New Disclosure Requirement for Employers Providing Prescription Drug Coverage to Medicare Beneficiaries

By November 15, 2005, most employers with medical plans that provide prescription drug coverage must issue a "Disclosure Notice" to employees, retirees, and their dependents who are eligible for the new Medicare Part D prescription drug program that becomes effective on January 1, 2006 (including those individuals who are eligible due to disability). The notice must tell eligible persons whether their plan's prescription drug coverage is "creditable." This disclosure requirement potentially applies to all employers offering prescription drug coverage – not just those offering programs for retirees.

Importance of the New Notice. The Disclosure Notice is an important employee communication for two reasons. First, Part D eligible individuals will soon be deluged with information from the Centers for Medicare and Medicaid Services ("CMS") regarding Medicare Part D enrollment. The Disclosure Notice will provide these individuals with the information they need to assess whether they should enroll in Part D. Second, Part D has strict enrollment deadlines. Part D eligible individuals who do not enroll during the appropriate enrollment period will pay a higher premium – to the tune of a 1% premium increase for each month without coverage – on a permanent basis if they later enroll in Part D. If, however, a Part D eligible individual is covered under a plan that provides "creditable" prescription drug coverage and he or she does not have a 63-day break in coverage, then the individual will not be penalized for late enrollment. The Disclosure Notice will tell Part D eligible individuals whether the coverage provided through their employer is "creditable."

Meaning of "Creditable" Coverage. Under guidance recently issued by CMS, coverage is creditable if it is "actuarially equivalent" to the Part D benefit. In other words, the coverage under the employer's plan must, on average for all participants, be expected to pay out as much as the Part D prescription drug benefit. CMS has published a simplified safe harbor method for determining whether an employer's prescription drug coverage meets the actuarial equivalence test. A copy of the safe harbor is available at: Benefit Designs for Simplified Determination of Creditable Coverage Status

As a result of this safe harbor method, most plans will not need to retain an actuary to determine if their coverage is creditable. Plans will still need an actuary for that purpose, however, if they do not pass the safe harbor test, or if they are applying for the retiree prescription drug subsidy offered by CMS. (This subsidy is only available to employers offering prescription drug coverage to retirees that is certified to be actuarially equivalent to the Part D benefit.)

Delivery of the Disclosure Notice. CMS has published the following guidance for distributing the Disclosure Notice:

• Employers must deliver the initial Disclosure Notice by November 15, 2005, and subsequent notices annually thereafter. Depending on the time of their open enrollment periods, some employers may want to distribute the Disclosure Notices in conjunction with open enrollment materials. The guidance permits the Disclosure Notice to be combined with such employee communications.
• The Disclosure Notice must be provided to all Part D eligible individuals. It may be difficult, however, for employers to identify these individuals. For example, employers may not know whether an employee's spouse or dependent is eligible for Part D due to a disability. Some employers may find it easiest just to distribute the Notice to all employees.
• CMS has issued two model Disclosure Notices: one that says the employer's coverage is creditable, and a second model that says the coverage is non-creditable. These models provide a good starting point, but most employers will want to tailor them to add plan-specific information, especially if they have applied for the Part D retiree prescription drug subsidy.
• The Disclosure Notice can only be distributed electronically if consent has been obtained in advance from the employee or other addressee. Consent must be obtained from Part D eligible individuals, regardless of whether they have regular access to computers through their employment. This consent rule is therefore stricter than the rule for electronic distribution of summary plan descriptions, which only requires that consent be obtained from participants without computer access at work. Depending on the size of an employer's workforce, this may make electronic distribution unworkable.

Penalties for Noncompliance. Employers who are applying for the subsidy for their retiree prescription drug plans may not be able to receive the subsidy if they fail to deliver the Disclosure Notice. CMS currently has not announced any penalties that would apply to other employers who do not deliver the notice. Furthermore, although persons who don't receive the Disclosure Notice may not enroll on time and thus may incur late enrollment penalties, CMS can waive those penalties for individuals who establish that their employer failed to tell them whether their coverage was creditable.

Next Steps. To comply with the Disclosure Notice requirement, you first need to determine whether each of your medical plans constitutes creditable coverage. You should then evaluate how you will deliver the Disclosure Notice and how this new requirement fits with your overall strategy regarding the provision of prescription drug coverage to your employees and retirees.