1. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. Options for Employers to Provide Retiree Coverage Post- Implementation of Medicare Part D Union Forum Call March 23, 2006 Kathryn Bakich, The Segal Company

2. 1 Understanding Part D  Plan Sponsors have spent significant time and effort to understand the Retiree Drug Subsidy program, but may be unfamiliar with the details of the Medicare Part D program  Consequently it may be difficult to know the ramifications for retirees if a plan sponsor proposing switching from traditional retiree drug coverage to coverage under a Part D plan  Understanding the plan sponsor options for 2007 and beyond means understanding how the Part D market and benefit plan designs have evolved and are being implemented

3. 2 Medicare Enrollment Numbers  According to CMS, the overall drug benefit enrollment figures as of February 13, 2006 total almost 27 million, broken down as follows: oStand-alone Prescription Drug Plans: about 4.9 million (1.3 million since January 13) oMedicare/Medicaid: 6.2 million (including 560,000 in Medicare Advantage plans) oMedicare Advantage: 4.7 million plus 560,000 in Medicare/Medicaid oRetiree coverage: About 6.4 million retirees are enrolled in the Medicare retiree subsidy oAnother 1 million retirees are in employer coverage that incorporates or supplements Medicare’s coverage. Another estimated 500,000 retirees are continuing in coverage that is as good as Medicare’s. oTRICARE/ FEHBP retirees: 3.1 million

4. 3 Plan Sponsor Options  Retiree Drug Subsidy  Contract with a PDP  Become a PDP  Wrap Arounds

5. 4 Plan Sponsor Benefit Designs Plan Sponsors are permitted to:  Provide a prescription drug benefit that is actuarially equivalent to the Medicare standard benefit, without regard to the benefit design and network access requirements of a PDP or Medicare Advantage plan and take the Retiree Drug Subsidy  Pay all or part of the Medicare PDP or Medicare Advantage Part D premium for their retirees  Provide a supplemental insured or self-insured benefit to Part D that pays all or part of retiree cost sharing, such as coinsurance and deductible (Plan payments would not count toward the retiree’s out- of-pocket maximum)  Contract with a private PDP or Medicare Advantage plan for an employer-specific plan  Become a PDP

6. 5 What are Most Plan Sponsors Doing in 2006?  Most plan sponsors signed up to receive the 28% employer subsidy from Medicare in 2006 because it is the easiest decision and does not require plan redesign  Many plan sponsors will contract with stand-alone Prescription Drug Plans (PDP)  Some plan sponsors will contract with a Medicare Advantage HMO  A few plan sponsors will offer a supplemental benefit to Part D (a “wrap”) plan  Fewer than a dozen governmental employers and very large employers and unions direct-contracted with CMS to offer a Part D program  Some plan sponsors terminated retiree prescription drug coverage

7. 6 Cost Implications of the Medicare Options for 2006  Retiree Drug Subsidy estimated by CMS to be $668 per retiree per year – actual numbers unknown  For 2006, a group health plan that contracts with a Part D plan for the standard benefit package would have costs offset approximately $720 from Medicare  Offering a supplemental benefit to Medicare means that the plan pays after Medicare pays. Cost savings will depend on the design of the supplemental plan

8. 7 Targeted Employers  Medicare Prescription Drug Plans are likely to target certain employers and attempt to sell them a Part D product  Non-profits, including state and local governments, because they do not receive the tax benefits from the Retiree Drug Subsidy and because of GASB  Plans that do not meet the “actuarial equivalence” standard and therefore are not eligible for the Retiree Drug Subsidy  Due to caps on retiree contributions, the number of employers who do not meet the actuarial equivalence standard may increase over time

9. 8 A Few Critical Factors in Decision Making  Is the Retiree Drug Subsidy producing expected returns?  Are there collective bargaining restrictions on benefit modification?  Is benefit redesign acceptable to the trustees and the retirees? Can it be effectively communicated?  Are medical and drug benefit administration currently linked in a way that adding a separate drug plan is impractical?  Are there local Medicare HMOs that might provide alternatives?  What kind of formulary is currently used for the retiree drug benefit and how much disruption can the plan tolerate?  How stable is the Part D market?  Are there enough retirees (e.g. over 5,000) to make it worthwhile to consider becoming a Medicare prescription drug plan?

10. 9 Retiree Drug Subsidy Implementation/Due Diligence  Retiree Drug Subsidy  Payments can be requested beginning July 1, 2006  Interim one-time payment can be requested in April 2006  Reconciliation required within 15 months after the end of the Plan Year  Ongoing issues regarding how to treat retirees who signed up for Part D (terminate coverage or pay secondary to Part D)  Next steps  Plan sponsors must complete the application, payment process  Contracting with PBMs regarding RDS services, charges  Reconciliation Audits of payment requests  Send Notices of Creditable Coverage and file Disclosure Notice with CMS by March 31, 2006  Assure that plan sponsor monitors deadlines for submission of RDS application for the plan year ending in 2007

11. 10 Understanding the Part D PDP  We’ll review several issues important to understand when considering implementing a Part D Prescription Drug Plan  Benefit design  Formulary  Network  Cost  For PDPs that contract with a group health plan, all of the above are negotiable

12. 11 Prescription Drug Plan Regions DRAFT

13. 12 Stand-Alone Prescription Drug Plans  There are 2,190 stand-alone PDP options in the US  There are 10 companies offering stand-alone PDPs in every state:  Aetna Medicare  CIGNA Health Care  Coventry AdvantraRx  Humana  Medco  MEMBERHEALTH  PacifiCare  SilverScript  United Healthcare  WellCare

14. 13 What kind of Benefits/Network will Plans Offer?  PDPs may offer the standard benefit design, an actuarially equivalent benefit, or a supplemental benefit (additional premium could be charged)  Individuals must be able to use the PDP’s negotiated discounts even if they are not eligible for a benefit (e.g., before the deductible is met)  Low Income Subsidies are available for individuals with incomes under 150% FPL. Subsidies increase benefits and offset premiums

15. 14 Out-of-Pocket Maximum  “True Out-of-Pocket” (TROOP) rule: Only individuals or another person (e.g., family member) can pay out-of-pocket amounts and have that payment count toward the out-of-pocket maximum  Payments from a group health plan, insurer or other third party arrangement toward beneficiary cost sharing do not count toward the individual’s out-of-pocket maximum  Costs are not considered toward out-of-pocket maximum if they are for non-formulary prescription drugs or drugs purchased from outside the US

16. 15 Medicare Rx Standard Benefit Design – 2006 5% Beneficiary 95% Medicare “Coverage Gap” $5,100 100% Beneficiary 25% Beneficiary 75% Medicare $2,250 $250 Deductible 100% Beneficiary $250

17. 16 Coverage Gap Issues  The coverage gap is the hole in coverage between $2,250 and when the individual reaches their out of pocket maximum of $3,600  Some Medicare PDPs offer coverage in the gap, and others do not  A PDP might fill the gap with generics or brand, or both, or could leave the gap empty

18. 17 Sample High and Low Part D Plans Low Benefit Plan  $250 Deductible  Tiered Copay: $5 generic; $20 preferred brand; $40 non-preferred brand  Extra Coverage in the Coverage Gap? No  Number of Top 100 Drugs on Formulary: 85  Mail Order offered High Benefit Plan  $0 Deductible  Tiered Copay: $5 generic; $20 preferred brand; $40 non-preferred brand  Extra Coverage in the Coverage Gap? Yes, for generics  Number of Top 100 Drugs on Formulary: 99  Mail Order offered

19. 18 Formulary Issues  Medicare Prescription Drug Plans must file a formulary with CMS that lists the drugs covered under the plan  Drugs not listed are not paid for by the PDP and do not count toward an individual’s TROOP

20. 19 Formulary Issues  Retirees who move from an employer-sponsored plan to a Medicare PDP may see a change in the covered drugs  A new formulary may replace an old one (or even no formulary)  A displacement analysis determining how many retirees will be affected by the formulary change is important  Under Medicare Part D, if the retiree’s drug is not on the new formulary they can switch drugs, ask for a formulary exception, or pay for the old drug out of their pocket  Medicare required a 90-day fill for prior drugs in 2006, but that rule is not likely to continue in 2007

21. 20 Network Issues  Medicare Prescription Drug Plans must satisfy certain network rules, but the network might be different than that currently in place for a group health plan  PDPs can offer a nationwide pharmacy network to employer group plans. However, to do so the PDP must offer an individual product in the area where the employer has most of its employees  Consequently, displacement analysis regarding whether the PDP network is appropriate for the group of retirees is important

22. 21 Eligibility and Enrollment–Part D  Entitled to or enrolled in Part A or enrolled in Part B and live in a Part D region  Voluntary Enrollment  Employers can Group-Enroll their retirees into a PDP  Annual Open Enrollment, beginning November 15, 2005  Right to change elections annually  Special enrollment periods (e.g., an individual may specially enroll if they lose actuarially equivalent employer-sponsored coverage)  Penalties for late enrollment are 1% per month (minimum)  Penalties are not imposed if individual had Creditable Coverage

23. 22 Group Enrollment in a Prescription Drug Plan  Employer Group Health Plans (EGHP) have several options for enrolling retirees in a Prescription Drug Plan on a Group Enrollment basis  Annual Open Enrollment  Special Election Periods –For individuals enrolling in or disenrolling from an employer/union-sponsored Part D plan –No limit –May be used when an employer would otherwise allow coverage changes  Group enrollment –No individual enrollment form needed for each beneficiary –Provide notice of group enrollment not less than 30 calendar days before effective date –Permit retirees to decline; include information about consequences

24. 23 Let’s Talk Timetables  Trustees need to know the time frames for decision making and program implementation  Time tables will differ for each Medicare option

25. 24 What will CMS do Next??  March - April 2006 – Approximate time for release of Part D deductible, coinsurance, OOP max for 2007  April 17, 2006 – Formularies must be submitted to CMS  May 1, 2006 – CMS issues renewal/non-renewal notices to PDPs  June 5, 2006 – PDP bids due to CMS  September 15, 2006 – Approximate date for final PDP approval for 2007 benefit year  October 1, 2006 – Plans may begin to market to individuals  October 15-30, 2006 – Medicare & You handbooks mailed  November 15-December 31, 2006 – Annual Election Period  January 1, 2007 – Part B Premium indexed based on income and phased in over 3-year period

26. 25 Retiree Drug Subsidy Timetable  Subsidy applications must be submitted 90 days before the beginning of the Plan Year for which the subsidy is requested  Calendar year plans – September 30, 2006  Non-calendar year plans need to monitor timeline for their plan years; e.g. July 1 plans have a March 31 filing date  Notices of Creditable Coverage are required every year  Disclosure of Notice of Creditable Coverage required on March 31, 2006, and 60 days after the beginning of the plan year for subsequent years

27. 26 PDP Contracting Timetable  We know what companies are offering PDPs in regions and nationally  We will know the benefits and formularies this spring  Plan sponsors won’t know how much the Medicare plans are getting paid until August or September each year  Unknown payment terms leaves a short window for negotiating the benefits and premiums with a Part D plan  Unknown payment means implementation must occur in October/November/December  Similar time frames if contracting with a Medicare HMO or PPO

28. 27 Becoming a Prescription Drug Plan  Application deadline was March 20, 2006  Option is available for 2008 if the 2007 deadline was missed

29. 28 Helpful Acronyms  CMS = Centers for Medicare & Medicaid Services  MA-PD = Medicare Advantage Plan with Prescription Drugs  MMA = Medicare Modernization Act  PDP = Prescription Drug Plan  RDS = Retiree Drug Subsidy  TROOP = True Out-of-Pocket

30. 29 More Information  CMS website has further information on the Part D program and the employer subsidy  For more information about employer-sponsored plans and Part D go to http://www.cms.hhs.gov/EmplUnionPlanSponsorInfo/  Retiree Drug Subsidy information is available at http://rds.cms.hhs.gov/

31. 30 Questions Kathy: 202-833-6494 kbakich@segalco.com