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CAPITOL PERSPECTIVES Obamacare Is Vaporizing Retiree Drug Coverage T he headlines have been filled with reports of thou- difference for many beneficiaries as the Congressional sands of individuals losing their health insurance Budget Office observed that about one-fifth of spending by because many plans in the individual market do not non-low-income beneficiaries was for drugs in the donut conform to certain requirements of Obamacare. But what hole. is not well-known is that employer-sponsored retiree drug Simultaneously, the statute closes the donut hole by coverage for Medicare-eligible beneficiaries has virtually gradually increasing the initial benefit threshold and dropevaporated as a result of enactment of Obamacare. ping the catastrophic attachment point over 10 years. By Some background: The Medicare Modernization Act of 2020, the donut hole is eliminated and beneficiaries will 2003, which integrated prescription drugs into Medicare, receive 75% coverage, on average, of their drugs before provided for a tax-free "retiree drug subsidy" to employ- the catastrophic protection kicks in. ers that offer qualified drug coverage to Medicare-eligible Secondly, Obamacare repeals the tax-free nature of the retirees. That subsidy is equal to about two-thirds of the retiree drug subsidy. (This was, interestingly, the provivalue of the subsidy for Part D drug plans. This retiree sion that sealed the bipartisan deal between then Ways and drug subsidy was meant to leverage — but not replace — Means Chairman Bill Thomas [R-CA] and Finance Ranking the private coverage in the market. By doing Member Max Baucus [D-MT] 10 years ago.) so, it would help individuals retain their curBy making the retiree subsidy taxable income, rent coverage and limit the expenditure of this had the effect of decreasing the value of taxpayer dollars. To the degree retirees retain the subsidy by the corporation's marginal tax drug coverage from their employers, Medicare rate — up to 35 percent in many cases. saves money. PhRMA agreed to the 50 percent discount, in Analysis from the CMS Office of the Actuary part, to deter a worse alternative — Medicaid (OACT) shows that the subsidy achieved that rebates on the Part D drug benefit. But the goal for the first five years of the program. industry also benefited from the provision John McManus, From 2006 to 2010 the number of individuals because it had noticed that many beneficiaries The McManus Group receiving the retiree drug subsidy remained often discontinued their prescriptions when jmcmanus@mcmanusgrp.com they hit the donut hole. The 50 percent disstable at about 7 million. But in 2011, the number dropped to about 6 count helped beneficiaries stay on their meds million. In 2012, it declined to 5.7 million. Then in 2013 and get to the catastrophic protection, where 95 percent the bottom dropped out of the market, with the number of costs are covered. of individuals receiving the retiree drug subsidy plunging Employers also took note that this more generous coverto about 3 million. OACT projects this number to fall to age is available in Part D prescription drug and Medicare less than 1 million by 2016 and beyond. (See chart on Advantage plans, but not under their own retiree plans. page 12.) Employers, of course, are in the business of producing widgets, not providing health coverage. And it is ecoWHAT HAPPENED? nomically irrational to leave money on the table. IBM, for Obamacare made two substantial changes to the Medicare example, discontinued retiree drug coverage and directed drug benefit. Most importantly, it filled the "donut hole" their retirees to coverage available under Medicare drug — the $3,610 gap in coverage in 2010 between the initial plans and Medicare Advantage. benefit and the catastrophic protection. That feature of the benefit was a result of the limited resources available when WHAT LESSONS CAN BE LEARNED? Congress enacted drug coverage in 2003, and Democrats The press has been understandably focused on the disastrous rollout of Healthcare.gov and the relatively few indivowed to address the issue when they took power. Starting in 2011, brand-name pharmaceutical manufac- viduals who have signed up for coverage. But a more troubling concern over the long term will be turers were required to provide 50% discounts for drugs purchased in the donut hole. This made a substantial whether employers react similarly for their current work- 10 LifeScienceLeader.com January 2014