Prescription for Change: Options for Retiree Drug Coverage in the Age of Medicare Part D

Prescription for Change: Options for Retiree Drug Coverage in the Age of Medicare Part D
by Wayne Miller

An explanation of the options employers have under the Medicare Part D Act.

American employers are crying "uncle" under the strain of paying for healthcare benefits, especially the rapidly rising costs of prescription drugs. As more workers live longer and new drugs enter the market, the price tag for maintaining these benefits for workers, retirees and their dependents continues to go up. According to federal statistics, the average annual expenditure for prescription drugs for those over 65 increased 35 percent from 1997 to 2000, rising from $819 to $1,102 or three times the average spent for those under 65.1 Employers are paying for drug benefits for about one in three Medicare-age Americans.2 About 90 percent of plans covering prescription drugs have no upper limit on coverage.3

The legacy of health benefit costs for retirees is threatening the ability of major companies to be profitable and competitive. With two and a half retirees and dependents for every one active worker, General Motors (GM)–the world's largest automaker–spent $5.1 billion in 2004 on retiree healthcare in the United States.4 GM's sweeping changes in its retiree program, announced in October 2005, are indicative of the magnitude of the problem and the extent of the changes that many firms may need to make.

On the positive side, some relief has arrived with the introduction of the Medicare Part D, or the Prescription Drug Improvement and Medicare Modernization Act (MMA) of 2003, which took effect in January 2006. Of the several options available to employers, the clear, first-year favorite was the retiree subsidy. However, as companies live with the reporting and administrative requirements of the subsidy, and become more familiar and comfortable with the program, other options may be more attractive in the long term.

This article provides insight into the options available under MMA and presents their pros and cons. In addition, it offers recommendations for the critically important components that any effective pharmacy benefit program must have today, based on several decades of experience in managing drug benefits for senior populations.

New MMA Options
Employers have four options under the MMA:

  • Choose the retiree subsidy.
  • Endorse one of the Prescription Drug Plans (PDPs) for its retirees.
  • Choose a wraparound supplemental plan to enhance Medicare coverage.
  • Sponsor their own PDP.

Each of these options has advantages and disadvantages, depending on the specifics of the employer's situation. This section examines each of these choices and why a plan sponsor might want to select it.

  1. Retiree Drug Subsidy (RDS)–Employers who currently have a retiree drug benefit may be eligible for the RDS. The RDS provides a 28 percent tax–free subsidy for allowable drug costs, which are between $250 and $5,000 in 2006. To qualify, an employer must demonstrate that the net value of the benefit (i.e., less the retirees' contribution) is equivalent to the standard Part D benefit.


  • The subsidy will be valued at $668 (pre–tax) in 2006, equaling $891 at a 25 percent marginal tax rate and $1028 at 35 percent marginal tax rate.
  • In addition to being tax free, the subsidy translates into little disruption to the existing benefit plan, and enables the plan sponsor to maintain existing provider relationships with their health plan and pharmacy benefit management (PBM) firm.Disadvantages
  • The major disadvantage of the RDS is that the submission requirements are administratively burdensome. Firms must collect census and pharmacy claims data on retirees and dependents, determine retiree Medicare eligibility, collect general employer and union contract information, and track systems to manage claims and eligibility.
  • Non–profit organizations do not benefit from the subsidy's tax exemption.
  • Plan sponsors' retiree benefit may not meet actuarial equivalence tests for future retirees.
  • Employers must wait a month or more for subsidy payments.
  • And finally, due to the haste in which some firms had to make a decision, they may find later that their plans don't qualify for the subsidy after all.

Employers should consider the RDS when:

  • Current retiree benefits meet the Centers for Medicare and Medicaid Services' (CMS) equivalence test.
  • The employer is unable or unwilling to migrate retirees to the Part D benefit.
  • The employer is concerned about retiree and/or vendor disruption.

PDP Wraparound Supplemental Plan
This option can be utilized by both self–insured employers and fully–insured employers. The wrap supplemental plan offers Medicare Part D primary benefits to employees supplemented by additional benefits to cover the gap. The wrap benefit uses the PDP's formulary and retail network.


  • Medicare is a primary payor, thus decreasing the employer's costs proportional to the amount Medicare pays first, which in 2006 was $900. The value of Medicare as a primary payor may exceed the value of the RDS (especially for tax–exempt organizations).
  • The employer can approximate the same level of benefits for retirees and can group enroll retirees into the PDP.


  • Under a PDP, the employer's financial commitment grows as coverage gaps increase over time.
  • There is less flexibility to customize the formulary and network as compared to the RDS option.
  • In addition, some analysts are concerned there will be possible administrative complications (e.g., processing two bills instead of one).
  • In most cases the retiree will require two ID cards to access prescription coverage.

Employers should consider this option if the organization:

  • Is tax–exempt.
  • Currently takes risks for retiree benefits.
  • Expects that future contributions to their retiree benefit will not meet the equivalence test.
  • Is interested in allowing Medicare to become the primary payer.
  • Can accommodate some retiree disruption.
  • Has retirees living in areas where wrap plans are available.

A plan sponsor who chooses the wraparound supplemental plan can contract with a PDP to coordinate both the primary and supplemental benefit, and manage functions required, such as True Out–Of–Pocket (TrOOP) account–ing, Explanation Of Benefits (EOB) compliance, claims processing of primary and secondary benefits, CMS reporting, network contracting, coordination of benefits, direct member reimbursements, account management and implementation services and Med–ication Therapy Management (MTM) programs. The administrator can also offer additional services such as a custom formulary and clinical programs.

Employer–sponsored Prescription Drug Plan
A plan sponsor can decide to form its own PDP and assume the financial risk in the plan by contracting with CMS directly. To do this, the plan sponsor must meet all PDP requirements and be willing to accept the risk exposure. It is advisable to contract with an outside entity, such as a pharmacy benefit management company, to provide the drug benefit and its administration.

Endorsed Option
In this option, the plan sponsor selects a PDP for all retirees. This choice requires a minimum commitment of time, money and resources. The plan sponsor then determines if the company will pay all, part or none of the premiums on behalf of the retirees.


  • CMS pays the national average bid to the selected PDP, freeing the plan sponsor from risk and cost.
  • Retirees are treated as individual enrollees so there is no need for a group enrollment.

A plan sponsor not currently making a contribution to retiree benefits, or who is considering dropping retiree benefits, may find this option to be her/his most appealing choice. Also, a plan sponsor who wants to make a small contribution towards retiree benefits will be able to do so under this option.

Whether the employer chooses one of these new options and selects a PDP or continues with their own pharmacy benefit plan, it's vitally important that the selected plan sponsor has experience in managing drugs for seniors to ensure that prescription drugs are used appropriately, safely and cost–effectively. Seniors' prescription benefit programs require special oversight and management. For example, the average senior takes six to 10 medications at one time. Often, these individuals have chronic illnesses, multiple diagnoses and multiple physicians. These situations pose challenges for plan sponsors ranging from the potential for adverse drug reactions (ADR) to increased opportunities for medical errors to simply being unable or unwilling to be compliant with a medication regime.

While MMA regulations require each PDP to offer MTM services, the choice of these services and their scope is not spelled out. Therefore, plan sponsors should do their "due diligence" to make sure that their PDP or PBM has the expertise and clinical management experience to manage utilization, safety and compliance, in addition to administering the program.

The following five components have been proven to be effective in managing drugs for a senior population.

  1. Managed formulary. Under a managed formulary, drugs are selected by a pharmacy and therapeutics (P & T) committee that looks at current research and the total efficacy of the drug. In addition, the PBM developing and administering the program will use prior authorization to check for dosing, frequency of use and provide patient education prior to implementation of the drug regimen.
  2. Generics. Generic drugs are the bioequivalent of their branded counterparts; their use can save thousands of dollars each year. The pharmacy benefit plan should have programs in place to educate patients and physicians on generics and ensure the safe and effective switching from branded drugs to appropriate generics.
  3. Mail service. Utilizing mail service for prescription refills is safe, convenient and cost–effective. Drugs are usually less expensive by mail than at retail, and the convenience of mail delivery is attractive to many older people. Many seniors report saving an average of $400 per year as they pay fewer co–pays for a 90–day supply versus the traditional 30–day supply at retail pharmacies. Mail service also has the capability to dispense over–the–counter drugs at significant discounts and to provide educational materials on specific disease states that are important for compliance for seniors. Pharmacists should be available 24 hours a day, seven days a week to offer immediate customer assistance. Finally, due to the high degree of automation in today's state–of–the–art mail service facility, accuracy rates should be higher in mail service than at retail pharmacies.

    Because pharmacists have access to an individual's prescription drug history through claims data, they are in an ideal position to intervene to prevent drug combinations that may cause adverse reactions, provide education about side effects and inform patients about safety issues.

  4. Specialty pharmacy management. Specialty pharmacy drugs are the "wonder drugs" of today. These drugs are also expensive–averaging $1,000 to $1,500 a month–and the treatment programs associated with them are complex. However, they have the potential to prolong the onset of debilitating illnesses such as rheumatoid arthritis and multiple sclerosis, vastly improving the overall quality of life. Because of their high cost, these drugs require intensive oversight and care manag, soment to ensure those who are taking them secure optimal benefits and guarantee that employers' dollars are used wisely. However, the nature and promise of these drugs makes them an important component of an effective pharmacy benefitprogram for seniors. Personalized care management programs are effective in helping seniors and their families stay compliant with the complex treatment regimens and get the full benefit from them.
  5. Preventing polypharmacy. As noted, seniors take multiple medications, thus increasing the chance for dangerous and costly drug interactions. Employers should look for plans with the ability to develop and implement polypharmacy programs that can identify potential harmful drug interactions through automated edits in the retail pharmacy when a prescription is filled, pharmacist intervention at mail service, as well as special programs that educate patients and physicians about potential side effects and combinations of drugs to avoid.

What's Next for Employers and Retirees
Whatever option employers choose for their retiree pharmacy benefit programs beyond 2006, they must secure real value from this benefit. Given the new array of choices through Medicare Part D, after selecting the best option, plan sponsors need to look carefully at the structure of their plan or a prospective PDP to see that programs are in place to promote safe and appropriate drug use for the older population that is covered.

Wayne Miller, R.Ph., M.B.A., is vice president of Client Management for Prescription Solutions, a pharmacy and medical management company based in Costa Mesa, CA. For more information visit


  1. Wellner, Allison Stein. "Payment Tiers for Seniors," HR Magazine, 8.04.
  2. Medpac, "Report to the Congress: Medicare Payment Policy," p. 201, 3.03.
  3. Henry J. Kaiser Family Foundation, Hewitt Associates 2003.
  4. Detroit Free Press, "GM's CEO must cope with retiree benefit cost," 5.20.05.