst with the Washington, D.C.-based Kaiser Family Foundation, a nonprofit health policy group.

"There was concern in Washington that within this law that there was nothing to keep employers from just terminating their benefits outright," Strollo says. "The thought was in order to keep the law within the $399 billion estimated price tag, it would have to rely on those people who currently have employer-based benefits."

But like everything, that, too, has a price: An estimated $71 billion in tax-free subsidies is projected to be paid to employers over the next 10 years.

According to a recent survey by the Kaiser Foundation, 79 percent of employers said they have no intention of dropping their drug coverage in the first year. But among those keeping their coverage and taking the subsidy, 50 percent said they expect they'll drop the benefit by 2010.

Mike Morfe, a vice president of the benefits firm Aon Consulting, says part of the reason for the hesitation is that employers like to maintain control over the design and function of their benefits programs. "For a lot of employers, that's very important," he says. "They like to know it's working well and treating their retirees right."

That the subsidy is tax-free is attractive for many employers, he says. It can translate a payment of $600 or $700 per employee into a bottom-line value of as much as $1,000.

Still, over time, many employers may find that the subsidy no longer outweighs the savings from eliminating drug coverage from their retiree benefits. As startup kinks get worked out, employers might become more comfortable with sending their retirees out into the Medicare wild.

"This (subsidy) is like trying to keep the Titanic afloat by sending out one row boat," says Jon Oberlander, an expert in Medicare and a professor of public health policy at the University of North Carolina at Chapel Hill. "You may have stopped it in the short run, but over the long run there's no doubt that people are going to drop their retiree health benefits."

Employers will have two options with the Medicare drug program, which is called Part D. One is to enter a so-called wrap-around plan in which Medicare is designated as the primary payer, and then whatever is not covered is picked up by the employer's drug plan.

The other is for employers to create a custom drug plan in which Medicare and the employer's benefits are all rolled into the same plan. Retirees present one card at the pharmacy counter, and the drug plan coordinates everything with Medicare directly.

"Once (companies) understand what the other options are, and have some proof that they work, they may say, 'We'll switch,'" Morfe says.

But for now, that doesn't appear to be happening, says Carla Obiol, deputy commissioner of the Seniors' Health Insurance and Information Program, a division of the North Carolina Department of Insurance.

The SHIIP, for short, is the state's primary call center for people who have questions about Medicare. While they've been overwhelmed with ringing phones the last few weeks, so far, Obiol says, few callers have said their drug coverage is being canceled.

"The concern that employers would drop people is not happening now," she says. "The big fear is that that could change over time. The subsidy could just be a Band-Aid."