Even before health reform crossed the finish line as the Patient Protection and Affordable Care Act, employers were beginning to have doubts about opting for the Retiree Drug Subsidy (RDS) under Medicare Part D.
While the federal government writing a check for up to 28 percent of the costs for retiree pharmaceuticals sounded good at first, the choice wore thin as employers gained more experience with the bookkeeping mandates and other rigid requirements that came with the subsidy.
Then when the health reform law put in place provisions that reduce the value of the subsidy beginning in 2013, corporations who filed for the RDS were forced to immediately adjust their financial statements to the tune of billions of dollars in future tax costs. It may well be the final straw that drives companies away from the subsidy and into the arms of agents and brokers who can bring them a better strategy: an Employer Group Waiver Plan (EGWP), better known as "egg whip."
Understanding the basics
The details of Medicare Part D options for employers who provide benefits to retirees can be complex. But agents simply need to know the broad outlines of the challenges facing their customers and why an EGWP can reverse the negative effects created by health care reform changes.
The story begins with the creation of Medicare Part D. To keep employers from dumping drug prescription coverage and flooding the new program with their retirees, the federal government invited companies to accept a subsidy to pay for 28 percent of approved costs. The subsidy is not only tax free, but companies can continue to write off 100 percent of their pharmaceutical costs as expenses (their 72 percent share, plus the government's 28 percent).
The average value of the subsidy has been estimated at around $500 per Medicare beneficiary per year, a bargain for the government since its cost to provide coverage exceeds $1,000 per year.
Under health reform, companies will no longer be able to write off the 28 percent of the costs covered by the subsidy, and the administrative costs associated with the retiree drug subsidy will no longer be deductible. These are significant reductions in the value of the subsidy for employers – a value that under general accounting rules has been factored into future liabilities that are reflected in current financial reports.
As with all substantive changes in financial situations, companies were obligated to immediately report the change in their future tax liabilities. The amounts were stunning: $1 billion for AT&T, $150 million for John Deere, and $90 million for 3M, to name a few. In fact, Towers Watson benefits consultants estimates that as many as 3,500 companies that accept the drug subsidies may write down as much as $14 billion.
