July 14, 2004
Medicare Law Is Seen Leading to Cuts in Drug Benefits for Retirees
By ROBERT PEAR

 
WASHINGTON, July 13 - New government estimates suggest that employers
will reduce or eliminate prescription drug benefits for 3.8 million retirees
when Medicare offers such coverage in 2006.

That represents one-third of all the retirees with employer-sponsored
drug coverage, according to documents from the Department of Health
and Human Services.

No aspect of the new Medicare law causes more concern among retirees
than the possibility that they might lose benefits they already have.

Democrats are likely to cite the new estimates as evidence to support
their contention that the new law will prompt some employers to curtail drug
coverage for retirees, forcing them, in some cases, to rely on
Medicare's leaner benefits. Republicans do not want to see the government
supplant employers in providing drug benefits to retirees.

Senior officials at the department have been saying for weeks that they
believe federal subsidies will induce more employers to continue
providing drug benefits to retirees. Under the new Medicare law,
the government expects to spend $71 billion on subsidies to employers
from 2006 to 2013.
To qualify for assistance, an employer must certify that its retiree drug
benefits are worth at least as much as the standard Medicare drug
benefit.

Federal officials have substantial discretion in deciding how to measure
the value of drug benefits. They said they would use that discretion to
encourage employers to continue providing drug coverage - a goal
ardently favored by retirees, labor unions and members of Congress
from both parties.

When Medicare officials held an open-door forum on June 9, they were
deluged with complaints from Medicare beneficiaries alarmed at the
prospect of cuts in retiree drug coverage.

Gale P. Arden, director of the private health insurance group at the
Centers for Medicare and Medicaid Services, said: "This is a new line of
business for us. We have never been engaged in paying subsidies to
employers or unions before.''

In last year's debates, Republicans repeatedly said the new drug
benefits would be completely voluntary. "Seniors happy with the current
Medicare system should be able to keep their coverage just the way it is,''
Mr. Bush said in his State of the Union Message in 2003.

But Representative Pete Stark of California, the senior Democrat on the
Ways and Means Subcommittee on Health, said it now appeared that the
new law would "force millions of retirees out of comprehensive retiree drug
coverage and into a flawed, inadequate program.''

Still, Republican supporters of the new law and many employers said it
would help stabilize retiree health benefits. "Rather than worsening the
situation, it works to stop the trend of employers' dropping retiree
coverage,'' said Representative Bill Thomas, Republican of California,
one of the principal architects of the law.

Employers lobbied for the subsidies, saying they would slow the erosion
of retiree health benefits, a trend that began more than a decade ago.

E. Neil Trautwein, assistant vice president of the National Association
of Manufacturers, said Tuesday that he believed the new law "has the
potential to slow or even reverse the decline in the level of retiree health
coverage provided by employers.''

Medicare officials said that 11.5 million beneficiaries would have
retiree drug benefits from their former employers in the absence of the new
Medicare law.

Under the law, according to the documents from the Department of Health
and Human Services, 7.6 million of those retirees are expected to receive
drug benefits through employer plans subsidized by the government, and 3.8
million are expected to receive their primary drug coverage from
Medicare.

This number is expected to grow to 4.1 million by 2010.

Employers who curtail drug benefits could still try to help retirees by
offering drug coverage to supplement or complement what Medicare offers.
But the government would not subsidize such assistance.

In another sign of Congressional concern about drug costs, the House
voted on Tuesday to allow Americans to import prescription drugs from other
countries, where prices are often lower. The provision was included in
the annual spending bill for the Agriculture Department and the Food and
Drug Administration.
Republican leaders said it would probably be dropped from the bill in negotiations
with the Senate. The White House opposed the provision, saying
"it would be virtually impossible'' to guarantee the safety of imported medicines.

Medicare officials plan to propose standards for employer-sponsored drug
benefits later this month.

Employers say their decisions about whether to continue offering
benefits to retirees will depend to a large degree on the federal rules -
in particular, the criteria for deciding whether their retiree drug benefits are as
generous as those provided by Medicare.

The standard Medicare drug benefit will be worth about $1,200 a year.
But its structure - with a large gap in coverage when the beneficiary must
pay all drug costs - is much different from the type of drug benefit
typically offered by employers.

Frank B. McArdle, a health policy expert at Hewitt Associates, a
benefits consulting firm, said: "The subsidy will be very popular with large
employers, whose No. 1 concern is to minimize disruption to their
retirees.

In many cases, employers who take the subsidy will be able to continue
doing just what they did before.''

But employers said that if the federal rules and requirements proved too

burdensome, they would be more likely to drop their retiree drug coverage.

Under the Medicare law, the government will pay a subsidy equal to 28
percent of drug costs from $250 to $5,000 a year for any retiree who has

employer-sponsored drug coverage as generous as the standard Medicare
drug benefit. The subsidies will be tax-free to employers, who can still take
tax deductions for the cost of retiree health benefits.

Anthony J. Knettel, senior health policy adviser at the Erisa Industry
Committee, which represents 130 of the nation's largest corporations,
said that "some big employers have dozens of different retiree health plans''
-
for different lines of business, different units of the company or
employees hired at different times. It will be difficult to determine whether the
"actuarial value'' of drug benefits under those plans is equivalent to
that of the standard Medicare benefit, he said.

John J. Schubert of PricewaterhouseCoopers, a director of the American
Academy of Actuaries, said, "It will be a real challenge for the government
to write a set of rules that can be applied to every retiree health plan
because every plan is different.''