Preserving Healthcare Benefits Promised to RetireesNovember 19, 2014
Vice President of Business Development and Marketing
KTP Advisors, Inc.
With the passage of the Affordable Care Act (ACA), private and public healthcare insurance exchanges offer the best and most cost-effective solution for an employer’s younger retirees who are not yet eligible for Medicare, provided that collective-bargaining agreements don’t preclude their use by union members.
From a fiscal perspective, this is particularly important because early retirees, who are under age 65, such as public safety personnel, tend to have healthcare needs and costs that exceed those of the active workforce. Furthermore, from a balance-sheet perspective, managing other post-employment benefit (OPEB) costs and liabilities have become more important than ever before and future GASB accounting rules, under consideration, will bring increased focus from credit agencies, especially on governments. In the private exchange marketplace, it is important to recognize that every exchange or marketplace is different, thereby requiring increased due diligence by employers in choosing an exchange vendor.
In addition to creating healthcare exchanges and other new options for coverage prior to Medicare eligibility, the ACA also incrementally ends the coverage gap or “donut hole” for Medicare Part D prescription drug costs by 2020. From now until then, the gap will be filled with federal subsidies and discounts from drug manufacturers. With that in mind, employers may find that providing a prescription drug plan for Medicare retirees and beneficiaries is no longer the best use of available dollars. However, for retirees on a fixed income and with no means of further employment, that decision could bankrupt them.
To put it in perspective, CVS Caremark reports that new high-cost specialty medications to treat debilitating diseases, such as rheumatoid arthritis, multiple sclerosis and others, was just under 20% of its customers’ overall drug spend in 2012, and is expected to more than quadruple by 2020. The proper structure and maintenance of prescription drug plans for retirees is, therefore, key to the fiscal health of every plan sponsor and its ability to keep healthcare promises to retirees.
To help pay for their pharmacy benefits, the majority of plan sponsors have received the Retiree Drug Subsidy (RDS) from the Centers for Medicare and Medicaid Services. With the elimination of its tax-exempt status in 2013, along with changes in healthcare laws, the RDS program has become less attractive to employers. Moreover, the RDS program provides no catastrophic coverage after a retiree’s annual drug costs exceeds $6,680, the 2015 spending threshold set by the federal government. With the average annual cost of specialty drugs reaching $75,000 in 2014, retirees face paying upwards of $18,750 (25%) for their essential medications.
However, if the employer’s drug benefit were structured to include free catastrophic reinsurance from the federal government under the Series 800 Employer Group Waiver Plans subsidy program (EGWP), an increasingly popular federal reimbursement option for companies and state and municipal governments, the federal government would pay 80% of retirees’ drug claims over $6,455, the preset spending limit. The supplemental plan would cover 15%, leaving the retiree to pay the remaining five percent or, based on the previous example, no more than $938. This represents a savings of $17,812 for the retiree, the health plan or both.
Neil Smith is vice president of business development and marketing at KTP Advisors, a specialty advisory firm on retiree health benefit plan design and implementation, private exchange evaluations and comparative analysis, and pharmacy benefits management for active employees. The firm is based in Newport, R.I., and with offices in Newport Beach, Calif.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.