For retirees aged 65 and older, Medicare is typically the primary source of health insurance coverage. Medicare covers nearly 43 million beneficiaries. The program covers hospital care as well as physician office visits and outpatient services and, effective January 1, 2006, prescription drugs. Medicare beneficiaries may rely on private retiree health coverage through former employment or through individually purchased Medicare supplemental insurance (known as Medigap) to cover some or all of the costs Medicare does not cover, such as deductibles, copayments, and coinsurance. For 2004, the most recent data available, the Medicare Current Beneficiary Survey (MCBS) found that about one-third of Medicare-eligible beneficiaries obtained supplemental coverage from a former employer or union. Employment-based retiree health benefits are typically offered as a voluntary benefit to retirees, thereby giving sponsors of these benefits the option of decreasing or eliminating benefits. However, some sponsors may be prevented from making immediate changes to coverage because of union contracts, for example. Benefit surveys have found that the percentage of employers offering retiree health benefits has decreased, beginning in the early 1990s. For example, according to a series of surveys conducted by Mercer, the percentage of employers with 500 or more employees offering health insurance to Medicare-eligible retirees declined from 44 percent in 1993 to 29 percent in 2006, although this trend had leveled off from 2001 through 2006. (See app. I for more information on employment-based retiree health coverage.) Sponsors typically integrate their retiree health benefits with Medicare once retirees reach age 65, with Medicare as the primary payer and the sponsor as the secondary payer. Several types of integration occur between sponsors and Medicare. For example, some sponsors coordinate through a carve out approach, in which the sponsor calculates its normal benefit and then subtracts (or carves out) the Medicare benefit, generally leaving the retiree with out-of-pocket costs comparable to having the employment-based plan without Medicare. Another approach used by sponsors is full coordination of benefits, in which the plan pays the difference between the total health care charges and the Medicare reimbursement amount, often providing retirees complete coverage and protection from out-of-pocket costs. The provision of employment-based retiree health benefits may vary depending on a variety of factors, including whether the sponsor is in the private or public sector, and by industry type. The 2006 Kaiser Family Foundation and Health Research and Educational Trust (HRET) survey, for example, showed that 82 percent of state and local government employers with 200 or more employees offered coverage to retirees, compared with 35 percent of employers with 200 or more employees across all employer industries that offered coverage to retirees. Coverage can also differ between retirees under age 65 and those eligible for Medicare, although sponsors often cover both groups of retirees. For example, some sponsors offer retirees under age 65 a preferred provider organization plan but offer a fee-for-service plan for retirees eligible for Medicare. While the provision of employment-based retiree health benefits varies by employer size, plan type, industry, and whether retirees are Medicare-eligible, these benefits almost always include coverage of prescription drugs. MMA created a prescription drug benefit for beneficiaries, called Medicare Part D, which became effective January 1, 2006. This voluntary benefit is available to all Medicare beneficiaries and is the first comprehensive prescription drug benefit ever offered under the Medicare program. In January 2007 (the most recent data available) CMS reported that approximately 39 million beneficiaries were receiving prescription drug coverage from a combination of Medicare Part D, employment-based coverage, and other sources, such as the Department of Veterans Affairs. The drug benefit is offered primarily through two types of private plans created as a result of the MMA: stand-alone prescription drug plans (PDP) that supplement fee-for-service Medicare, and Medicare Advantage prescription drug (MA-PD) plans, such as coordinated care plans, that cover drugs and other Medicare benefits. To be in operation for 2006, prospective PDPs and MA-PD plans had to apply by March 2005 and were approved in September 2005. At a minimum, these plans were required to offer the standard Medicare Part D benefit or alternative coverage that was at least equal in value. According to the Kaiser Family Foundation, plans approved for 2006 often varied from the standard Part D benefit in benefit design and covered drugs. For example, although the standard Part D benefit had a $250 deductible for 2006, Kaiser reported that 58 percent of PDPs and 79 percent of MA-PD plans approved for 2006 had no deductible requirement. In 2007, a total of 1,875 PDPs are offered nationally across 34 PDP regions. The standard Medicare Part D benefit in 2007 has a $265 deductible (up from $250 in 2006) and 25 percent coinsurance up to an initial coverage limit of $2,400 in total drug costs ($2,250 in 2006), followed by a coverage gap in which enrollees pay 100 percent of their drug costs until they have spent $3,850 out of pocket ($3,600 in 2006). Thereafter, the plan pays approximately 95 percent of total drug costs. The standard benefit amounts are set to increase annually by the rate of per capita Part D spending growth. Assistance with drug benefit premiums and cost-sharing is available for certain low-income beneficiaries. The MMA resulted in several options for sponsors of employment-based retiree health plans to provide prescription drug coverage to Medicare- eligible retirees. These options are as follows: Retiree Drug Subsidy (RDS). Sponsors with plans ending in 2007 that offer prescription drug coverage that is actuarially equivalent to that under Part D can receive a federal tax-free subsidy equal to 28 percent of the allowable gross retiree prescription drug costs over $265 (up from $250 for plans ending in 2006) through $5,350 (up from $5,000 for plans ending in 2006), with a maximum subsidy of $1,423 per beneficiary for each individual eligible for Part D who is enrolled in the employment-based plan instead of Part D. Actuarial equivalence, which is attested to by a qualified actuary, is intended to certify that a retiree health benefit sponsor’s coverage is at least as generous as the standard Part D coverage. Sponsors must demonstrate actuarial equivalence to qualify for the RDS, and sponsors will only receive the RDS for those Medicare beneficiaries who do not enroll in the Part D benefit. Sponsors may opt to receive RDS payments on a monthly, quarterly, or annual basis. In order to receive the RDS, sponsors must apply to and receive approval from CMS. For 2007 and subsequent years, sponsors are required to apply for the RDS no later than 90 days prior to the beginning of the plan year. For example, sponsors that applied for a calendar year 2007 plan would have had to apply no later than midnight on October 2, 2006. Additional steps involved in applying for and receiving the RDS include submitting a qualified actuary’s attestation that the plan meets the RDS actuarial equivalence standard; certifying that the creditable coverage status of the plan has been or will be disclosed to plan participants and CMS; electronically submitting and periodically updating enrollment information about retirees and dependents; and electronically submitting aggregate data about drug costs incurred and reconciling costs at year-end. Provide Supplemental Coverage. Sponsors can set up their own separate plans that supplement, or wrap around, Part D coverage. Apply to Offer Own PDP or MA-PD Plan. Sponsors can apply to CMS to offer their own PDP or MA-PD plan for retirees. CMS has waived or modified Part D requirements added by the MMA that hinder the design of, the offering of, or the enrollment in a Part D plan offered by a sponsor. For example, CMS has issued guidance that allows sponsors to limit coverage to retirees only, whereas other Part D plans must offer coverage to all eligible individuals residing within a certain location. Contract with a PDP or MA-PD Plan. Sponsors can contract with a PDP or MA-PD plan to offer the standard Part D prescription drug benefits or enhanced benefits to the sponsors’ retirees who are eligible for Medicare. For example, an enhanced benefit could allow retirees to pay a lower deductible or lower copayment than the standard Part D benefit requires. As with the previous MMA option, CMS has waived or modified Part D requirements that hinder the design of, the offering of, or the enrollment in these types of arrangements. Payment of Part D Premiums. Sponsors can pay for some or all of the Part D premiums for their eligible retirees. According to survey data we reviewed, the majority of surveyed retiree health benefit sponsors reported that they continued to offer prescription drug coverage and accepted the RDS for 2006. Survey data also indicated that much smaller percentages of sponsors took other MMA options— such as offering supplemental, or wrap-around, prescription drug coverage or contracting with a PDP or MA-PD plan. According to survey data we reviewed, the majority of surveyed sponsors reported that they continued to offer prescription drug coverage and accepted the RDS for plans ending in 2006. However, the size of the reported majority differed across the surveys. For example, the 2006 Kaiser/Hewitt survey, which surveyed private sector employers that offered retiree health benefits and had 1,000 or more employees, found that 82 percent of these employers accepted the RDS for 2006. In contrast, the 2006 Mercer survey found that 51 percent of surveyed private and public employers that offered retiree health benefits and had 500 or more employees continued to offer prescription drug coverage and accepted the RDS for 2006. Another survey of state and local public sector sponsors that offered retiree health benefits found that 79 percent reported accepting the RDS for 2006.