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Medicare Part D Prescription Drug Benefit

Effective Jan. 1, 2006, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) added a voluntary outpatient prescription drug benefit to the Medicare program, known as Medicare Part D. The MMA also created a subsidy to encourage employers with retiree prescription drug plans to maintain this coverage even after the Medicare Part D program went into effect.

This Legislative Brief provides a high-level overview of the Medicare prescription drug program for health plan sponsors, and addresses some changes made to the program by the Affordable Care Act (ACA).

Overview of Medicare Part d

Medicare-eligible individuals have the option of enrolling in a Part D prescription drug plan. Health plan sponsors whose plans cover Medicare-eligible individuals are required to address a number of related issues, regardless of whether they provide retiree coverage. Medicare-eligible individuals include those persons who are entitled to Medicare benefits under Part A or who are enrolled in Medicare Part B.

Even if they do not provide retiree coverage or elect to receive the retiree drug subsidy, health plan sponsors are required to certify to Medicare-eligible individuals whether their drug coverage is “actuarially equivalent” to the standard Part D prescription drug program. Also, plan sponsors should expect to receive requests for information from their enrollees regarding Part D plan coordination, since Part D plans are required to coordinate benefits with other health plans that provide prescription drug coverage to eligible individuals.

Plan sponsors who do provide retiree coverage may choose from several options in dealing with prescription drug coverage:

  • Receive a 28 percent federal subsidy of the eligible drug costs for each retiree who declines Part D coverage and stays with the plan sponsor if the plan is “actuarially equivalent” to the Medicare prescription drug benefit;
  • Modify the current plan to develop a wrap-around plan that supplements the Part D benefits;
  • Subsidize the monthly beneficiary premium for any Medicare Part D plan chosen by the retiree or the retiree’s dependent; or
  • Contract with or become a Part D or Medicare Advantage sponsor.The Medicare prescription drug program imposes numerous compliance deadlines on health plans. Sponsors of plans should regularly refer to these deadlines. More information regarding the Medicare prescription drug program, such as details for determining the actuarial equivalence of employer-provided drug coverage, can be found on the website for the Centers for Medicare & Medicaid Services (CMS) at:

Health Care Reform Changes

Beginning in January 2011, the ACA makes certain changes to the Medicare prescription drug program, such as:

  • Gradually closing the coverage gap that occurs between the initial coverage limit and the out-of-pocket threshold (the “donut hole”) mainly through the use of drug discounts and subsidies, until the donut hole is completely closed in 2020;
  • Charging an income-related increase to the Medicare Part D premiums of high-income individuals;
  • Changing the annual coordinated election period to Oct. 15 through Dec. 7 of each year; and
  • Starting in 2013, eliminating the ability of employers receiving the retiree drug subsidy to take a tax deduction for the subsidy amount.




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