For retirees aged 65 or older, Medicare is typically the primary source of health insurance coverage. Medicare covered about 41 million beneficiaries as of July 2003. The program covers hospital care as well as doctor visits and outpatient services but has never covered most outpatient prescription drugs. Under traditional Medicare, eligible individuals may apply for part A, which helps pay for care in hospitals and some limited skilled nursing facility, hospice, and home health care, and may purchase part B, which helps pay for doctors, outpatient hospital care, and other similar services. Depending on where they live, individuals may have the option of obtaining traditional Medicare coverage (on a fee-for-service basis) or coverage from a managed care or other private plan offered through the Medicare Advantage program. Many beneficiaries have been attracted to these plans because they typically have lower out-of-pocket costs than fee- for-service plans and offer services not covered by traditional Medicare prior to the MMA, such as routine physical examinations and most outpatient prescription drugs. Nearly 4.7 million Medicare beneficiaries were enrolled in a local Medicare Advantage plan as of July 2004. To cover some or all of the costs Medicare does not cover, such as deductibles, copayments, and coinsurance, Medicare beneficiaries may rely on private retiree health coverage through former employment or through individually purchased Medicare supplemental insurance (known as Medigap).13, 14 For example, for 2001, the Medicare Current Beneficiary Survey (MCBS) found that about three-fourths of Medicare-eligible beneficiaries obtained supplemental coverage from the following sources: a former employer or union (29 percent); individually purchased coverage, including Medigap policies (27 percent); both employment-based and individually purchased coverage (7 percent); or Medicaid (13 percent). About 24 percent had Medicare-only coverage. Medigap is a privately purchased health insurance policy that supplements Medicare by paying for some of the health care costs not covered by Medicare. 42 U.S.C. 1395ss (2000). Medicare beneficiaries can purchase 1 of 10 standardized Medigap benefit packages. Three of the 10 standardized Medigap benefit packages offer limited prescription drug benefits, paying 50 percent of drug charges up to either $1,250 per year or $3,000 per year after the beneficiary pays a $250 deductible. New Medigap plans sold after January 1, 2006, will no longer include prescription drug benefits. MMA sec. 104(a)(1), § 1882(v)(1), 117 Stat. 2161 (to be codified at 42 U.S.C. § 1395ss(v)(1)). Health plans typically require enrollees to pay a portion of the cost of their medical care. These cost sharing arrangements include deductibles, which are fixed payments enrollees are required to make before coverage applies; copayments, which are fixed payments enrollees are required to make at the time benefits or services are received; and coinsurance, which is a percentage of the cost of benefits or services that the enrollee is responsible for paying directly to the provider. Employers generally offer health benefits to retirees on a voluntary basis. While these benefits vary by employer, they almost always include prescription drugs and often cover both retirees under age 65 as well as those eligible for Medicare. However, coverage can vary between these groups of retirees. For example, premiums are often lower for those aged 65 and over because Medicare pays for certain costs, and cost sharing requirements, which can make retirees more sensitive to the costs of care, may differ. Plan types may also differ based on Medicare eligibility. For example, some employers offer retirees under age 65 a preferred provider organization (PPO) plan but offer a fee-for-service plan for retirees eligible for Medicare. Regardless of the type of plan offered, retirees who have employment-based coverage generally have a choice of more than one plan. Plan sponsors typically coordinate their retiree health benefits with Medicare once retirees reach age 65, with Medicare as the primary payer and the plan sponsor as the secondary payer. Several types of coordination occur between plan sponsors and Medicare. For example, some plan sponsors coordinate through a carveout approach, in which the plan 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 plan 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. According to one employer benefit survey, carveout is the most common type of coordination used by employers that sponsor retiree health plans. In January 2006, Medicare will begin offering beneficiaries outpatient prescription drug coverage through a new Medicare part D. Medicare beneficiaries who choose to enroll for this voluntary benefit will have some of their prescription drug expenditures covered by prescription drug plans authorized by the MMA. In addition to paying a premium— estimated initially to be about $35 per month ($420 per year)— beneficiaries must meet other out-of-pocket expense requirements: a $250 deductible; 25 percent of their next $2,000 in prescription drug expenditures; and 100 percent of the next $2,850 in prescription drug expenditures, a coverage gap often referred to as the Medicare part D benefit “doughnut hole.” Medicare beneficiaries must therefore pay $3,600 out-of-pocket for prescription drugs in 2006 before part D catastrophic coverage begins. Part D catastrophic coverage pays most drug costs once total costs exceed $5,100, with beneficiaries paying either the greater of a $2 copayment for each generic drug and $5 copayment for other drugs, or 5 percent coinsurance. Only prescription drug costs paid by the part D enrollee or by another person or certain charitable organizations or state pharmaceutical assistance programs on behalf of the enrollee, rather than by a plan sponsor, are considered in determining a beneficiary’s true out-of-pocket costs. (See fig. 1.) After the part D benefit becomes effective in January 2006, Medicare beneficiaries will be able to receive prescription drug coverage in several ways, such as the following: Beneficiaries covered through the traditional fee-for-service Medicare program will be able to enroll in privately sponsored prescription drug plans that contract with CMS to receive their drug benefits. Beneficiaries enrolled in Medicare Advantage plans providing part D prescription drug benefits will receive all of their health care services, including part D benefits, through their Medicare Advantage plan. Beneficiaries will be able to continue to receive prescription drug benefits from other sources, such as an employment-based plan, if the plan sponsor chooses to provide prescription drug coverage to Medicare-eligible retirees. The MMA creates options and incentives for a current or a potential sponsor of an employment-based retiree health plan to provide prescription drug coverage to Medicare-eligible retirees. Options for plan sponsors under the MMA include the following: Offer retirees comprehensive prescription drug coverage through an employment-based plan in lieu of Medicare part D prescription drug coverage. Under this option, a sponsor of a plan with prescription drug coverage actuarially equivalent to that under part D will receive an incentive to maintain coverage through a federal tax-free subsidy equal to 28 percent of the allowable gross retiree prescription drug costs over $250 through $5,000 (maximum $1,330 per beneficiary) for each individual eligible for part D who is enrolled in the employment-based plan. For 2006, CMS estimated that the average annual subsidy would be $668 per beneficiary. In order to qualify for this subsidy, however, a plan sponsor must attest that the actuarial value of prescription drug coverage under the plan is at least equal to the actuarial value of standard Medicare part D prescription drug coverage. Furthermore, a plan sponsor will receive a subsidy only for those Medicare beneficiaries who do not enroll in the Medicare part D benefit. Offer prescription drug coverage that supplements (“wraps around”) the part D benefit, as health plans commonly do for hospital and physician services under Medicare parts A and B. Pay all or part of the monthly premium for any of the prescription drug plans or Medicare Advantage plans in which Medicare-eligible retirees (and dependents) choose to enroll. Contract with a prescription drug plan or Medicare Advantage plan to provide the standard part D prescription drug benefit or enhanced benefits to the plan sponsor’s retirees who are Medicare-eligible (equivalent to offering a fully insured benefit) or become a prescription drug plan or Medicare Advantage plan (equivalent to offering a self-insured benefit). Plan sponsors also have other options. As has always been the case, plan sponsors could stop providing any type of subsidized health care coverage, including prescription drugs, to Medicare-eligible retirees and their dependents. While they are not available for current Medicare beneficiaries, the MMA also authorized the use of health savings accounts (HSA) to which employers and active workers and retirees not eligible for Medicare can contribute to cover future health care costs. This option could provide a means for employees who are not offered employment- based retiree health coverage to save money for health coverage when they retire. On August 3, 2004, CMS published a proposed rule for implementing the Medicare part D prescription drug provisions of the MMA, and the comment period closed October 4, 2004. The proposed rule provided a preliminary overview of how CMS intended to implement the MMA, including the subsidy and other options. On January 28, 2005, CMS published a final rule implementing the MMA. CMS also indicated that it will provide further guidance relating to the subsidy for plan sponsors providing retiree drug coverage. The percentage of employers offering health benefits to retirees, including those who are Medicare-eligible, has decreased since the early 1990s, according to employer benefit surveys, but offer rates have leveled off in recent years.