U.S. to pay billions in drug subsidy

Money used to prod firms to maintain retiree health care

By Rachel Brand, Rocky Mountain News
April 19, 2005

Qwest Communications, Lucent Technologies and the Colorado Public Employees' Retirement Association will reap millions of dollars in tax-free federal subsidies next year.

They're among the employers nationwide to collect billions in taxpayer dollars for prescription drug benefits, part of the government's efforts to prod companies into maintaining retiree health care.

The legislation, which takes effect Jan. 1, 2006, comes at a time when companies aggressively have been scaling back retiree health care payments.

Critics are skeptical that the federal subsidy will translate into generous benefits for retirees, and some think that even after receiving the maximum subsidy of $1,330 per retiree, companies still could cut benefits.

"If companies have a very generous benefit, they can reduce that benefit as long as its equivalent to (Medicare) Part D," said Deane Beebe, a spokeswoman for the Medicare Rights Center, which provides free counseling services to people with Medicare questions or problems. "Employer coverage is already eroding. Our concern is that employees will be worse off."

Of employers who still offer drug benefits, the benefit is often much more generous than the new benefit paid by the federal government, which includes an average monthly premium of $37 and a $250 deductible.

The government pays 75 percent of prescription expenses between $250 and $2,250. Then there's a gap in coverage in which participants pay their entire drug bill. Once drug costs top $5,100, Medicare coverage resumes, with the government paying 95 percent of the bill from that point.

As long as the employers' benefit is equivalent to the smaller federal benefit, employers can get up to $1,330 per employee per year. Because the actual payment will be based on drug use, the government estimates a $668 per person average benefit.

Medicare, for its part, sees a brighter picture.

"You have to look at what's been going on," said Mark Hamelburg, director of the employer policy and operations group at the Centers for Medicare and Medicaid Services. "There's been significant erosion in retiree benefits. There's a real consensus and optimism that this will stem that erosion.

"We expect that by far most employers will take the subsidy, and they will maintain benefits."

Qwest, which offers a prescription drug plan for roughly 24,000 retirees 65 and older, estimates that it will reap $33 million in taxpayer subsidies to offset the cost of continuing coverage in 2006.

A company spokesman declined to give specifics about the company's drug plan or how the plan might change next year.

"At this point, we'll be communicating 2006 plan designs later in the year," said Qwest's Bob Taves.

Lucent Technologies, with 77,000 Medicare-eligible retirees, said it expects to get a $60 million-a-year subsidy from the government. In addition, the law will reduce Lucent's annual retiree expense by $90 million a year beginning in fiscal 2007.

The $30 million difference is because of the company's expectation that retirees will opt out of Lucent's plan altogether, said Lucent spokeswoman Joan Campion.

"It could be they find reliance on Medicare Parts A, B and D more financially attractive, rather than remaining in Lucent's retiree medical plan," Campion said.

Such talk has raised a red flag for retirees, who argue that their current plan already is much better than Medicare's drug plan.

The only reason to opt out is if Lucent cuts back on retiree drug coverage next year, said Ed Beltram, spokesman for the Lucent Retirees Association.

"At this point, we've not decided if or how we would alter our prescription drug plan in response to the current legislation," Campion said. "But as always, we would inform our retirees when we determine what path we would take."

Lucent has 400 employees and 3,000 pre-Medicare and Medicare-eligible retirees in Colorado.

The Colorado Public Employees' Retirement Association, or PERA, serves as the retirement plan for all state employees and workers in numerous school districts and municipal governments.

It subsidizes the cost of Medicare HMOs or Medicare supplement insurance for retirees age 65 and over to the tune of $115 a month.

About 8,000 of those retirees are enrolled in Medicare managed care plans - all of which offer prescription drug coverage - and another 18,000 buy Medicare supplement insurance, which also offers prescription drug coverage.

PERA hasn't calculated how much the federal subsidy will mean next year, but if it gets 26,000 of its Medicare supplement members to stay in PERA, PERA would reap about $17.3 million next year.

PERA will continue to give retirees $115 a month to cover their benefit, and it said the price of the benefit could drop for retirees.

"We'll be figuring the value of the subsidy into the cost of the plans next year," said Wendy Cenzyk, insurance director for PERA. "Hopefully, we'll see a reduction in the premiums retirees will pay, but we can't say for sure."

Companies don't have to take the federal subsidy. They can coordinate their plan with Medicare Part D, creating a plan that wraps around the drug benefit.

Or they can drop retiree health coverage altogether, forcing retirees to buy drug coverage through private plans.

Denver-based Johns Manville, with about 8,000 Medicare-eligible retirees, hasn't set firm plans.

"Right now, we're still evaluating the effects of this benefit," said Paul Gennaro, director of corporate affairs and communications.

 

Companies to get break in benefit costs

• Starting in 2006, as part of the Medicare Prescription Drug, Improvement, and Moderniza- tion Act, the U.S. government will reimburse employers 28 percent of prescription drug coverage over $250 and up to $5,000 per person. The move will save companies billions of dollars.

• Companies can get up to $1,330 per employee per year, though the government estimates a $668-per-person average benefit, depending on the quantity of prescription drugs used per person.

• The Congressional Budget Office estimates that Medicare will spend $71 billion on employer subsidies from 2006 to 2013.

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