DEPARTMENT OF HEALTH & HUMAN SERVICES  Centers for Medicare & Medicaid Services 
                                        
                           
          200 Independence Avenue SW 
                          Washington, DC 20201 
                                                                                                                          
 
 
     
     
Date:  January 25, 2013 
 
From:  Gary Cohen, Director, Center for Consumer Information and Insurance Oversight 
 
Title:  Insurance Standards Bulletin Series- INFORMATION 
 
Subject:  Employer Prescription Drug Coverage that Supplements Medicare Part D Coverage 
provided through an Employer Group Waiver Plan 
 
Market:  Group 
 
Purpose 
 
The purpose of this Bulletin is to provide guidance on how the requirements of title XXVII of 
the Public Health Service Act (PHS Act), Part 7 of the Employee Retirement Income Security 
Act (ERISA) and Chapter 100 of the Internal Revenue Code (the Code) apply when an Employer 
Group Waiver Plan, authorized under the Medicare statute, supplements standard Medicare Part 
D prescription drug coverage.  These requirements, originally added by the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA), and later amended by various statutes 
including the Affordable Care Act, are essentially the same in all three statutes.   Therefore, for 
ease of reference, we refer to the relevant PHS Act, ERISA, and Code provisions, collectively, as 
the federal health coverage requirements.  This also helps distinguish those requirements from 
Medicare provisions.  The Departments of Labor and the Treasury have reviewed and concur in 
the discussion in this Bulletin of the application of the federal health coverage requirements. 
 
Background 
 
Medicare in General 
 
The Medicare program established under title XVIII of the Social Security Act has four parts.  
Part A (hospital insurance) and Part B (medical insurance) benefits are provided to Medicare 
beneficiaries either directly by the government, under Original Medicare, or through private 
entities that contract with Medicare, called Medicare Advantage plans, established under Part 
C of Medicare.  Part D is an optional prescription drug benefit, also provided by private entities 
that are generally referred to as Part D plans.  Part D benefits can either be provided by stand-
alone Prescription Drug Plans (PDPs) that are available to beneficiaries enrolled in Original 
Medicare, or it can be provided by a Medicare Advantage (MA) plan, to beneficiaries who are  
enrolled in the plan to get their Part A and B benefits.   An MA plan that provides Part D 
coverage is referred to as a Medicare Advantage Prescription Drug or MA-PD plan.  
   
Part D coverage, at a minimum, includes a standard Part D benefit.  However, organizations 
offering PDPs or MA-PD plans are also permitted to offer supplemental Part D drug coverage 
that is more generous than that offered under the standard benefit.  Thus for most purposes, the 
term Medicare Part D plan coverage includes both the standard Part D benefit and any Part D 
supplemental benefits offered by the Part D plan.  For most MA-PD plans and PDPs, CMS must 
be able to distinguish what is in the basic benefit, and what is in the supplemental benefit.  The 
way this is accomplished is to require plans to submit a document called a bid. This bid 
includes the PDPs or MA-PD plans price for the standard Part D benefit, as well as the charge 
for supplemental Part D coverage (or, in the case of an MA-PD plan, the amount of Medicare 
dollars allocated to covering the cost of the supplemental coverage).   The bid must be submitted 
to CMS for approval.   
 
Standard Part D coverage historically has included a coverage gap, which means that after 
beneficiaries and the plan together incur a specified amount of expenses for prescription drugs 
(the initial coverage limit), beneficiaries pay the full cost of their prescriptions out-of-pocket 
until they reach a catastrophic limit.  Supplemental Part D benefits often include at least some 
coverage during the coverage gap.   
 
Under the Affordable Care Act, the coverage gap is being closed over a period of years.  Once 
the coverage gap is closed, under standard benefit coverage beneficiaries will pay the same 
levels of cost sharing throughout the period that starts when they satisfy the deductible and ends 
when they reach the catastrophic limit.  To cover a portion of the beneficiarys costs in the 
coverage gap, section 3301 of the Affordable Care Act has established the Medicare Coverage 
Gap Discount Program, under which pharmaceutical manufacturers must pay for some of the 
out-of-pocket costs of drugs that would otherwise be covered under Medicare Part D, but are not 
reimbursable while the beneficiary is in the gap.  The amount the manufacturer must pay is 
based on the coverage gap amounts that the beneficiary still owes after all Part D plan coverage 
(including both the standard benefit and any supplemental Part D coverage provided for in the 
bid) has been applied, but before any coverage provided outside the scope of the Part D plan has 
been taken into account. 
 
Medicare and Group Health Plans 
 
In addition to Part D plans (i.e., MA-PD plans and PDPs) that are generally available to any 
individual Medicare beneficiary who lives in the plans service area, Part D plans can also be 
provided through employer or union group health plans1 for their employees or retirees who are 
Medicare beneficiaries.  Because these plans can only be offered by employers pursuant to 
waiver authority in the Social Security Act, they are referred to as Employer Group Waiver 
Plans or EGWPs.  We use this term to encompass Part D plans provided by employers.  
When we discuss distinctions between the two types of plans (because PDPs can only be 
provided to retirees, while MA-PD coverage can be provided to both retirees and active 
                                                 
1 MA-PD plans and PDPs may be sponsored by an employer, an employee organization, or both.  For simplicity, this 
bulletin refers to employers.  This bulletin, however, is equally applicable to MA-PD plans and PDPs sponsored by 
an employee organization or jointly by employers and employee organizations. 
  employees) we will specify whether we are talking about employment-based MA-PD plans or 
employment-based PDPs.  
 
As noted above, the supplemental coverage that is included in a bid is considered part of the 
Medicare Part D coverage offered by the MA-PD plan or PDP.  We refer to it here as 
supplemental Part D coverage to distinguish it from any other supplemental coverage a 
beneficiary might have, such as through an employer,  that might also help defray expenses not 
covered by the Part D plan.  
 
In the case of the usual Part D plan (not offered under an employer group waiver) for which 
CMS reviews and approves the bid, the supplemental Part D plan benefits are readily 
identifiable.  However, in the case of EGWPs, whose enrollees are limited to members of an 
employer or union group health plan under waiver authority provided for under the Part D 
statute, CMS does not receive or review bids because CMS believes that applying the bid 
requirement to EGWPs would hinder the design, offering, or enrollment in employer-sponsored 
coverage given the additional complexity and level of effort that would be required of EGWPs to 
submit all applicable information on all of their employment-based benefit packages.  
Thus, for EGWPs, CMS does not have a way of distinguishing supplemental Part D coverage 
under the PDP or MA-PD plan from non-Medicare drug coverage that may be offered by the 
employer.  Consequently, in order to be able to distinguish Part D benefits (including both basic 
and supplemental Part D benefits) from non-Medicare supplemental benefits provided by an 
EGWP, CMS issued a final regulation that defined any supplemental benefits offered by an 
employer or union to enrollees in an EGWP as a non-Medicare benefit.2  This change means that 
the manufacturers liability for a discount under an EGWP is always calculated based on the 
standard Part D benefit (i.e., the minimum provided by any Part D plan), without taking into 
account any supplemental benefits provided by the employer or union to those eligible to enroll 
in the plan. This provides CMS with a consistent way to calculate the appropriate discount 
amount for EGWPs.  
 
Discussion 
 
Retiree-only plans 
 
The federal health coverage requirements generally do not apply to group health plans with less 
than two participants who are current employees (such as plans in which only retirees 
participate).  See, ACA Implementation FAQs Part III, issued on October 12, 2010 (which can 
be found at http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs3.html).  As 
explained above, for this purpose there is a distinction between EGWPs that are PDPs and those 
that are MA-PDs.  The employment-based PDPs can only be provided to retirees, and will, by 
definition, never enroll any current employees.  Accordingly, all employment-based PDPs are 
exempt from the federal health coverage requirements.   In addition, any employment-based 
MA-PD plans in which only retirees participate, or that do not otherwise cover at least two 
                                                 
2   See 42 CFR 423.100, 77 Fed. Reg. 22072 (April 12, 2012).  This rule represented an exercise of CMSs 
discretion to decide the circumstances under which to approve an EGWP by effectively conditioning such an 
approval on the plan not offering Part D supplemental benefits.   
  employees who are current employees, are exempt from the federal health coverage 
requirements.   
 
Plans that Cover at Two or More Current Employees - Insured Coverage 
 
 Sponsors of self-insured plans generally bear the risk associated with paying their plans 
covered health expenses.  In contrast, sponsors of fully-insured plans generally pay premiums to 
insurers and transfer all such risk to them.  EGWPs can either be self-insured or be fully insured. 
For MA-PD plans, a separate basis for exemption from the federal health coverage requirements 
exists if a benefit meets the requirements to be an excepted benefit under PHS Act section 
2722(c)(3).  For the reasons that follow, to the extent that non-Medicare supplemental drug 
coverage is provided to enrollees through an insured EGWP MA-PD plan, we believe that the 
coverage would qualify as an excepted benefit.   
 
Pursuant to PHS Act section 2791(c)(4) and implementing regulations at 45 CFR 146.145(c)(5), 
coverage that is provided under a separate policy, certificate, or contract of insurance and is 
either Medicare supplemental health insurance (Medigap),3 TRICARE supplemental programs, 
or similar supplemental coverage provided to coverage under a group health plan is an excepted 
benefit,  and the federal health coverage requirements do not apply.4  In Insurance Standards 
Bulletin No. 08-01 (May 2008) and parallel guidance issued by Labor and Treasury, the 
Departments set forth criteria for an enforcement safe harbor for determining whether coverage 
can be considered similar supplemental coverage and thus an excepted benefit.5  The following 
analysis explains why supplemental prescription drug coverage offered to active employees 
enrolled in an employer-sponsored MA-PD plan provided through insurance is considered to 
satisfy these criteria:  
 
  First, the coverage must supplement coverage provided under a group health plan.  While 
coverage under EGWPs that are MA-PD plans is considered Medicare coverage because 
enrollment is based on eligibility for Medicare benefits, enrollment in these plans is, by 
definition, limited to employees or retirees who are also eligible for benefits under the 
group health plan sponsoring the employment-based MA-PD plan.  
 
  Second, the supplemental coverage must be provided through a separate policy, 
certificate, or contract of insurance.  To the extent the employer plan is an insured plan, 
the insured MA-PD is considered coverage provided by an EGWP through a separate 
policy, certificate, or contract of insurance. 
  
  Third, the supplemental coverage must be independent of the primary coverage, meaning 
that it must be issued by an entity other than the entity providing the primary coverage 
                                                 
3 Medigap policies are private health insurance that Medicare beneficiaries can buy to cover certain Medicare cost-
sharing amounts, and provide some additional benefits.   
4 This language is also contained in ERISA section 733(c)(4) and 29 CFR 2590.732(c)(5), and Code section 
[9833(c)(4) and 26 CFR 54.9831-1(c)(5)]. 
5 See also Department of Labor Field Assistance Bulletin 2007-04, available at 
http://www.dol.gov/ebsa/regs/fab2007-4.html . 
  under the plan.6  In this case, even though the same issuer may be contracting to deliver 
both, it is contracting with two different entities, based on two different sources of 
eligibility for coverage.  The supplemental prescription drug benefits are offered by the 
employer through an insurance policy based on an individuals status as an employee or 
retiree, while the standard Part D drug coverage provided under the MA-PD plan is 
offered by the Federal government through a tax-funded program (Medicare) for which 
one is eligible under the Social Security Act, without regard to whether the enrollee is an 
employee or retiree.  CMS believes this situation is precisely analogous to Medigap 
coverage supplementing Medicare Part A and Part B benefits. Therefore, the Medicare 
Part D and supplemental prescription drug benefits meet the criterion of being offered by 
separate entities, even if they are offered through a common contractor. 
 
  Fourth, the coverage must be specifically designed to fill gaps in the primary coverage, 
such as coinsurance or deductibles, but may not become secondary or supplemental only 
under a coordination-of-benefits provision.  While some EGWPs that are MA-PD plans 
may incidentally cover items excluded under Medicare Part D, such as over-the-counter 
medications, the vast majority of supplemental benefits in EGWPs that are MA-PD plans 
are for reducing the cost-sharing for prescription drugs covered under the Medicare Part 
D standard benefit.  Accordingly, CMS considers this criterion satisfied with respect to 
EGWPs that are MA-PDs. 
    
  Fifth, the cost of supplemental coverage must not exceed 15 percent of the cost of 
primary coverage.  The Office of the Actuary at CMS has determined that it is highly 
unlikely for the cost of supplemental prescription drug benefits provided in addition to 
those provided by MA-PD plans to exceed 15 percent of the cost of the Part C and Part D 
benefits.  Accordingly, CMS considers this criterion to be met for all EGWPs that are 
MA-PD plans. 
 
  Finally, the supplemental coverage must not differentiate among individuals in eligibility, 
benefits, or premiums based on any health factor of an individual (or any dependent of 
the individual).  Since supplemental drug benefits offered by employer sponsored MA-
PD plans are closely integrated with the standard Medicare Part D benefits, beneficiaries 
are protected against potential discrimination based on health status since there is no 
medical underwriting used in connection with enrollment and premium setting and there 
is no separate medical necessity or claims determination for the supplemental benefits. 
 
Accordingly, non-Medicare drug benefits provided by an insured EWGP that is a MA-PD 
constitute an excepted benefit and are not subject to the federal health coverage requirements.  
 
Plans that Cover at Two or More Current Employees - Self-Insured Coverage 
 
                                                 
6 For this purpose, the guidance states that entities that are part of the same controlled group of corporations or part 
of the same group of trades or businesses under common control, within the meaning of section 52(a) or (b) of the 
Code, are considered a single entity. 
  EGWPs that are MA-PD plans can also be self-insured by an employer or employee organization 
(or both), rather than insured through an issuer.  Although the supplemental non-Medicare drug 
coverage provided through self-insured MA-PD plans is technically subject to the federal health 
coverage requirements, CMS, the Departments of Labor and the Department of the Treasury 
have recently released an FAQ that provides an enforcement safe harbor for such plans.  See, 
ACA Implementation FAQs Part XI, issued on January 24, 2013 (which can be found at 
http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs11.html). 
 
Beneficiary Protections 
 
Although CMS has clarified that any prescription drug benefit provided by an EGWP that 
supplements the standard Part D benefit is a non-Medicare benefit, group health plans and health 
insurance issuers are encouraged to apply Part D beneficiary protections to the supplemental 
benefits as well.  In fact, most of the supplemental coverage consists of cost sharing reductions 
that are, as a practical matter, directly controlled by the Part D requirements because they flow 
directly from the determination of the basic benefits.   Because the Affordable Care Act has 
increased basic Part D benefits in the coverage gap, as of 2013 there will be very few claims that 
do not contain some basic Part D benefits and would not ultimately be governed (as a practical 
matter) by the Part D regulations. 
 
Where to get more information: 
 
If you have any questions regarding this Bulletin, please e-mail phig@cms.hhs,gov or call 877-
267-2323, ext. 1565.