Human Capital & Careers

New Medicare Drug Benefit Falls Short

The new Medicare drug benefit feels good, but it doesn't really solve underlying issues.
David KatzJune 21, 2004

In 2006, when the new prescription-drug benefits kick in, Americans over 65 should finally get a break on pharmaceutical costs, thanks to the Medicare Reform Act signed into law in December. But employers that supply pharmacy coverage to retirees could make out even better.

That’s because the framers of the new law included provisions to motivate companies to keep providing these benefits.

For instance, the government will subsidize 28 percent of the total prescription-drug cost (up to $5,000 per retiree) for qualifying companies. Employers won’t have to pay federal taxes on the subsidies, so they could be worth even more, notes Mark Beilke, director of benefits research at Seattle-based consulting firm Milliman.

Moreover, companies don’t have to wait until 2006 to benefit from the new law. The prospect of future subsidies has had an immediate accounting effect for some companies, reducing their estimates of future benefit liabilities. Firms reporting a reduction of estimated future liabilities include General Motors, which gauged it could sever $4.1 billion of its burden, cutting its obligation by 6 percent to $63.4 billion. Auto-parts maker Delphi Corp., in Troy, Michigan, expects to shave $500 million from its $8.5 billion OPEB (other postretirement employee benefits) obligation this year.

Further, under the new law, companies can take credit for both their own and their employees’ OPEB payments. For instance, an employer that splits a $2,000 benefits premium with a retiree would get 28 percent of the full $2,000 (minus a $250 deductible), according to a report by Egan-Jones Ratings Co. That amounts to $490 per employee, rather than the $210 the employer would receive based on its payments alone. An employer with 100,000 covered retirees could hypothetically receive a subsidy of $49 million a year.