Employers offering prescription drug benefits to their employees have an important annual duty: by October 14th each year, they must notify Medicare-eligible employees and their Medicare-eligible dependents whether their plan’s drug coverage is “creditable” or “non-creditable” as compared to a standard Medicare Part D drug plan.
This notice not only informs employees and their dependents about the status of their drug plan, but also explains what that status means, the potential risks involved, and the associated compliance requirements. A “creditable” drug plan offers coverage that is at least as good as a standard Medicare Part D plan, while a “non-creditable” plan provides fewer drug benefits. If a group drug plan is classified as “non-creditable,” the notice emphasizes the need for Medicare-eligible individuals to obtain “creditable” coverage with a Part D drug plan during the Medicare Open Enrollment Period (October 15th to December 7th) to avoid future penalties.
Medicare-eligible individuals without “creditable” prescription drug coverage for more than 63 consecutive days after becoming eligible for Medicare will incur a late enrollment penalty if they later join a Medicare Part D plan. This penalty, calculated based on the number of months without creditable coverage, is permanently added to their Part D premium. The employer’s notice is vital in helping employees understand these implications, so they can take action to maintain proper coverage, thereby avoiding future penalties.
ERISA mandates the disclosure of these notices, and non-compliance can lead to penalties on employers imposed by the Departments of Health and Human Services (HHS) and Labor (DOL). Noncompliance can also lead to civil lawsuits by plan participants.
Model Notices
The Centers for Medicare & Medicaid Services (CMS) provides model notices that employers can use to meet their notification requirements. Employers must customize these model notices to include their specific plan sponsor information and ensure each notice accurately reflects the drug coverage status of their plan(s). Two separate notices are available – one for “creditable” coverage and another for “non-creditable” coverage.
Online Disclosure
Employers that provide prescription drug coverage to Medicare-eligible employees or dependents are also required to disclose their plan’s drug status to CMS. This requirement applies to employers with group health plans of all sizes, whether fully insured or self-funded.
Plan sponsors must use an online disclosure form to report the status of their drug plans to CMS annually. This data must be submitted within 60 days of the establishment or renewal of a health plan, within 30 days of terminating prescription drug coverage (if applicable), or within 30 days of any change in the plan’s “creditable” status.
Determining the Drug Status of a Fully Insured Group Health Plan
For fully insured plans, the health insurance issuer is generally responsible for determining whether the plan’s drug benefits are “creditable” or “non-creditable.” Word & Brown provides references that include the creditable coverage statuses of drug benefits for all plans quoted by the General Agency:
- California – Small Group Plans
- California – Large Group Plans
- Nevada – Small Group Plans
- Nevada – Large Group Plans
Determining the Drug Status of a Self-Funded Group Health Plan
For self-funded plans, Plan Administrators have a greater compliance responsibility than those with fully insured plans. The Plan Administrator must determine the “creditable coverage” status of each of its health plans using one of two methods: the Simplified Determination method or the Actuarial Analysis method.
The Simplified Determination method is the most commonly used approach. This method utilizes long-standing, predefined criteria set by CMS. It involves relatively straightforward calculations based on the overall design of the plan, making it more accessible for most plan administrators.
On the other hand, the Actuarial Analysis method is much more detailed and complex. It involves a thorough mathematical comparison of actual claims data for drug benefits, and in some instances, it must be certified by an actuary. Employers often lack easy access to the necessary data required for this analysis, making it challenging to perform. Due to these complexities and the potential requirement for actuarial certification, this method is less commonly used compared to the simplified determination approach.
Medicare Part D Changes Coming in 2025
The federal Inflation Reduction Act (IRA) of 2022 introduced significant changes to Medicare Part D drug plans, effective January 1, 2025. These changes aim to reduce out-of-pocket costs for seniors covered by Part D plans by requiring the plans to meet new standards.
Under the new structure, Part D plans will have an annual deductible capped at $590. Part D enrollees will be responsible for their full prescription drug costs until this deductible is met. After the deductible is met, beneficiaries will pay up to 25% coinsurance for medications covered under the plan’s formulary. Importantly, there will be a $2,000 annual out-of-pocket maximum. Once a Part D beneficiary reaches this out-of-pocket limit – including costs paid toward the deductible and coinsurance – all medications listed on the plan’s formulary will be covered entirely by the plan at no cost to the beneficiary for the remainder of the calendar year. Deductibles and out-of-pocket maximums will reset annually on January 1st.
Additionally, Medicare Part D drug plans must offer enrollees the option to pay out-of-pocket drug costs through capped monthly payments, rather than paying the full amount upfront at the pharmacy. This applies to deductibles, copayments, and coinsurance amounts, which can be evenly spread over the remaining months of the calendar year, usually for costs exceeding approximately $600.
Disruptions Looming in the Group Health Market?
While the generous changes to Medicare Part D drug benefits are welcomed, they may have unintended consequences in the group health insurance space. Since most group health plans do not align with the new structure of Medicare Part D plans, many employer-sponsored plans could soon be classified as “non-creditable.” Currently, most employer group health plans are deemed “creditable,” with some exceptions, including some High Deductible Health Plans (HDHPs) and certain other plans.
Due to these planned changes, CMS will need to update its Simplified Determination and Actuarial Analysis tests to align with the new Medicare Part D standards. Although CMS initially planned to revise these tests for use in 2024 assessments, it reversed this decision in April 2024, opting to keep the tests unchanged – at least for now. As a result, the current tests may no longer accurately compare employer plans’ drug benefits against the new Part D standards introduced by the IRA.
CMS has suggested that these tests may be updated in 2025 to reflect the IRA changes. Stay tuned to this column for future updates.