Client Bulletins

Employee Hird Form Available Filing of Section 125 Documents on hold >> download info	Connector dispenses with filing requirement for section 125 plan documents >> download info
New filing deadline for section 125 plan documents Clarification of certain excludable classes of employees >> download info	Further information for municipal/school employers - RE: filing employer hird form >> download info
Municipal client advisory on the new GIC option >> download info	Reminder: Fair Share contribution and employer health insurance responsibility disclosure (HIRD) filing deadline approaching >> download info
Client advisory on the Massachusetts Health Care Reform Law >> download info

Articles

Consumer Directed Health Care (CDHC)

In the recent past, for some Employers, Consumer-Directed Health Care meant fully replacing their health benefits with high-deductible plans and Health Savings Accounts (HSA's). Others gave Employees a choice between HSAs, Health Reimbursement Arrangements and traditional health plans. Still other Employers didn't adopt HSAs or HRAs, but maintained their traditional plans and utilized online tools to help Employees select health care providers based on price and quality.

Employers continue to "navigate" through the choices Consumer-Directed Health Care offers. It's important to see how these options impact plan design and cost containment and to evaluate how Consumer-Driven Health Plans fare in enrollment and what changes vendors plan to make to them.

Cost Containment

While empowering Employees to take responsibility for their health is a key component of Consumer-Directed Health Care, many Employers look to the CDHC movement to help better control out-of-control health costs.

Recently, Health Reimbursement Arrangements were established at several of our Clients including Private and Public Sector Employers.

What effect did this have on their plans?

For a Private Sector Employer who had just over 50 Employees covered by a local HMO plan, adding deductibles and increasing co-pays reduced costs by 20%. The Employer and the Employees now have lower insurance costs.

The Employer then added an HRA plan with a local Third Party Administrator who is providing claims administration and where the Employees will have a portion of the deductibles paid by the Employer as they are incurred. Clearly it's a "win-win" for both parties; for those members who use these benefits, the Employer is assisting in the cost shift, and the members have the benefit of knowing their monthly insurance costs have been reduced. Also the Employer is better off because they have reduced insurance costs, and only spend the savings if and when claims are incurred.

For a Public Sector Employer, a simple HRA was added for the specific reimbursement of in-patient hospital expenses incurred by the members. The Employees now enjoy a lower payroll contribution because of this change, and the Employer reimburses any member who incurs one of the hospital co-pays. Again, both the Employer and the Employees "win" in this scenario, and this Employer will likely reduce their health benefit increase by approximately $200,000.

Our Organization assisted both Employers in establishing the formal process and provided them with documents, material, and more Importantly, employee educational support in implementing these plans.

Please contact our office on how a simple HRA can possibly benefit your plan costs.

Enrollment Trends

Participation in Consumer-Directed Health Plans is growing, but is still somewhat small. Enrollment rates for CDHPs increased from 1.1% of covered employees in 2004 to 3.9% in 2005, according to Fidelity Investments, which surveyed 86 Employers with more than 2,000 workers.

Marc Hallee, senior vice president of Health and Welfare consulting for Fidelity, stated, "A number of clients that I work with have seen numbers as high as 50% of their Employees enrolled in CDHPs. [For workers who already had a CDHP], we saw re-enrollment rates reach 95%, the highest observed across all types of health plans. This indicates a very high level of Employee satisfaction with CDHPs."

At least 1.6 million Americans are enrolled in a Health Reimbursement Arrangement, and 810,000 are enrolled in a high-deductible health plan that qualifies for a health savings account, according to the Kaiser Family Foundation, which studies health care trends.


Employer Actions

Roughly 45% of large firms indicated they would offer a Consumer-Directed Health Plan this year, typically as one of several health plan choices, a recent Fidelity survey finds. Among employers projected to have a CDHP this year, 62% said they would provide an HSA, while 38% declared they would offer an HRA.

Hallee predicts that at least three-fourths of Fortune 500 companies will offer a CDHP next year. "Employers are becoming increasingly committed to CDHPs as a way to address health care cost issues, a development that should help drive employee participation rates even higher," he says.

When they don't offer a CDHP, it's because "they do not think their employee population is engaged enough to understand the program," he explains.

Conclusion

Consumer Directed Health Plans have a great impact on the purchasing of health care. Based on recent studies the emerging data suggests positive outcomes through Employer sponsorship of Consumer Directed Health Plans. There is a higher degree of consumer engagement exhibited by those employees (and their families) who participate in some type of CDH program. Consumers are generally satisfied with their CDH plan choices and have a high incidence of reenrollment. The availability of more information geared toward quality provider analysis, tiered benefit design, integrated wellness incentives and other plan enhancements will also help change the face of Consumer Directed Health care over the next few years.

Contact your EBS Foran Account Manager to learn how we can help you understand and benefit from a Consumer Directed Healthcare Plan.

Sources:
Employee Benefit News o March 2006
Leah Carlson Shepherd & Tom Anderson

International Society of Benefit Specialists Benefits Quarterly - 2nd quarter 2006
C. William Sharon, CEBS & Toni Donahue


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Massachusetts Enacts Landmark Health Care Reform Bill:
An Overview of H. 4850, An Act Providing Access to Affordable, Quality, Accountable Health Care

By Alden Bianchi esq./Steve Weiner esq.

On Wednesday, April 12, Massachusetts Governor Mitt Romney signed into law a sweeping health care reform bill (House Bill H. 4850, as reported out by the Conference Committee) entitled, "An Act Providing Access to Affordable, Quality, Accountable Health Care" (the "Act"). The Act's stated purpose is to "more effectively cover currently uninsured low-income populations, and . . . make quality health coverage more affordable for all residents of the Commonwealth."1 It includes a mandate under which residents of the Commonwealth are generally required to obtain health insurance, and employers who do not offer health insurance to employees are subject to an assessment.2 There are also a host of provisions aimed at assuring access to coverage through premium support programs and providing so-called "safety net" care. The Act is structured to assure the availability of $385 million in federal matching funds under the most recently approved version of the Massachusetts' Medicaid waiver. It also makes important changes to the Commonwealth's Medicaid program by expanding benefits, especially to children, and by enhancing acute hospital and physician provider reimbursement.

Set out below is a summary of the principal features of the Act.

Individual and Employer Mandates

The Individual Mandate

Perhaps the Act's most novel and controversial provisions relate to what the Conference Committee calls the "individual mandate". The individual mandate requires that, beginning July 1, 2007, all residents of the Commonwealth obtain and maintain a minimum level of health insurance coverage-referred to as "creditable coverage"-based on a premium schedule published each December 1 that will allow for variations for age and rate. (The requirement has been likened to the requirement imposed on motorists to obtain automobile insurance.) Residents will be required to confirm that they have health insurance coverage on their state income tax forms filed in 2008, and coverage will be verified through a database of insurance coverage for all individuals.

The Act's individual mandate provisions will be enforced by the Department of Revenue. Individuals who fail to comply with the individual mandate in 2007 (and do not otherwise qualify under an exception) are faced with the loss of their personal exemption. For 2008 and beyond, failure to comply results in the imposition of a penalty of up to 50% of the monthly "minimum insurance premium for creditable coverage" for each month without coverage. The penalty is first satisfied by forfeiture of any available tax refunds (subject to higher statutory priority claims on use of refunds), and, if that is insufficient, a direct assessment on the affected individual for the balance.

An individual need not obtain coverage in accordance with the individual mandate where his or her refusal to obtain coverage is based on:

1. religious beliefs,
   
2. a hardship (based on criteria established by regulation), or
   
3. a determination that no affordable coverage is available.

Toward this end, the Act establishes a sliding "affordability scale." In addition, individuals will have appeal rights to dispute a determination that the mandate applies or that he or she can access affordable coverage.

The Employer Mandate and the "Fair Share Contribution"

The Act imposes on Employers with 11 or more full time employees (FTEs) who are not "contributing employers" an obligation to make an annual "fair share employer contribution," which is capped at $295 for each FTE. (The requirement is pro-rated for employers with seasonal or part-time employees.) A "contributing employer" is an employer that offers a group health plan to which it makes a "fair and reasonable premium contribution," as defined by regulations issued by the Commonwealth's Division of Health Care Finance and Policy (DHCFP).

The amount of the fair share contribution is established based on a portion of the cost paid by the state for free care used by workers whose employers do not provide insurance. Under current law, a portion of the payments made by employers who provide health coverage goes towards free care costs, and this obligation will continue under the new law at the current level (a total of $160 million per year). The purpose of the fair share contribution is to level the playing field between employers who offer group coverage and those that do not.

There is also a separate surcharge-referred to as the "free rider surcharge" - which is imposed on employers who do not provide health insurance and whose employees access the Commonwealth's uncompensated care pool. The Act refers to these employers as "non-providing employers." A "non-providing employer" does not include an employer that:

1. contributes to or arranges for the purchase of health insurance and is a signatory to bona fide collective bargaining agreement,
   
2. participates in the current so-called Insurance Partnership which provides for
   Commonwealth contributions toward premium payments for employed
   qualifying individuals, or
   
3. employs fewer than 10 individuals (it is not clear if this means 10 FTEs).
   
   

The free rider surcharge is triggered when an employee receives free care more than three times a year, or a company has five or more instances of employees receiving free care in a year. The surcharge ranges from 10% to 100% of the state's costs of services provided to the employees, with the first $50,000 per employer exempted.

Internal Revenue Code Section 125 Cafeteria Plan Mandate

Internal Revenue Code Section 125 permits employees to make pre-tax contributions under employer-sponsored group health plans. These plans are referred to as "cafeteria" plans. While often misunderstood and underappreciated, cafeteria plans allow employees to make contributions toward the costs of employer-provided coverage with pre-tax dollars.

Under the Act, employers with more than 10 employees are required to offer cafeteria plan coverage to their employees. The employer will also need to provide access to group health coverage either under its own group health plan or through the health insurance connector (described below). Coverage may be entirely employee paid, but, unless the employer contributes at least a minimum amount established by DHCFP, the employer will be required to pay its "fair share" contribution (as discussed above.)

The Health Insurance Connector

The Act establishes an entity that it refers to as the "Commonwealth Health Insurance Connector" (or the "Connector"), the purpose of which is to connect individuals and small businesses with health insurance products. The Connector will issue a "Good Housekeeping Seal of Approval" through which it certifies that group health insurance products meet certain pre-established criteria. Individuals can also purchase coverage directly from the Connector.

Policies purchased through the Connector will include mental health coverage and other state-mandated benefits. Employer-sponsored group health plans that offer coverage through the Connector can choose to contract only with certain providers so long as their products are Connector-approved. Regulations will establish deductibles and co-pays (other than those sold in connection with health savings accounts (HSAs), which will have the deductibles established by law).

Individuals who are employed by businesses with 50 or fewer employees may also purchase health insurance through the Connector on a pre-tax basis under a cafeteria plan that the employer is required to make available. The Connector, which is under the jurisdiction of the Commonwealth's Department of Administration and Finance, will be overseen by a separate board of private and public representatives.

Insurance Market Reforms

The Act merges the non-group insurance and the small-group insurance markets, and it enables health maintenance organizations to offer coverage plans that are linked to HSAs. Children are permitted to stay on their parents' insurance plans for two years past the earlier of the loss of their dependent status, or until they turn 25, and 19-26 year-olds will be eligible for new, lower-cost, specially designed products offered through the Connector. Finally, the Act also imposes a moratorium on the creation of new health insurance
mandated benefits through 2008.

Health Insurance Subsidies

The Act creates a subsidized insurance program called the Commonwealth Care Health Insurance Program (Commonwealth Care). To be eligible to enroll in Commonwealth Care, individuals must satisfy the following criteria:

1. They must be residents of the Commonwealth;
   
2. Their income must not exceed 300% of the Federal Poverty Level (FPL);
   
3. They must not be eligible for Medicare, Medicaid or a State Child Health Insurance Program (SCHIP);
   
4. They must not have accepted employer financial incentives to decline employer insurance; and
   
5. Their employers may not have provided insurance coverage in the previous six months for which they were eligible and for which their employers met certain contribution thresholds. (This criterion may be waived under appropriate circumstances.)

Premiums for Commonwealth Care will be set on a sliding scale based on household income, and no plansoffered through this program will have deductibles. The program will be operated through the Connector, which will retain any employer contribution to an employee's health insurance premium.

The Act includes special provisions for eligible individuals with income up to 100% of FPL. Plans covering these individuals will include inpatient and outpatient services, preventive care, prescription drugs (through the MassHealth formulary established for the Medicaid program), medically necessary inpatient and outpatient mental health/substance abuse services, and medically necessary dental services. No premium, deductible or other cost sharing will apply to these plans. Enrollees will be responsible only for co-payments for prescription drug and for non-emergency use of emergency rooms at levels equivalent to those established for MassHealth participants. Co-payments may be waived, however, in the case of substantial financial or medical hardship.

The Act also expands eligibility for employee participation in the current Commonwealth-subsidized Insurance Partnership program from the current limit of 200% of FPL to 300% FPL.

Medicaid

The Medicaid Waiver

In order to comply with changing requirements of Federal law, the Act shifts federal Medicaid reimbursement dollars from the support of individual hospitals to the funding of health insurance coverage for uninsured individuals. This provision was required under the terms of a waiver previously granted to the Commonwealth by the federal Centers for Medicare & Medicaid Services (CMS). The Act also expands Medicaid coverage under a series of community-based outreach programs to locate people who are eligible for Medicaid but not yet enrolled, and by expanding eligibility for children. Currently, children in families who earn up to 200% of the FPL are eligible for MassHealth. The Act increases eligibility to children in families earning up to 300% FPL and restores all MassHealth benefits that were cut back in 2002. There is also 2-year pilot program for smoking cessation treatment for MassHealth enrollees. In addition, the Act expands enrollment caps for certain categories of MassHealth eligibles, such as for persons with HIV.

The Act sets aside $90m in fiscal year 2007, $180m in fiscal year 2008, and $270m in fiscal year 2009 for Medicaid rate increases for acute hospitals and physicians. (The Act specifies no methodology for calculating these rates or increases.) 15% of the total amount each year is to be allotted to physician rate increases. Amounts earmarked do not include rate increases for community health centers (CHCs), although it is expected that additional funding for Medicaid rate increases for CHCs will be added by an amendment to the Act or by separate appropriation. This funding for acute hospital and physician rate increases comes from the Commonwealth Care Trust Fund (The "Fund") and is only one of the purposes for which the Fund may be used. If revenues in the Fund are less than projected, all of the funding obligations of this Fund are to be reduced proportionately.

The Act also creates the "MassHealth Payment Policy Advisory Board" (the "Board") for the purpose of:

1. reviewing and evaluating Medicaid rates and payment systems;
   
2. recommending rates and methodologies that provide fair compensation; and
   
3. promoting "high-quality, safe, effective, timely efficient, culturally competent and patient-centered care."
   

Before implementing payment policies recommended by the Board, DHCFP must provide 90 days advance notice to the joint committee on health care financing and the House and Senate ways and means committees.

The Act directs the Secretary of Health and Human Services to seek all needed amendments to the Commonwealth's Medicaid waiver to implement its provisions and to obtain the maximum available federal matching funds. This is intended to secure the expected $385 million in federal matching funds to be made available as part of the approved waiver. However, one of the tests for the availability of federal matching funds is that the additional expenditures under the Act do not cause the Commonwealth to be in violation of the so-called "budget neutrality" condition of the waiver, which, based on a fairly complex formula, provides, more or less, that, over the life of the Medicaid waiver, federal matching funds to Massachusetts under the waiver do not exceed what the federal government would have funded absent the waiver.

The Act requires that the Secretary must conduct all negotiations with CMS, and with the federal Office of Management and Budget, regarding the waiver in consultation with a member of the House appointed by the Speaker and a member of the Senate appointed by the Senate President. Any terms or conditions negotiated with CMS, and all correspondence related to the waiver, must be submitted to the House and Senate appointees at least seven business days prior to submission to CMS. The Secretary must also report quarterly to the joint committee on health care financing and the House and Senate ways and means committees on the status of waiver amendment.

The Safety Net

The Act eliminates the current "uncompensated care pool" and replaces it with the "Health Safety Net Fund" (or the "Fund"). The Fund will be administered by a newly-created Health Safety Net Office. Funding for uncompensated care will remain at the same level in FY 2007 as it is in FY 2006. However, beginning in FY 2008, the only identified sources of dollars for the Fund will be the current payor and hospital assessments of $160 million each. There is no assurance, after FY 2007, of continued state support for uncompensated care, given the expectation that the new mechanisms for accessing affordable insurance coverage will reduce dependency on uncompensated care.

Rates of payment to hospitals and CHCs from the Fund will be derived from Medicare's payment methodologies.

Funding

The Act is designed to leverage federal dollars to match state resources and to use revenue generated by employer contributions and, eventually, the individual mandate, to fund premium support for health insurance coverage.

1. Conference Committee Report (April 3, 2006), at page 1 (emphasis in the original)
   
2. Concurrent with his signing of the Act, the Governor used his line-item veto authority to
   veto the imposition of $295 per worker fee on most employers who fail to offer coverage to
   workers as well as a dental benefit for Medicaid recipients. The Legislature did override the
   veto of the business fee, which is projected to raise $48 million a year.
   

If you would like further information on any subject covered in this article, please contact Steve Weiner (617 348 1757 or sweiner@mintz.com) or Alden Bianchi (617 348 3057 or ajbianchi@mintz.com)

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Legislative Updates

Medicare Part D Continues to Evolve
By Vincent DiBenedetto

Benefit Brief-Case


Medicare Reform, Health Savings Accounts, and the Future of Consumer Directed Health Care-A Brief Summary

Alden J. Bianchi, Esq.*
Mintz, Levin, Cohn, Ferris. Glovsky and Popeo, P.C., Boston,Massachuetts

President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") on December 8, 2003. Among other things, the Act makes sweeping changes to the underlying structures of Medicare, adds a Medicare prescription drug benefit, and establishes a special subsidy to encourage employers to provide prescription drug coverage. But from the employer's perspective, the Act's most important feature is the introduction of a new type of account-the "Health Savings Account" or "HSA"-the purpose of which is to provide individuals with a tax-advantaged, participant-owned vehicle that allows them to accumulate funds for health care and other purposes.

Congress established the HSA at least in part to facilitate "consumer driven health care" (or CDHC). CDHC arrangements seek to lower the cost of health care by involving individuals in their own health care and providing monetary incentives in the form of tax-advantaged savings. Sustained, double digit increases in employer-based health coverage have left employers desperate for ways to constrain runaway medical cost increases. CDHC-i.e., arrangements that encourage greater employee participation in health care purchasing decisions-is being touted as the mechanism that can collar spiraling health care costs by encouraging and empowering previously passive plan participants to choose health care wisely and in a manner that is cost efficient. The statutory and regulatory mechanisms that existed before the Act, however, such as medical flexible spending accounts and health reimbursement accounts, were not seen as conducive to the adoption and maintenance of CDHC arrangements. This is no longer the case because of the HSA provisions of the Act.

HSAs are at bottom a legislative response to concerns over rising health care costs, and as the enabler of CDHC there is a great deal riding on them. Employers cannot continue to sustain double-digit medical cost increases. Something, as they say, must give. If this experiment fails, then what? Elected officials, policymakers and concerned individuals at both ends of the political spectrum would prefer that employers get out of the business of offering health care entirely. On the left are the proponents of universal health care; on the right are those that advocate for individual insurance coverage. If CDHC falters, one side might well get its wish.

* Alden J. Bianchi is a Member in the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., where he leads the employee benefits and executive compensation practice.

Mr. Bianchi has written and lectured extensively on employee benefits issues. He is the author of three books, Employee Benefits for the Contingent Workforce and Plan Disqualification and ERISA Litigation (both published by Tax Management, Inc.), and Benefits Compliance (published by World-at-Work), and dozens of benefits-related articles. His speaking engagements include presentations to the American Bar Association, American Insurance Group, Deloitte & Touche, PricewaterhouseCoopers, Salomon Smith Barney, UBS, ING Financial Services and the Risk Insurance Management Society, as well as a host of bar groups and professional, educational and civic organizations.

Mr. Bianchi is a graduate of Worcester Polytechnic Institute and the Suffolk and Georgetown Law Schools, and he holds an LL.M. in taxation from the Boston University Law School. He is listed in Woodward & White’s The Best Lawyers in America, and Marquis’ Who’s Who in American Law, and he is a Fellow of the American College of Employee Benefits Counsel

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Client Corner


Assumption College Celebrates a Centennial of Excellence and Service
By Marc Bilotta

Founded by the Augustinians of the Assumption (Assumptionists) in 1904 the institution that became Assumption College was a junior seminary for French-speaking young men who wanted to study for the Catholic priesthood. To this date, the links to the Assumptionists remain strong not only in the name of the institution and the college library dedicated to Fr. Emmanuel d'Alzon who founded the religious congregation in France in 1850 but in its tradition of excellence and service to the greater community.

The original students were the sons of immigrants from French Canada who had settled in Worcester. Located in the Greendale section of the City, by World War I Assumption had evolved into an eight-year institution (high school and college), and in 1918 it awarded its first bachelor's degrees. Through the years of the Great Depression and World War II, Assumption remained a small school dedicated to producing a Catholic elite to serve the French-speaking or "Franco-American" population of New England. Like many other institutions, World War II decimated the school, when virtually the entire college-level student body left for military service. Fortunately, the numbers in the high school increased as dramatically as those in the college declined.

After the war, control of the school passed from European to Franco-American Assumptionists. Graduates of the college themselves, the new leaders observing the gradual assimilation of French-speaking families into the English-speaking mainstream began the evolution of the school to reflect this. In the early 1950s the school admitted Franco-American boys who knew no French and then young men who were not ethnically Franco-American. Adding a summer school and a graduate studies program at the same time the school began to out grow its Greendale campus.

Just as this new era was getting under way, a tornado devastated the Greendale campus on June 9, 1953, taking three lives and causing extensive damage to buildings and grounds. The Assumptionists decided to turn this disaster into the long-awaited opportunity to separate the high school from the college. The Greendale campus was restored as the home of Assumption Preparatory School, while the college carried on in temporary quarters until Faculty and students took up residence on the current Salisbury Street campus in 1956.

During its half-century on Worcester's West Side, the college has lived through many changes and challenges. By the end of the 1950s, lay Professors outnumbered Assumptionists on the faculty, a process that has accelerated over the decades. In 1968 the Assumptionists turned the school over to a new board of trustees made up of both religious and lay people. In 1969 the first class of women was admitted to the college. In 1972 the college welcomed its first lay president, Dr. Pasquale DiPasquale.

Since his appointment in 1998, Dr. Thomas R. Plough, the fifteenth President of Assumption College, has launched an aggressive $60 million physical plant expansion, including the 63,000 sq. ft. Testa Science Center, an Information Technology Center, art studios and classrooms, four suite-style residence halls, as well as renovating the campus center space, and building two parking decks. At the same time, he has championed an increase in the number of full-time faculty members and additional academic opportunities for experiential learning. Undergraduate enrollment has grown strategically by 16% over the past four years and has reached its optimum size of 2,150. Graduate and Continuing Education programs as well as the very successful Worcester Institute for Senior Education (W.I.S.E) continue to support the Assumption College's commitment to lifelong learning.

In the past four years, seven Assumption students have been awarded Post-baccalaureate Fulbright grants to study in Spain, Ireland, South Korea, Taiwan, Finland, Ecuador and Belgium.

"Assumption College has a long-standing association with EBS Foran. Their knowledge, experience and insight have helped us to keep abreast of the latest trends in employee benefits and to make informed decisions that provide our employees with a comprehensive benefit package. We are indebted to EBS Foran and their dedicated staff."

Francis P. Gurley, Executive Vice President/Treasurer, Assumption College

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In the Marketplace 

Flexible Savings Accounts Come of Age
By Kenneth Lombardi

A recent study by the Center for Studying Health System Change1 revealed that many Employers are choosing cost shifting as a method to help control rising Health Care Costs.

Cost shifting comes in many fashions but whether you ask Employees to pay more for health care through higher contributions or by paying more in co-pays or deductibles the end result is that they will be taking home less disposable income. This often leads to Employee dissatisfaction and a decrease in Employee retention. The introduction of an FSA is a remarkably simple solution to this problem that many Employers overlook.

The FSA has been in effect for over 20 years, but in the benefit rich environment of the Northeast, it didn't fit since most plans covered all expenses at 100%. Ironically, our desire to have robust benefit plans is one of the main reasons why health care costs, including insurance premiums, are now escalating at such a high rate. Now however, the benefit of being able to use pre tax dollars to help offset some of the increased expenses caused by cost shifting appeals to both Employers and Employees.

Here is how an FSA works:

Assuming a 15% increase in premium an Employee with an annual income of $40,000 who had an annual premium of $2400 and annual out of pocket medical expenses of $1000 would see disposable income drop by $242. The same employee able to pay out of pocket medical expenses with pre tax money from an FSA would actually see a raise in disposable income of $88.

Added to this savings can be many other advantages included, but not limited to the ability to use a debit card linked to the FSA account to pay for out of pocket medical expenses. FSAs are still tied to the " use it or lose it" requirement of the IRS. However, the allowance of the use of these funds for over the counter drugs and other medically necessary expenses greatly reduces the probability that the Employee will not spend in full the moneys deposited to the account. The ability to access their account balance either through the Internet or by phone also helps to assuage employee concerns about this requirement. There are also some savings in FICA contributions for the employer that can help offset the small monthly administrative fee charged.

EBS Foran has a unique relationship with TASC (Total Administrative Services Corporation) for FSA administration that can help you build an integrated solution to increasing costs. For further details contact Patrick J. Foran.

In future articles we will discuss other cost shifting strategies and cutting edge plan innovations that will help you hold the line on increasing Health Care costs.

 1 Issue Brief "Employers Shift Rising Health Care Cost to Workers: No Long-Term Solution in Sight.

### ###
The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation's changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.
### ###

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What's Under Underwriting?
 
What Comprises an Insurance Rate?
By Edward Byrnes

We look at premium rates every time we receive our pay check and then again each time the premium bill is paid to the insurance company, but what factors make up the rate, and which of these factors can be used to impact total costs?

1. Claims are the first component of the rate. The insurance company must first project what the paid claims will be during the next policy year. Depending upon the size of the employer the insurance company uses actuarial tables based upon demographics (age, sex, location) in conjunction with your selected plan design, or your historical claims history, or a combination of both to project what claims will be. Claims are paid and charged against your experience as they are paid. Claims on average take approximately 2 months to work through the system. Some are paid in only a few days but others (mainly large hospital claims) can take months to reach the insurance company for payment. This can pose a problem for insurance companies. If a policyholder terminated on December 31, 2003, claims would still be coming in for much of the following calendar year without any premium payment to support that cost. To protect against this risk insurance companies post what is called an "incurred but not reported" claim reserve. The combination of these two pieces represent incurred claims.

2. Administration is the second component of the rate. Administration costs are the cost of doing business with the insurance company. In order to pay the claims of a policyholder the carrier must employ a great number of people and machinery to not only simply pay, record, and track a claim, but to assist in the management of the health care of each employee and dependent and the management of the health care plan they market to the public. Additionally, there are the many interfaces with State and Federal government agencies.

3. Risk is the third and final component of the rate. While no one can predict the future perfectly 12 months ahead of time, the amount of risk must be developed. There are many factors can impact claims such as changes in federal laws, and simply how many individuals in a group have claims in excess over what can reasonably be expected. The risk charge is what the insurance carrier charges as an attempt to cover excess risks on their entire block of insured business.

Certainly the employee can impact rates by accepting a larger share of the claims burden by utilizing higher co-pays, deductibles, or coinsurance amounts. This will certainly lower rates, but it does not necessarily lower claims costs.

Utilizing more restrictive benefit plan designs such as HMO's and PPO's may lower claims costs in certain areas of the Country, but in Massachusetts virtually everyone is covered through a managed care contract.

The fact is that the only way to reduce claims costs and therefore risk charges is to alter the manner in which individuals utilize healthcare dollars. We certainly do not want to lower the utilization of preventative care services as this could adversely impact future medical costs. But possibly altering the way we use other services or the way we pay for other services could provide the answer. Consumer Driven Health Care Plans in conjunction with approved tax advantaged programs may prove to hold some answers.

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Dental Bites
By Seamus O'Hara

As health cost have continued to experience double -digit increases, Employers have been bombarded with a plethora of benefit plan innovations that are designed to reduce cost while maintaining employee retention. However, often overlooked in the reconfiguration of health benefits is Voluntary Dental Coverage. These plans offer a benefit that is both cost effective to the Employer and desirable to the Employee.

As part of EBS Foran's continuing effort to assist our clients in controlling the cost of Health Benefits, we urge all of you to consider the implementation of Voluntary Dental plans.

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MUNICIPAL MUSINGS

Consumer Driven Health Care Cost Shifting in an Equitable Way
By Kevin Paicos, MPA

With health care costs escalating at annual double-digit rates, cities and towns across the Commonwealth are constantly searching for new ways to preserve or enhance employee benefits, while simultaneously reducing costs.

Future editions of this newsletter will feature in-depth discussion of this new generation of these plans. In the meantime, please feel free to call if you would like to discuss CDHC plans in detail.

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Benefit Brief-Case

The Impact of the Working Families Tax Relief Act of 2004 on the Definition of “Dependent” for Employee Benefit Plan Purposes
By Alden J. Bianchi, Esq.*

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Client Corner

The Hyde Group
One Hundred and Thirty Years of Manufacturing Excellence
By Vincent A. DiBenedetto

Founded 130 years ago by Isaac Perkins Hyde to provide cutting instruments to the New England leather goods and shoe manufacturing industries Hyde Manufacturing and its Affiliated Companies has grown into one of the worlds largest manufacturer of industrial machine and hand knives, fix-up-paint-up tools, and decorating aids.

It only took eighteen (18) years for Hyde to grow from a small operation in which Isaac made the knives, loaded the wagon and delivered the product to a large manufacturer of a multitude of Industrial knives. By 1917 business had again expanded and an additional plant was built in the shape of an H to allow for efficient workflow and accommodate expansion. Eight years later in 1925 the H shape of the building had been filled in with additions. Hyde continued to expand with the addition of painting and decorating tools to the product line in 1927.

Isaac Hyde's strong Yankee work ethic to run a business in such a way that profit ensured not only the continued success of the Company but a fair return to stock holders and the health and welfare of the employees allowed the company to weather the economic dislocation of the great depression. After the Second World War, Hyde continued to grow adding two additions to its plant in the 1950s along with a new packaging concept called the "Card-O-Sell. The "Sixties" saw more expansion and an enlargement and modernization of the heat-treating department along with the acquisition of the Russell Harington Cutlery Company.

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In the Marketplace


Health Reimbursement Arrangements Help Hold the Line
By Kenneth Lombardi

In our last Newsletter, we indicated that in future articles we would discuss other cost shifting strategies and cutting edge plan innovations that will help you hold the line on increasing Health Care costs.

Deductible Leveraging and its Impact on Rates
By Edward Byrnes

As we all know, medical care trend factors are made up of many different items, including, inflation, cost shifting from federal programs, new advancements in medical technology, etc. A very important factor that impacts the trend factors we see in our carrier renewals is "Deductible Leveraging."

Deductible leveraging occurs when one piece of the claim cost is "frozen" while others are not. An example of this is the co-pay. For example; in year one an office visit co-pay (paid by the Employee) is $10. The Employee incurs an office visit that costs $80. The employee pays $10 and the Plan pays $70. In the second year there are no plan changes and the employee has another office visit. With 14% medical care trend that office visit in the second year will now cost $91.20 (1.14 X $80). The employee still pays $10, but now the plan pays $81.20. In this case, medical care inflation to the employee is zero (0 %) while medical care inflation to the plan is not 14% but 16% ($81.20 divided by $70).

This concept becomes more significant the larger the "frozen piece" of the puzzle is. For example some Employers may have deductibles included in their Plan or larger co-pays for such things as hospital inpatient co-pays. Again, employing a 14% trend factor let's assume for example that an Employer's plan has a $200 calendar year deductible that the Employee must satisfy prior to receiving benefits. After the deductible the Employee pays 20% of the expenses and the plan pays 80% of the expenses. During the Plan Year, the employee has outpatient surgery, which costs $1,750. The employee pays $200 and then pays $310 (20% of $1,550), for a total expenditure of $510. The plan pays $1,240 (80% of $1,550). In the second year the employee has the same procedure performed. Now the bill for this procedure one year later is $1,995 (1.14 times $1,750). The employee still pays the $200 since there were no plan changes and then pays 20% of the remaining $1,795 for a total expenditure of $559. The employee's trend is 9.6% ($559 divided by $510). The plan on the other hand pays $1,436 (80% of $1,795) resulting in a trend factor of 15.8%.

In self –funding where the Employer purchases Individual Stop-Loss protection deductible leveraging can truly produce significant concerns. For example in 2003, an Employer purchases a policy with a $100,000 individual deductible. This policy provides that if any of the Employers covered Employees has individual claims that exceed $100,000 during the contract period the amounts over that $100,000 will be reimbursed to the Plan. During 2003 an Employee has claims totaling $247,000 for an ongoing condition. The Employer during this plan year is reimbursed $147,000. In 2004 this employer renewed this policy with no changes to the deductible. Again, .In policy year 2004 this same employee has claims that total $281,580 (1.14 times $247,000). The employer is reimbursed $181,580. The employer's trend is 0% as his share of the cost of this claims remains at $100,000. The insurance carrier on the other hand has recognized a trend of 23.5%. And this situation usually ends up with the Employer Group receiving a rate increase by the reinsuror who now has a larger share of the risk load

When designing plans from year to year it is important to recognize that when changes are not made to co-pays or deductibles deductible leveraging can severely impact how medical care trends impact will impact your rates.

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Cobra Factoids

These plans may be either fully Employee paid, fully Employer paid or paid by a combination of Employer and Employee funds. In plans that have Employer participation there is often the additional advantage that this participation may be used as a "leverage tool" to offset benefit changes in a medical plan. The Bureau of Labor's Statistics indicate that 68% of Employers with 20-90 and 90% of Employers with 100 or more Employees make dental coverage available. This is the first in a series of articles to describe how these plans function, their impact on the workplace and their effect on the overall cost of Employee Welfare Benefits.

Group Dental Insurance contracts have been patterned after group medical expense contracts and they contain many similar, if not identical, provisions. Dental plans may be limited to specific types of services, or they may be broad enough to cover virtually all dental services. In addition, coverage can be obtained from various types of providers, and benefits can be in the form of either services or cash payments. Many fully insured Dental Plans are moving toward a managed care approach to providing benefits .The most common example of this is the emphasis on providing a higher level of benefits for preventive care. As fully insured Dental Benefit plans have become more prevalent, the percentage of persons receiving preventive care has increased. As a result, the percentage of people requiring care for more serious dental problems has decreased.

The federal tax treatment of fully insured Dental Benefit premiums and benefits is the same as the tax treatments for medical expense premiums and benefits. In Self Funded Dental Benefit plans an Employer may self administer the plan or retain the services of a Third Party Administrator. In either case, the Plan may use a preferred provider network to provide the dental services.

Many fully funded dental plans as well, as self-funded plans, can be classified as indemnity plans or managed care plans and as with medical care expense insurance, different plan types may be available, Latest statistics indicate that 31% of fully funded plan participants are covered by under traditional fee-for-service indemnity plans; 37% are covered are enrolled in dental PPOs and 13% in DHMOs. An additional 19% are estimated to be participants in non-insured discount dental plans. Rarely is there any type of conversion privilege for fully insured Dental benefits. However, Dental coverage is subject to the continuation rules of COBRA.

There is an immediate and long-term impact that the introduction of these dental plans can have on the workplace even though they may be of no direct cost to the Employer. This will be the topic of our next article.

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Municipal Musings

Cost Containment Strategy
By Kevin Paicos, MPA

As health insurance costs continue to rise and projections for double-digit increases for the next few years continue to be made, Municipalities are increasingly examining health plan benefit changes as a cost-containment strategy.

These changes often consist of increases to office visit and emergency room co-pays. Historically such co-pays have been in the $5 (office visit) and $25 (emergency room) range, but modest increases such as $15/50 or even higher, can produce important and immediate savings in the form of premium reductions.

Other benefit changes that are typically considered are co-pays, (or less frequently coinsurance), for ambulatory or in-patient surgical procedures. These co-pays typically range from $100 to $500. Again, the introduction of such co-pays can produce significant reductions in premium increases.

Since these premium reductions affect both the Municipality and the Employee, (consistent with the respective premium contributory shares), they can offer important cost-containment that represents true "win-wins".

Often, if the employee contributory premium share is in the “average” range of 20-30 percent, the Employee's premium savings will be greater than the out-of pocket cost increase due to the co-pay change(s). If the out-of-pocket costs to the employee are further buffered with the use of a Flexible Spending Account, the savings/cost ratio can be very favorable to the Employee.

In the consideration of such options, Municipal Employers are reminded however, that changes to Employee group health plans are a mandatory subject of bargaining. Any prospective change to benefit plans should be discussed with labor counsel or other responsible Municipal officials. Existing labor contract language should be reviewed to determine the full extent of “management rights” to consider and introduce such changes.

Finally, and particularly for those communities that are associated with Joint Purchase Groups, the impact of the Dennis decision must be considered and appropriate notice to labor unions provided.

Despite all of these implications, many Communities are successfully introducing benefit modifications as described above and doing so in a cooperative partnership with their Employees and labor representatives. We would be pleased to assist you in this process. Please give our office a call to learn more.

Every community should consider this strategy as part of their effort to contemporize their group health plans, and achieve the cost-containment gains that such strategies provide.

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COBRA Update

COBRA ELECTION FORMS:

To avoid sending separate COBRA Notices to all of the family members that are qualified beneficiaries be sure to include all such family members by name and relationship to the Employee in the Election Forms to sent to COBRA eligible employees. As always, we recommend your notice be sent by both regular and certified mail.

Women's Health and Cancer Rights Act (WHCRA) Annual Notice Requirement:

The WHCRA requires that in addition to the notice that must be presented to all new enrollees an annual notice must also be sent to all participants. This is an exception to the notice requirements commonly associated with Summary Plan Description rules. The Group Health plan, its insurance companies or HMOs may send these notices. You should check with your insurance provider to be sure that this requirement is being met. For a sample notice form you may contact us at ebsforan.com.

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Regulatory Ramblings

ERISA - An Overview of the Requirements for Plan Documents and Summary Plan Description
By William George & Denise Cole

The Employee Retirement Income Security Act of 1974 (ERISA) is a Federal Law governing the design and administration of Employee Benefit Plans. ERISA defines the term “employee benefit plan” to include any pension benefit plan or any welfare benefit plan. A welfare benefit plan is any plan that provides, through the purchase of insurance or otherwise: medical insurance; benefits in the event of sickness, accident, disability, death or unemployment; severance pay; vacation benefits; training programs; day care centers; scholarship funds; prepaid legal services; or any welfare benefit described in the Taft Hartley Act. For the purpose of this article, we are limiting our overview to welfare benefit plans and have excluded any reference to ERISA pension requirements. For those clients with pension plans, we encourage you to review your ERISA compliance with your attorney.

Perhaps the most important exception outlined in the ERISA regulations is that relating to Government and many church plans. Under ERISA section 4(b), Governmental and some church plans are not subject to any of the requirements of Title I of ERISA, including its reporting and disclosure provisions. As a result, Government Entities and many church plans are not subject to ERISA.

While the exempt entities may not be subject to ERISA, most opt to provide some level of information to plan participants regarding their rights under the Plans which the exempt entities maintains. Because ERISA does not apply, it does not mean that there are not other state laws under which participants could claim that communications from the exempt entity have been less than forthcoming. As a result, many exempt entities opt to follow the ERISA Summary Plan Descriptions requirements in whole or in part.

The goal of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans. ERISA requires that sponsors of employee benefit plans provide participants and their beneficiaries with adequate information regarding their plans. The law also contains provisions for reporting to the government and disclosure to plan participants.

To be in compliance with ERISA, the Plan Administrator must provide plan participants with Summary Plan Descriptions (SPD) and in addition, make other documents available upon written request (within defined timeframes) and have copies available for examination. These documents include the latest updated SPD, latest form 5500, trust agreement or other plan document that serves as the plans constitution. While ERISA requires that plans be established pursuant to and administered in accordance with written plan documents keep in mind that an ERISA governed plan may exist even if there is no written plan document. An example would be when an Employer has a practice of giving severance pay to Employees that are laid off or terminated but does not have a formal plan. We encourage you to seek the advice of your legal counsel should you have any questions in this regard.

Under ERISA Summary Plan Descriptions are required to be distributed to each plan participant and to each beneficiary receiving benefits as follows: For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant and a beneficiary must receive a copy within 90 days after receiving benefits. For newly created plans, an SPD must be distributed to participants and beneficiaries within 120 days after the plan is first instituted. Failure to meet these standards can result in substantial fines being levied against the plan sponsor. Further, when a plan is significantly modified, plan participants must be provided with a revised SPD that reflects the changes to the plan. It is also important that plan sponsors take a reasonable measure to ensure that plan participants actually receive the SPD. Distribution by first class mail is considered to be acceptable while merely posting it in a common area is not.

An excellent reference tool to use is the ERISA Reporting and Disclosure Chart for Welfare Benefit Plans prepared by Attorney Robin S. Lazarow of the Law firm Mirick O'Connell. Which Follows this article.

The U.S. Department of Labor has a very good Web site that clearly explains the requirements for ERISA compliance. ( www.dol.gov/ebsa ) We encourage you to review this web site and to familiarize yourself with the ERISA requirements for all of your benefit plans. Should you require legal counsel with a specialty in this area we would be glad to give you a referral.

View Basic Reporting and Disclosure Requirements for ERISA Welfare Benefit Plans

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Benefits Intelligence


Voluntary Benefits
By Matthew J. Capone

Employers today understand the value of a high quality benefits package, both to attract and retain the best Employees. Over time, however, the cost of offering these benefits has increased. As a result, Employers are looking for more affordable ways to deliver high quality Employee benefits. The most commonly offered add-on or Voluntary Benefit is permanent life insurance. The second most common is disability insurance which we will cover in a future newsletter.

What is Voluntary Permanent Life Insurance?

It is a non-qualified, Employee-paid whole life insurance program that allows Employees to purchase individually-owned policies on themselves and their eligible dependents for a “whole” lifetime of insurance protection. This whole life insurance product is priced to be competitive when compared to similar products that an Employee might purchase privately. In addition, employees make premium payments through the convenience of payroll deduction. Some of the program features are:

• Affordable permanent life insurance for Employees
• Premiums are paid through payroll deduction
• No Employer contributions-employees pay all premiums
• Simplified underwriting
• Permanent coverage on spouse and eligible dependent children
• Portable coverage- Individual policies can be continued at job change or retirement at the same level premium
• Income tax-deferred cash values
• Easy implementation

Benefits for Employers

This type of program complements existing benefits and can be either stand alone or combined with existing group term life insurance. It will help to enhance your total Employee benefit package without dramatically increasing your overall benefit cost. Some of the additional benefits to Employers are:

• There are no Employer contributions… premiums are paid through payroll deduction

• Helps to avoid expensive term conversion charges

• Minimal administration responsibilities

• No tax-associated recordkeeping

• May be offered to a special classification of Employees such as managers or supervisors
or any other classification of employees

•Added prestige to Employer because the program is a valuable benefit which an Employer can make available which can significantly boost employee morale

Benefits to Employees

The peace of mind that an Employee has knowing that there insurance needs can so conveniently be taken care of only makes for a more satisfied Employee. Add to this the following benefits and Employee-Employer goodwill can be greatly enhanced:

• Immediate coverage… as soon as the application is signed employees and their dependents are immediately given insurance protection under a temporary insurance agreement

• Convenient premium payments through payroll deduction

• Portable coverage… policies are individually owned, and therefore, can be continued at job change or retirement at the same level premiums

• Post-retirement insurance… at retirement, the policy's cash value my be used to provide a reduced amount of paid-up insurance coverage with no further premium payment. Or, the policy's cash value may be used to supplement retirement income or for any other purpose

• Simplified underwriting… medical exams and other requirements normally associated with the purchase of life insurance are oftentimes entirely eliminated

In conclusion, if you are looking for some good news to tell your Employees consider adding voluntary programs to your benefits package. It's the perfect way to stretch your benefit dollars and provide a real service to your Employees.

We can help design the best package for you and your Employees. For Further information contact Matt Capone at mcapone@ebsforan.com or Edd Byrnes at ewbyrnes@ebsforan.com

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Editorial Comment


The Changing Face of EBS Foran
By John P. Foran

“Omnia mutantur, nos et mutamur in iilis”
"All things are subject to change, and we change with them"
An Anonymous Latin saying

In the more than two decades that out firm has been in existence I have seen many changes in the Employee Benefits World. The design and funding of Benefit Plans have become mutable and in some respect this mutability has lead to the success of EBS Foran. I have always prided myself with the fact that this firm remains on the cutting edge of innovation. EBS has also changed over the years in structure and now is a full service firm with a dedicated staff of professionals that can provide a plethora of Employee Benefit Services.

There has also been a change in how we are paid for our services. Originally founded as a consulting firm our income was derived from the fee-for-service monies that we received directly from our clients. This allowed us to maintain the objectivity that has become one of the hallmarks of EBS Foran. We were able to obtain coverage from providers net of commission therefore providing the best possible rate for our client. This was in an era in which the insurance industry differentiated between its captive marketing and the brokerage community. Over the years this differentiation has become blurred, as the insurance industry found that is was more cost effective to use the brokerage community as a primary resource in its marketing efforts rather than maintain the large number of captive marketing agents necessary to reach the entire health plan consumer market. To accomplish this, many insurance providers developed a practice of revised rating that set one set of rates for the plans offered regardless if the sale were from an internal seller or an external seller (broker). In these instances, this has removed the ability of a consultant to provide rates net of commission to his clients and in fact on occasion made a fee-for-service arrangement the most uneconomic way in which to procure health benefits.

Our first reaction to this trend was to eliminate our established consulting fee schedule and accept the compensation load built in rate that our clients were being compelled to pay. It has become evident to us over the last few years that that the ability to conduct business based on the net commission concept has virtually ceased to exist with only a few exceptions.

The realization that this is the current configuration of how Insurance premiums are calculated has required us to react and adapt as well. We are therefore effective January 01, 2005 operating on a primarily brokerage basis for all new business. That is to say the commission fee set in the rate will pay for our services. Our existing Clients that are on a fee-for-service consulting basis will continue to be provided that service at their discretion. We will of course convert these contracts to a brokerage contract if it is the client's wish and if we determine the rates assessed incorporate such a servicing fee.

We will continue to be aggressive advocates for our Clients and I can assure you that our objectivity will not be clouded by the source of our compensation. It is our stated goal to deliver the most cost-effective result to the Employer while maintaining a high quality of benefit to your Employees

Since our inception, we have taken great pride in our ability to work with each client on an individual basis to create leading-edge benefit solutions to account specific challenges. Our commitment in this regard remains as strong today as ever. We fully recognize that our allegiance is to our Employer/Client and not to an insurance entity. Even as the method of how we are compensated changes, we are fully aware that you ultimately pay our bill be it through a fee or through commissions/service fees inherent in any insurance product. In the end we serve at your will.

As part of our continued effort to further detail to our client what is transpiring in the market place, we are providing a link on our Website that will have the 2005 commission schedules for many major insurance carriers available for your review.

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Benefit Brief-Case

An Employer's Guide to Medicare Part D Outpatient Prescription Drug Benefit-Notices of Creditable Coverage and the Retiree Prescription Drug Subsidy

Enacted into law on December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act (the "Act") radically overhauled many key features of Medicare and added a new outpatient prescription drug benefit (Medicare Part D). The Centers for Medicare & Medicaid Services (CMS) recently published a comprehensive final rule implementing many of the Act's important features. This client advisory describes the particulars of the standard Medicare Part D benefit and explains how the Act affects employer-sponsored group health plans in the following two important respects:


(i) Beginning later this year, employer and union-sponsored group health plans must provide certain notices to their Medicare-eligible participants advising whether the coverage under the plan is so-called "creditable coverage." A common misconception is that this notice requirement only applies to plans that cover retirees. This is not the case. Rather, it applies as well to any employer-sponsored plan covering only active employees and their beneficiaries if any covered employee or beneficiary is Medicare eligible. (This would include, for example, the "working aged" under the Medicare secondary payer rules-i.e., someone who continues to work past age 65.)

(ii) The Act also includes a subsidy designed to encourage employers to continue to provide retiree medical coverage. This subsidy could prove to be a boon to employers with existing retiree medical programs that cover prescription drugs.

I. The Standard Medicare Part D Outpatient Prescription Drug Benefit
The Act amends the Social Security Act ("SSA") to include a new, voluntary Medicare Part D outpatient prescription drug benefit beginning in 2006. Medicare Part D covers outpatient prescription drugs, as well as insulin and associated medical supplies and certain prescription biological products, but not over-the-counter drugs. Prescription drugs that are covered under Medicare Parts A (hospital charges) or B (physician services) are also excluded from coverage under Medicare Part D. Individuals who are entitled to benefits under Medicare Part A, or who are enrolled in Medicare Part B, are eligible. As is the case currently with Medicare Part B, there is a deadline for enrollment. If an individual fails to timely enroll, then he or she must pay a higher rate upon late enrollment. Importantly, though, the increased rate will not apply where the individual continues to work past age 65 and is covered under a group health plan with prescription drug coverage that qualifies as "creditable coverage."

Unlike Medicare Parts A and B benefits that are paid by the Government, usually through intermediaries, Medicare Part D benefits will be provided commercially through either a Medicare Advantage-Prescription Drug plan ("MA-PD") or through a stand-alone prescription drug plan ("PDP"). PDPs are state-licensed, risk bearing entities that meet Federally-established reserve requirements. MA-PDs and PDPs are funded through a combination of monthly premiums and Medicare subsidies. The prescription drug benefit that they provide must be either the standard Part D benefit or a benefit that is the actuarial equivalent of the standard Part D benefit. CMS's final rule establishes rules for determining actuarial equivalence, which are explained below.

Medicare Part D enrollees will be able to choose between "standard coverage" and "alternative coverage" (which is the actuarial equivalent of standard coverage). The standard Medicare Part D prescription drug benefit has an annual deductible of $250 (in 2006) and covers 75% of drug costs between $250 and $2,250. There is also a catastrophic coverage feature under which individuals are covered once they have reached an annual out-of-pocket threshold-referred to in the final rule as an individual's true-out-of-pocket (or "TrOOP") costs-of $3,600. Above that threshold, Medicare will pay any expenses subject to a co-payment which is the greater of (i) $2 for a generic drug and $5 for any other drug or (ii) 5% of the cost of the drug.

The absence of coverage between $2,250 and $3,600 is referred to as the "donut hole." While potentially burdensome to rank-and-file Medicare beneficiaries, Congress determined that this feature was essential to keeping the costs of the Act from spiraling out of control. To be eligible to reach the catastrophic coverage threshold requires $5,100 in prescription drug costs. This is so because the first $2,250 of prescription drug costs results in an out-of-pocket cost to the individual of only $750 (i.e., the annual deductible of $250, plus $500 of co-insurance-25% of the costs between $250 and $2,250-equals $750). Therefore, to reach the $3,600 out-of-pocket threshold amount, the individual must contribute an additional $2,850 ($3,600 - $750). The initial prescription drug costs of $2,250 (shared by the individual and Medicare) plus the additional $2,850 paid by the individual equals $5,100. When the annual Medicare Part D premium is added to the $3,600 out-of-pocket threshold, an individual would incur $4,020 before reaching the catastrophic threshold.

A participant's TrOOP costs for purposes of catastrophic coverage include only those amounts paid by a Part D enrollee or on behalf of a Part D enrollee by another individual, a charitable organization, or a State pharmaceutical assistance program. Not counted for this purpose are amounts paid by insurers, government-funded health care programs, group health plans, and other similar third party arrangements. Nor do TrOOP costs include amounts paid for prescription drugs that are not "Medicare Part D drugs"-i.e., a drug that may be covered under Part D. Distributions from health savings accounts and flexible spending accounts, however, are counted toward a participant's TrOOP.

II. Notices of Creditable Coverage
Medicare-eligible individuals may choose whether or not to enroll in Medicare Part D. This option extends to active employees who attain age 65 even if they are covered under an employer-sponsored group health plan that covers prescription drugs. For their initial enrollment to be considered "timely," these individuals must enroll in Part D between November 15, 2005 and May 15, 2006. (Thereafter, the annual open enrollment period runs from November 15 of each year to May 15 of the following year.) An eligible individual who fails to timely enroll in Medicare Part D must either maintain "creditable prescription drug coverage" (under rules that are similar to the creditable coverage provisions of Title I of the Health Insurance Portability and Accountability Act of 1996) or pay a late enrollment penalty. The late enrollment penalty is the greater of 1% of the base Part D premium for each uncovered month or the amount that the Secretary of Health and Human Service determines to be actuarially sound. It is therefore a matter of some importance that affected individuals be informed about their "creditable coverage."

Under the final rule, for employer-provided coverage to be treated as creditable coverage, its actuarial value must be equal to or greater than standard Part D coverage. CMS has yet to announce the form in which this information is to be reported. A plan sponsor offering prescription drug coverage must advise Medicare beneficiaries whether its prescription drug coverage is or is not actuarially equivalent to Medicare Part D. This notice is referred to as a "Notice of Creditable Coverage." If the coverage is not creditable, the notice must also explain that there are limitations on the periods during the year in which the individual may enroll in a Medicare prescription drug plan and that the individual may be subject to a late enrollment penalty.

NOTE: Curiously, neither the statute nor CMS's final rule imposes any penalty on plan sponsors who fail to provide this notice.

The notice of creditable coverage must be provided (i) in advance of the individual's Medicare Part D enrollment period (i.e., from November 15, 2005 to May , 2006), (ii) before the effective date of enrollment in the plan and in the case of any change that affects whether the employer-sponsored coverage is creditable coverage, and (iii) prior to each annual Medicare Part D enrollment period (i.e., May 15 of each year to May 15 of the following year).

III. The Retiree Subsidy
Included among the Act's provisions is a subsidy designed to encourage employers to continue to provide retiree medical coverage. Congress recognized that employer-sponsored retiree health plans routinely cover prescription drugs, and it was concerned that the addition of a Medicare prescription drug benefit would cause employers to drop retiree coverage altogether. After all, retirees will now have access to retiree medical coverage-including prescription drugs-under Medicare. Congress considered, and ultimately rejected, a "maintenance of effort" approach under which employers that currently offered retiree medical coverage would be required to continue to do so or face a penalty or sanction. Rather than opt for the stick, Congress chose to offer a carrot in the form of a subsidy.

CMS sets out three options for employers and unions who offer drug benefits to their retirees:

(1) Continue to provide prescription drug coverage through an employment-based retiree health plan. Where the coverage is at least actuarially equivalent to the standard Part D prescription drug benefit, the plan sponsor is eligible for a special Federal subsidy with respect to individuals who waive coverage under Medicare Part D.

(2) Contract with a PDP or MA-PD to offer prescription drug benefits to retirees who are eligible for Medicare. The preamble to the final rule notes that the plan sponsor could instead establish its own plan, which could offer either the standard Part D benefit or so-called "enhanced alternative coverage," which is more generous than the standard benefits. (This option would make sense only for very large employers and unions.)

(3) Provide separate prescription drug coverage that supplements or "wraps around" the coverage offered under Part D. Under this approach, the employer's plan pays for benefits that Medicare Part D does not. It might, for example, fill in the donut hole.
There is one other option that CMS does not discuss: the plan sponsor could drop retiree coverage altogether. While this may prove attractive to some employers, it may not be possible under all circumstances. The Equal Employment Opportunity Commission recently issued a final rule allowing employers to reduce or terminate health coverage when a retiree becomes Medicare eligible. But a Federal court has suspended the rule pending an appeal by the AARP.

Of these approaches, the subsidy is available only for the first option, i.e., where the plan sponsor continues to provide prescription drug coverage through employment-based retiree health plan in an amount that is at least the actuarial equivalent of the Part D benefit.

The Act's retiree drug subsidy pays employers 28% of a retiree's drug costs between $250 and $5000 in 2006, but only with respect to retirees who are eligible for but not enrolled in Medicare Part D. These payments are tax-free, thereby increasing their net value in the hands of employers subject to tax. The subsidy is paid only with respect to "qualifying covered retirees" who participate in a "qualified prescription drug plan," and it is determined based on his or her "gross retiree plan-related prescription drug costs."

A "qualified covered retiree" means an individual who is covered under a qualified retiree prescription drug plan who is also entitled to benefits under Medicare Part A or who is enrolled in Part B, and who is not enrolled in either Medicare Part D or in an MA-PD plan.

A "qualified prescription drug plan" is a "group health plan" within the meaning of ERISA section 607(1), which provides a prescription drug benefit that is the actuarial equivalent (or better) of the standard Medicare Part D outpatient prescription drug benefit. Qualified retiree prescription drug plans may also be governmental plans or church plans. Accordingly, governmental subdivisions and churches are also eligible to sponsor qualified prescription drug plans.

The term "gross retiree plan-related prescription drug costs" means the aggregate prescription drug costs that are incurred under the plan for a qualifying covered retiree, excluding administrative costs, but including the costs directly related to the dispensing of prescription drugs that are otherwise covered under Medicare Part D.
"Allowable retiree costs" are costs that are actually paid, net of discounts, charge-backs and average percentage rebates, by the plan sponsor or by or on behalf of a qualifying covered retiree under the plan.

To arrive at the subsidy for any particular participant, subtract from his or her allowable retiree costs, the annual "cost threshold" ($250 in 2006), and multiply the result (but not in excess of the "cost limit" of $5,000 in 2006) by 28%. The sum of these amounts for all qualifying covered retirees is the amount to which the plan sponsor is entitled.
In order to qualify for the subsidy, the plan sponsor must trace or allocate all costs in order to be able to establish that all of the components of the subsidy have been properly calculated. Certain other obligations are imposed on plan sponsors. In particular, the sponsor must provide the Secretary of the Department of Health and Human Services with an attestation that the actuarial value of the prescription drug coverage under the plan is at least equivalent to the actuarial value of the standard Medicare prescription drug coverage. This attestation must be made annually, or more often if directed by the Secretary. The plan must also provide information regarding the prescription drug coverage under its retiree health plan to both the Department of Health and Human Services and to all eligible individuals. Among other things, this disclosure will enable a participant to establish that he or she has creditable prescription drug coverage so as to avoid incurring a late enrollment fee once he or she does elect Part D coverage. The sponsor is required to maintain the necessary records sufficient to document the calculation of the subsidy for audit and oversight purposes.

IV. Actuarial Equivalence
Whether a benefit provided under an employer or union-sponsored group health plan is actuarially equivalent to the Medicare Part D outpatient prescription drug benefit is important both for purposes of the notice of creditable coverage and for the retiree subsidy. For purposes of creditable coverage notice, the determination is based on a so-called "gross value" test. Under the gross value test, both employer and employee contributions are counted. If the gross value of the plan benefits exceeds that of the Medicare Part D benefits, the plan passes the gross value test, which means that it provides creditable coverage for Medicare Part D purposes. This requirement makes sense because the purpose of the exercise is to let Medicare eligible individuals know whether they should be concerned about late enrollment penalties.

For purposes of the retiree subsidy, there is an additional requirement. The plan sponsor must-in addition to establishing that the gross value of the retiree prescription drug benefit under its plan is equivalent to or better than the Medicare Part D benefit-demonstrate that the value of the employer-provided coverage is also actuarially equivalent to Medicare Part D. This latter test is referred to as the "net value" test. The purpose of the net value test is to show that the employer is providing a Medicare equivalent benefit out of its own pocket.

NOTE: Shortly after the Act's adoption, there was speculation in the press that plan sponsors would get the benefit of the subsidy even where the retiree coverage was paid for entirely by the beneficiary-an interpretation which finds support in the Act. CMS was under some pressure to fix this "loophole," and it responded by making the employer contribution a component of establishing what constitutes actuarial equivalence. Some commentators questioned whether CMS has the authority to impose the net value requirement. CMS defended its position at length in the preamble to the final rule.

The final rule provided employers with substantial flexibility both in determining the "plan" with respect to which it claims the subsidy and in allocating employer contributions to prescription and non-prescription benefits under a plan that covers both. If a plan offers more than one category or class of prescription drug coverage, the employer can apply the net value test either in the aggregate or category-by-category. If one category or class fails the net value test, then the test (and the subsidy) can be limited to the categories that do pass. In the case of an integrated group health plan (i.e., a plan that reimburses both medical and prescription drug costs), the plan sponsor can allocate its entire contribution to the prescription portion for purposes of the net value test, which should vastly improve an employer's chance of collecting the subsidy.

V. True-Out-Of-Pocket Costs (TrOOPs)
As discussed above, the standard Medicare Part D benefit has a gap (or donut hole) that the Medicare Part D enrollee must cover out of his or her own funds before being eligible for catastrophic prescription drug coverage. Whether an enrollee has fulfilled this requirement is measured with respect to his or her TrOOP. TrOOP is important for two reasons:

(1) Amounts paid by an employer under a wrap around plan do not count toward the determination of TrOOP costs. This means that employer-provided coverage that is more generous than the standard benefit will in some instances be of little use to a covered individual with significant outpatient prescription drugs.

(2) TrOOP costs can be factored into the net value portion of the actuarial equivalence calculation, making it marginally easier for employers to demonstrate compliance. For this purpose, the net value of the Part D benefit is reduced by the value of the supplemental employer-provided coverage.

VI. Conclusion
Employers that sponsor group health plans, whether covering active employees, retirees or both, cannot escape the reach of these new rules. The Act's notice provisions are onerous to be sure, but they are also necessary. Plans will likely rely on their insurance carriers to comply with the Act's notice and reporting requirements, but they should expect that insurers and providers of administrative services will pass along the added compliance costs.

The Act's retiree subsidy will require sponsors of retiree plans (and those considering adding retiree coverage) to weigh their options and decide how best to proceed. Congress understood that adding an outpatient prescription drug benefit to Medicare might hasten the decline of employer-sponsored retiree medical plans. The purpose of the subsidy is to counter that decline. Whether it will achieve that result remains to be seen. By design, the subsidy is not as valuable as the Part D outpatient prescription drug benefit. The financial consequences will of course vary from employer-to-employer, and there are other, non-financial considerations (e.g., benefits might be required under the terms of a collective bargaining agreement) that need to be weighed.
IRS CIRCULAR 230 NOTICE

In compliance with IRS requirements, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties or in connection with marketing or promotional materials.

* Alden J. Bianchi is a Member in the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., where he leads the employee benefits and executive compensation practice.

Mr. Bianchi has written and lectured extensively on employee benefits issues. He is the author of three books, Employee Benefits for the Contingent Workforce and Plan Disqualification and ERISA Litigation (both published by Tax Management, Inc.), and Benefits Compliance (published by World-at-Work), and dozens of benefits-related articles. His speaking engagements include presentations to the American Bar Association, American Insurance Group, Deloitte & Touche, PricewaterhouseCoopers, Salomon Smith Barney, UBS, ING Financial Services and the Risk Insurance Management Society, as well as a host of bar groups and professional, educational and civic organizations.

Mr. Bianchi is a graduate of Worcester Polytechnic Institute and the Suffolk and Georgetown Law Schools, and he holds an LL.M. in taxation from the Boston University Law School. He is listed in Woodward & White’s The Best Lawyers in America, and Marquis’ Who’s Who in American Law, and he is a Fellow of the American College of Employee Benefits Counsel


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In the Marketplace

What are My Choices Under MMA
By Kenneth Lombardi

There were two major driving forces behind the creation of the Medicare Prescription Drug Improvement, and Modernization Act of 2003 (MMA), including the forecasted demographic trend that will occur in the over age 60 portion of the population in the United States during the next 25 years and the decline in Employer Sponsored Retiree Health Benefits

As more and more baby boomers mature into their retirement years they will swell the number of Medicare Eligible recipients. Within 20 years the number of individuals in the United States over 60 years of age will increase by 86.8% from 44,155,531 to 82,501,033 . In addition, as the average life span increases, the largest growing segment in the age group over 60 is the 85+ segment. The over 85 segment of the United States Population will increase by 125% by the year 2030 while the population as a whole will only increase by 28.87% . A portion of this growth can be directly attributed to the proliferation of health maintenance prescription drugs that are specifically targeted to the over 60 population.

Contemporaneously the number of Employers with over 500 Employees offering Retiree Health to Medicare-eligible individuals plans has declined over the last decade from 44% in 1993 to 27% in 2003 . While this decline seems to have leveled out over the last 3 years Employers are still experiencing significant increases in health care cost. A portion of these increases has been fueled by the growing cost and volume of Prescription Drugs. This has increased Employers reliance on cost sharing which requires Employees and Retirees to bear a larger financial burden for health care.
Faced with an impending health care crisis Congress passed the MMA with a Prescription Drug Plan designed to stop the decline in Employer sponsored Retiree Health Plans and offer low cost drugs to Medicare-Eligible individuals. Medicare Part D offers four choices to those Employers who offer or wish to offer Retiree Health Plans with prescription Drug Provisions. They are as follows:

1. Create their own prescription drug plan or Medicare Advantage plan (with the approval of the Center for Medicare and Medicaid Services) and in essence self-insure Medicare Eligible Employees.

2. Sponsor a comprehensive Retire Health Plan that offers prescription drug coverage (status quo).

3. Offer a "Wrap Around" program that is a supplement to Medicare Part D similar to those offered for services under Medicare Part B.

4. Contribute a portion or the entire monthly premium for a prescription drug plan or Medicare Advantage plans that is chosen by the retiree.

The choice of either 1 or 2 above might make an Employer eligible for the prescription drug subsidy under Medicare Part D provided that the requirements outlined in our Article on the Prescription Drug Subsidy in this Newsletter.

A Private Sector Employer could also chose to terminate a Retiree Health Plan prescription drug provision and let Medicare Part D cover their Medicare-Eligible Retirees. Our Public Sector clients that are required by State mandate to offer Retiree Health benefits cannot chose to elect this option. The decision of which alternative is best for Employers who offer Retiree Health benefits can only be made on a case by case analysis of each individual Employer. We will be contacting each of our clients so that we may schedule a review of the alternatives and suggest what choices we feel may best suit them.

1. U.S. Bureau of the Census "Aging in the Americas into the XXI Century"
2. U.S. Bureau of the Census "US Interim projections by Age, Sex, Race, and Hispanic Origin"
3. Mercer Human resource Consulting "National Survey of Employer-Sponsored Health Plans 2004"
4. ibid

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Benefits Intelligence


Medicare Modernization Act Opens Doors for Employer Sponsored Retiree Medical Plans
By Vincent A. DiBenedetto

Since 1988 the number of Employers that were offering Retiree Health Coverage declined from 66% to 36% as of 200 . This long decline has begun to level off, as the percentage drop from 2001 to 2004 was only 1%. The rising cost of Health Care in general can be attributed as the primary cause of this decline another proximate cause is the rise in prescription Drug cost for Retirees implicit by their demographics and the proliferation of various maintenance drugs designed specifically for treatment of geriatric maladies. . A recent report issued by the Government Accountability Office (GAO) indicates that only about 33% (1/3) of all retired Medicare Beneficiaries obtained supplementary health benefits from former employers or other employment-based groups. While most of these plans had some prescription coverage these participants were among the majority of Medicare beneficiaries who needed to use their own funds to pay for prescription drugs. It was these conditions that impelled Congress to Pass the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in December of 2003.
In general we have all experienced the need to make strategic decisions to control the inflationary spiral that health care cost have been undergoing in recent years. Many times in the private sector some of these decisions have been born by retirees. In addition to cost sharing many retiree plans have eliminated future participation. While our Public sector clients have instituted some of these measures they are prohibited under current law from eliminating retiree health benefits. The MMA offers a number of options to help Employers offer Retiree prescription coverage that run the gamut from Employers creating their own Medicare Advantage program to paying a portion of the premium for any approved prescription drug plan that Medicare-eligible retirees (and their dependants) chose to participate in.

This issue of our Newsletter will deal with the options and obligations that all Employers will need to be aware of as we approach the implementation in January 2006 of Medicare Part D which is the new prescription drug benefit offered under MMA. with the options and obligations that all Employers will need to be aware of as we approach the implementation in January 2006 of Medicare Part D which is the new prescription drug benefit offered under MMA. We trust that the articles and forms contained in this newsletter will be of use to all our clients.

As always we stand ready to offer assistance to you in navigating the shoals of this Act. And this assistance is now an integral part of the total service packaged for all our clients. The information contained in this Newsletter is meant to be informational in manner and is by no means to be construed as either legal or tax advice and we suggest that your own legal counsel or accountant review the MMA.