1	Medicare Prescription Drug Benefit Review for XYZ System March 18, 2004
2	Key Provisions of the Medicare Act New Medicare benefits Prescription drugs (Part D) in 2006 Employer 28% subsidy payment to maintain at least an actuarially equivalent drug plan Additional preventive benefits (Part B) Increases in Medicare benefit provisions Part B deductible Part B premium Medicare + Choice premiums Hospital and physician reimbursement New savings vehicles Health Savings Accounts
3	Overview of Medicare Rx Benefit $250 deductible 25% coinsurance between $250 and $2,250 Out-of-pocket limit of $3,600 (third party payments do not count) 5% coinsurance (or nominal copayment) after out-of-pocket limit All thresholds indexed to “trend” $35 average monthly Medicare Part D premium (equals about 25% of expected cost)
4	Changing Landscape Pharmacies will lose retail margin from seniors without drug coverage today How much will this revenue loss impact discounts provided to PBMs and add to health care trends? PBMs and carriers developing products and systems to compete for Medicare beneficiaries Opportunity or distraction from plan sponsor market Increased PBM volume may require new strategies Medicare Advantage Additional plans participating and increased enrollment Increased Medicare payments to providers Reduces pressure on health care trends Plan sponsors re-evaluating retiree medical coverage
5	XYZ System Response Evaluate a spectrum of alternatives Maintain current benefits and collect 28% subsidy Integrate with Medicare Part D on a carve-out basis and pay Part D premium on a service-related basis Integrate with Medicare Part D on a carve-out basis and do not pay Part D premium Modify plan design effective January 1, 2006 to add a $250 deductible, integrate with Medicare, and do not pay Medicare Part D premium Eliminate prescription drug coverage for Medicare eligible participants, but add a service-related $1,000 annual Health Reimbursement Account, effective January 1, 2006 Eliminate prescription drug benefit for Medicare eligible participants and consider service-related reimbursement of Part D premium
6	Maintain Current Benefits (Scenario 1) Collect 28% employer subsidy Plans must be at least actuarially equivalent and retiree not participate in Medicare Part D Plus Plan qualifies for all classes of participants where retiree or surviving spouse pays less than 100% of benefit cost (i.e., about 53,000 participants ³65) Catastrophic Plan does not qualify nor participants paying 100% of benefit cost (i.e., about 22,000 participants ³65) Average annual per capita gross cost to XYZ System in 2006 is estimated to be $1,871 before retiree contributions; Medicare benefit costs $1,536 before $420 retiree contribution
7	Maintain Current Benefits (Scenario 1) 28% subsidy based on gross claims in 2006 between $250 and $5,000 per capita AdvancePCS 2003 data for XYZ System was projected to be $626 per capita in 2006 or 33% savings XYZ System net benefit in 2006 is $438 per capita (i.e., after allocation of a portion of subsidy to reduce retiree contributions) Potential additional benefit for 3,300 HMO enrollees Comments Least disruptive approach $23 million savings in 2006 to XYZ System (net of retiree contributions) 33% reduction in participant contributions at ages ³65 for those not paying 100% of benefit cost; estimated $10 million in 2006 Additional XYZ System savings in 2006 from HMO enrollees estimated to be $700,000 Fund solvency period increased by one year to 2016
8	Comparison of Current Benefits (Scenario 1)
9	Integrate with Medicare Part D (Scenario 2) Amend Plans effective January 1, 2006 to integrate on a carve-out basis Reimburse participants for Part D premium on a service-related basis Pay claims as if participant is enrolled in Medicare Part D Preserves Plan benefits, while taking advantage of Medicare benefit, except for portion above out-of-pocket limit
10	Integrate with Medicare Part D (Scenario 2) Reduces net benefits paid by Plans, retiree copays, and retiree contributions Reduces average per capita XYZ System net cost by $308 or $16 million in 2006 Reduces retiree copays to 25% of drug cost for claims between $250 and $2,250 Retiree pays 33% of drug cost on average in 2006 based on current plan design Estimated $10 per script savings in 2006 Reduces retiree and surviving spouse contributions by an average $145 annually where they are not paying 100% of benefit cost Participants paying 100% would benefit from a 30% reduction in the drug portion of their Plan contribution ³ age 65; this would be a net 9% reduction after payment of the Part D premium
11	Integrate with Medicare Part D (Scenario 2) Comments Less savings to XYZ System than 28% subsidy because Plan copays are higher than the Medicare 25% coinsurance Additional administrative burden on XYZ System to verify participant enrollment in Medicare Part D for reimbursement of Part D premium Additional administration required to coordinate XYZ System and Medicare benefits at point of sale AdvancePCS and other PBMs will likely offer products that will do this; however, it will require additional negotiations and retiree communications Greatest benefit to the participant, while still benefiting XYZ System Fund solvency period increased by one year to 2016
12	Comparison of Integration Approach (Scenario 2)
13	Integrate with Medicare Part D (Scenario 3) Same as Scenario 2, except XYZ System would not reimburse Medicare Part D premium, which is estimated to be $35 in 2006 Reduces average annual per capita XYZ System net cost by $873 or $32 million in 2006 Same impact on retiree copay and contribution as Scenario 2 Comments Consistent with Plan changes made in 2003 for retiree to pay all increases in Medicare premiums Same administration and communication issues as Scenario 2, but more savings to make it attractive Fund solvency period increased by two years to 2017
14	Comparison of Integration Approach (Scenario 3)
15	Modify Plan Design (Scenario 4) Amend Plan to add a $250 deductible per individual for prescription drugs, integrate with Medicare, and do not reimburse Part D premium Does not apply to Catastrophic Plan; something comparable would have to be done with the HMO plans Reduces average annual per capita XYZ System net cost by $1,011 or $37 million in 2006 Increases retiree copays on first $250 in drug costs annually, but reduces retiree copays on the next $2,000 while maintaining current benefits above $2,250 Net effects are offsetting, so retiree copays are slightly above current levels (i.e., 35% vs. 33% of benefit cost) Reduces prescription drug portion of Plan contributions for all participants by about 50% However, payment of Part D premium by participants increases overall contributions from 20% to 23% of benefit cost for participants not paying 100% of benefit cost Fund solvency period increased by two years to 2017
16	Comparison of Plan Redesign (Scenario 4)
17	Eliminate Rx and Add HRA (Scenario 5) Amend Plans to eliminate prescription drug benefit for all participants ³65 Add a service-related HRA of $1,000 annually for participants not paying 100% of benefit cost Average benefit provided of $700 or $35 million in savings Would not reimburse any Medicare Part D coinsurance Increase HRA amount by 5% annually Increases savings to XYZ System by capturing additional Medicare Part D benefits above $5,100 out-of-pocket limit Additional Medicare benefit represents 17% of total drug cost; Medicare would provide 37% of total drug cost Reduces retiree portion of cost from 53% to 40% 14% is Part D premium ($35 in 2006) compared to 20% under current Plus Plan 26% is Part D coinsurance compared to 33% in current Plus Plan copays
18	Eliminate Rx and Add HRA (Scenario 5) Comments Most cost-effective approach because it maximizes value of Medicare benefits, shifts burden of high cost drugs and utilization to Medicare, and reduces cost trend of benefits provided by XYZ System May have more appeal to retirees because of flexibility in use of funds; however, would require retirees and surviving spouses to file claims for reimbursement to take advantage of HRA benefit Provides XYZ System with more control over future increase in benefit cost Fund solvency period increased by three years to 2018
19	Comparison of HRA Approach (Scenario 5)
20	Eliminate Rx Benefit (Scenario 6) Amend Plans effective January 1, 2006 with service-related reimbursement of Part D premium Reimbursing Part D premium on a service-related basis would be an average annual per capita savings to XYZ System of about $1,000 or $54 million in 2006 Retirees would pay 53% of prescription drug costs, which is the same portion that they would pay in 2006 under the current plan It will result in different out-of-pocket costs for participants depending on their level of utilization (i.e., less than $3,000 would pay less than they do today but others would pay more) Comments This approach is the most cost effective, similar to Scenario 5, because it takes full advantage of Medicare benefits Enables XYZ System to dedicate resources to more adequately fund other benefits Fund solvency period increased by four years to 2019
21	Comparison of Part D Premium Reimbursement (Scenario 6)
22	Summary Comparison of 2006