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Medicare Reform/Medicare Prescription Drug Benefit

Why Employers Care


The Social Security and Medicare Boards of Trustees in May 2013 estimated that Medicare will be bankrupt by 2026.1 There is some controversy behind this statistic because it does not take into account restoration of Medicare physician payment cuts.

Medicare payment and delivery reforms are necessary to sustain the Medicare program for current and future retirees. Recent reform efforts have focused on pay-for-performance and transparency. Meaningful disclosure of performance results to the public and employers will reinforce the value of pay-for-performance by improving the stability of Medicare and rewarding superior performers with additional demand for their services while eliminating waste, fraud and abuse. The Patient Protection and Affordable Care Act includes provisions that change Medicare payment and health care delivery. In October of 2011 the federal government issued final rules to implement Accountable Care Organizations (ACOs) which encourages groups of providers to manage and coordinate inpatient and outpatient care for Medicare fee-for-service (FFS) beneficiaries. In addition, a bipartisan group of members of Congress (primarily House Ways and Means and Senate Finance Committee members) have introduced bills to change how Medicare reimburses physicians from a fee-for-service to a pay-for-performance (P4P) model.

Other reforms considered at various times have included reductions in benefits, raising the eligibility age, and means testing (which would require wealthier beneficiaries to pay more for Medicare). In the absence of reform, to deal with the pressures on Medicare's finances, Congress has raised beneficiary contributions, reduced funding for some providers to pay for increases for other providers, and attempted to shift costs to other programs. Representative Paul Ryan (R-WI) and Senator Ron Wyden (D-OR) introduced a bill that would allow seniors to choose traditional Medicare or an $8,000 subsidy (voucher/premium support), adjusted for health status, to purchase private health plans in a Medicare exchange.


The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was landmark legislation, introducing prescription drug coverage (Medicare Part D) under the Medicare program.

As a result of the Medicare prescription drug program, employers have a variety of alternatives for covering the prescription drug needs of their Medicare-eligible retirees. Also, employers who maintain employer-sponsored retiree prescription drug coverage can be partially reimbursed for this costly benefit through a federal subsidy program.

As the Medicare prescription drug program evolves and the market begins to mature, the Centers for Medicare and Medicaid (CMS) will continue to evaluate and make changes in the design and administration of these plans, potentially affecting employer cost and retiree satisfaction with their prescription drug benefits. Any changes in the federal subsidy program may cause employers to re-evaluate their retiree prescription drug program strategies.

The Patient Protection and Affordable Care Act includes a provision that doesn't allow employers to exclude the retiree drug subsidy for gross incomes for corporate tax purposes. In addition employers must immediately begin to account for the tax on the RDS in their 1st Quarter 2010 earnings report. Other provisions in the law would phase in the closing of the "doughnut hole" and provides seniors with discounts while they are in the "doughnut hole", the gap in coverage before the government catastrophic plan begins and after the basic Part D benefit ends.

What Can Employers Do?

The National Business Group on Health is a member the Employers' Coalition on Medicare (ECOM), a coalition of 60 businesses and associations who support comprehensive Medicare reform. For more information or to join this coalition, employers can contact

Employers can evaluate their alternatives for providing retiree prescription drug coverage, including:

  • Medicare prescription drug plans,
  • Medicare Advantage plans that include prescription drug coverage,
  • Wrap-around plans that supplement Medicare Part D coverage, or
  • Continued employer-sponsored coverage with partial reimbursement through the federal subsidy program.

Members of the National Business Group on Health can also voice their concerns to the Business Group's public policy team and by responding to public policy opportunities to comment on proposed regulations, contact Congress and/or the Administration, testify, or participate in related activities.

Relevant Tools and Resources Include:

References (show references)

1 Social Security and Medicare Board of Trustees. Status of the Social Security and Medicare Programs. Updated May 2012.

Page last updated: January 29, 2014

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