The Retiree Drug Subsidy (RDS) was always a mixed blessing for employers. With tax changes starting in 2013 that tilted the balance further toward “more trouble than it’s worth,” employers are getting ready to flee – if they can just find a better spot to land.
As a health insurance agent, stepping up to the plate with a strategic solution can deepen your relationship with current customers and broaden your business to new ones. There should be plenty of new business to capture, judging by the federal government’s own estimates. More than 4 million of the current 6.2 million lives now covered by RDS are expected to disappear from that category by 2014.
Fortunately, recent federal guidance regarding the advantages of another option gives advisors and agents a solid alternative to recommend. One type of Employer Group Waiver Plan (EGWP+Wrap, often called Egg Whip Plus Wrap) allows employers to continue to offer their same health benefits to their retirees while lowering costs and reducing future obligations.
What went wrong with RDS?
Looking back, RDS always sounded better than it actually performed. After creating Medicare Part D drug coverage, the federal government was eager to keep employers who already covered their retirees better than the CMS base plan from abandoning their plans and shifting the burden to the government. The subsidy was designed to convince employers it was better financially to go on providing coverage.
Under the subsidy, the government covered up to 28 percent of approved costs. Not only was the federal payment tax free, but the employer could write off 100 percent of the costs – even the portion covered by the subsidy – as well as the administrative costs of complying with government regulations. However, that administrative burden was heavy, with annual reporting requirements, attestations and other hoops to jump through.
The disenchantment with RDS only grew when the Patient Protection and Affordable Care Act of 2010 was passed. One of its provisions eliminated an employer’s ability to write off the RDS payment provided by the government; policymakers said they were merely closing an unintended loophole. Another made the administrative costs no longer deductible. Both provisions are slated to take effect in 2013.
The end result is a badly diminished subsidy. At one time, the subsidy was estimated to be worth about $500 per Medicare beneficiary to employers. Its value is now far less, as indicated by the dozens of companies that had to restate their future tax liabilities soon after the provisions were signed into law. Although federal estimates put the cost to employers at $4.5 billion, AT&T alone restated its future tax obligations as $1 billion greater.
How to position EGWP+Wrap
What can employers do in place of RDS? EGWP+Wrap is an increasingly attractive option. As the name indicates, the Employer Group Waiver Plan is partnered with a wrap-around secondary plan. This self-insured product with its two integrated parts can be designed to mimic the employer’s current retiree drug benefit, which is particularly helpful for employers who face benefit requirements under collective bargaining agreements.
EGWP+Wrap offers multiple advantages for employers. Recent federal government guidelines have established that, by using this strategy, an employer can harvest the cost savings from both the government-mandated 50% Drug Discount Program and the reinsurance provided by the federal government for catastrophic care. Analysts estimate the value is about 25 percent more than employers have been getting from RDS.
The key is to combine your current plan design with a doughnut hole level program (“the wrap plan”) that provides coverage for brand-name drugs in that doughnut hole when retirees are required to pay for 100 percent of their drug costs. With the wrap firmly in place, the 50% Drug Discount Program reduces the employer’s costs, while the employee still pays his or her normal copays.
The second big savings comes from the ability to participate in the federal catastrophic reinsurance program. All that is required is that the EGWP+Wrap have a calendar-year basis for the plan. Because the amounts paid under the 50% Drug Discount Program count toward the Out-of-Pocket Threshold for catastrophic coverage, more retirees are likely to qualify for catastrophic coverage.
Finally, a third benefit for companies is that EGWP+Wrap lowers their future benefit costs and obligations, which means their current balance sheet accounting for post-retirement benefits is lower.
Making EGWP+Wrap work well
The advantages of EGWP+Wrap are compelling – but many employers may still hesitate because this is a much more complex strategy than they are used to, and one that requires sophisticated administration. However, by partnering with a drug benefit administrator that is well versed in EGWP+Wrap processes, the administrative burden is shifted away from the employer. The right administrator can handle formulary management, federal reporting requirements and the broad range of other tasks required to make health benefits work for both employers and retirees.
The coverage also may require more extensive communication with retirees so they understand the new approach. That, too, can be addressed by selecting a drug benefit administrator that is experienced in call center operations and customer support.
Health benefit advisors and agents do not have to be experts when it comes to EGWP and the EGWP + Wrap. But they do have to recognize an opportunity when they see one, and know who to partner with to take advantage of that opportunity. In the case of the diminishing value of RDS, all they have to do is focus on finding that right escape route for employers – and government actions and guidelines have made EGWP+Wrap a journey worth taking.