Employer-sponsored health benefits are the single largest source of drug coverage for both the Medicare and non-Medicare population. As will be discussed below, in 1996 employer-sponsored plans were the source of coverage for about 60 percent of the non- Medicare population and 32 percent of Medicare beneficiaries.
Until the late 1980s, prescription drug coverage was often not a distinct benefit, but was included in conventional major medical plans if it was included at all. It was subject to the overall deductible for all services and to the same coinsurance amounts (typically 20 percent) that applied to other medical care.3 Two developments have led to major changes in employer drug benefits.
The first is the widespread use of managed care plans, such as health maintenance organizations (HMOs), preferred provider organizations, and point of service plans, which now cover 89 percent of workers, although a smaller percent of retirees.4 Managed care plans offer a distinct drug benefit; only about 10 percent impose a deductible, and a copayment—for example, $5 for generic drugs and $10 for brand- name drugs—is used in place of a coinsurance percentage.5
The second is the growth of pharmacy benefits managers (PBMs).6 Most managed care plans contract with a PBM to administer their drug benefits. In addition, many employers have “carved out” prescription drug benefits from their general health plans and contract separately with a PBM.7 Unlike indemnity insurers, PBMs process and pay claims at the point of sale. They develop formularies (lists of preferred or approved drugs), negotiate discounts with manufacturers and retail pharmacies, encourage use of mail-order pharmacies, and take other steps to control drug costs. (A fuller description of PBM practices is provided in Chapter 3.) PBMs are not insurers; they usually do not accept financial risk for the costs of services, although their contracts with managed care plans or employers may include some incentives for cost reduction.
Some large managed care organizations, such as Kaiser Permanente and Aetna, manage their own drug benefits instead of contracting with a PBM. As the practices of these organizations are similar to those of PBMs, the single term PBM will be used in this report to cover all types of entities that manage prescription drug benefits. Some other insurers, such as indemnity plans or self-insured employer plans, may not manage drug benefits, but simply pay claims submitted by enrollees. Overall, an estimated 78 percent of people with non-Medicaid drug coverage are in PBMs, while the rest are in plans managing their own benefits or in unmanaged plans.8
Although still the single largest source of Medicare supplemental drug coverage, retiree health benefits have been eroding in the last decade. In part, this decline is a response to accounting rule changes that required firms to account for benefits promised to future retirees as a current liability. In some cases, firms may provide more generous coverage for active workers than for retirees because of the role of benefits in recruiting employees. According to a recent employer survey, about 41 percent of large firms offered health benefits to retirees in 1998 compared to 66 percent in 1988. Of these, 80 to 85 percent provided benefits to Medicare beneficiaries; the remainder covered only early retirees in the period before Medicare eligibility.9 Another survey recorded a drop from 40 percent in 1993 to 28 percent in 1999 in the number of large firms offering health benefits to Medicare eligible retirees.10
Smaller firms are less likely to offer health benefits to retirees. One survey found that only 8 percent of smaller firms, those with fewer than 200 workers, offered retiree coverage in 1998.11 The Mercer/Foster Higgins survey of medium-sized firms with 500 to 1000 employees, reported that 22 percent of employers offered coverage to Medicare- eligible retirees in 1999.12
The impact of the decline in employer sponsorship of retiree health benefits will be felt more strongly in the future. Most firms that have dropped coverage have done so for their active workers planning to retire in the future, rather than for current retirees.13 Since effective rates of change vary by firm and by the age of the workers, it is difficult to predict the rate of coverage decline.
Additionally, there are indications that the nature of coverage offered to retirees has changed. Of those employers that still offer medical coverage, 40 percent are requiring Medicare-eligible retirees to pay the full cost of their benefits compared to 28 percent in 1995.14 Further, many firms that continue to offer retiree coverage have tightened the eligibility rules for future retirees. For example, the percentage of large employers who require employees 55 years or older to have between 10 and 15 years of employment to qualify for benefits rose from 30 percent in 1991 to 49 percent in 1998.15
In recent years, increasing numbers of employers who provide retiree health benefits have permitted or required Medicare-eligible retirees to enroll in a Medicare+Choice plan (see below). The employer may pay the plan’s premium for its usual supplemental coverage and may also negotiate additional supplemental benefits on behalf of the retirees.16
Some drug coverage is provided in 80 percent of retiree health benefit plans.17 However, many employers are looking for ways to reduce the costs of these benefits. One recent survey of large employers found that 40 percent would consider cutting back on prescription drug coverage for Medicare-eligible retirees in the next three to five years.18