From the East Coast to the West Coast and at almost every location in between, public entities are struggling to balance diminished revenue, increasing demands for service and the rising costs of employee benefits. In fact, bankruptcy is either looming or has become reality for a number of local governments, including the cities as far apart as Stockton, California and Central Falls, Rhode Island.
Finding a way to cover obligations at a lower cost has never been a more pressing priority.
Public agencies that used to fund retiree health benefits on a pay-as-you-go basis now find that new accounting regulations are forcing them to reflect future costs in current budgets. This is creating a painfully obvious schism between what is owed and the available resources, and endangering the credit ratings of many.
The timing is right for agents who can offer their public customers a solution that will reduce costs both now and in the future, maintain control over benefits, and limit exposure to risk. When it comes to retiree drug benefits, that solution is EGWP+Wrap.
Whipping Up Coverage
Employer Group Waiver Plans (EGWPs, usually pronounced Egg Whips) have been around for some time, but have remained in the shadow of the more well known Retiree Drug Subsidy (RDS) program. RDS was created by the federal government to stop companies from dropping their retiree drug benefits and enrolling their retirees in Medicare Part D base plan.
However, with the coming changes created by the Patient Protection and Affordable Care Act (PPACA), RDS is beginning to take a back seat and EGWPs are emerging as their most viable replacement. When a “wrap” plan that addresses the infamous doughnut hole of drug coverage is added, EGWP+Wrap becomes an attractive solution for public agencies.
The shift makes particular sense for public agencies. RDS was never as attractive to them as it was for for-profit businesses, which could reap the substantial tax benefits attributed to RDS. At one point, RDS was estimated to be worth about $500 per beneficiary to companies, a good bargain for the federal government because of the estimated Medicare Part D cost of about $1,000 per beneficiary.
Now, however, some provisions of PPACA are making EGWP+Wrap a valuable tool for public agencies who are seeking more savings than what the RDS program offers.
The Benefits of EGWP+Wrap
Although complex, many elements of EGWP+Wrap should feel familiar to public agencies. It is a self-insured product, a strategy that most public agencies are already using. It has two integrated parts – the Employer Group Waiver Plan and a wrap-around secondary plan – that can be designed to mimic current retiree drug benefits, or even enhance those benefits. This is particularly important for employers who are bound by collective bargaining agreements as to what their benefits must cover.
In addition, EGWP+Wrap can be handled by third-party administrators who can bring expertise and economies of scale to the process while eliminating the public agency’s administrative burden.
The major benefit, however, come from aspects that reduce current costs. These include:
- Higher federal subsidy. The EGWP+Wrap plan leads to lower costs because of the higher per-retiree federal subsidy, low-income subsidies, and the elimination of exposure to large risks because of the catastrophic coverage.
- The 50% Drug Discount Program. This program was created as part of the Patient Protection and Affordable Care Act to help Medicare Part D beneficiaries who have high enough pharmaceutical costs that they fall into the doughnut hole – the point at which they must pay for all prescriptions on their own until they reach a higher threshold of expenses when complete coverage kicks in. Normally under the new discount program, the patient receives a 50 percent discount. However, under the Wrap part of EGWP+Wrap, coverage can be provided that reduces the employer’s costs instead.
- Catastrophic care reinsurance. The EGWP+Wrap can easily be designed to make the employer eligible for the federal government’s catastrophic reinsurance program, an economical way to shift risk for high medical care costs to the government. With the amounts paid under the 50 percent discount program counting toward the doughnut hole thresholds, more retirees are likely to qualify for this catastrophic coverage, making it even more valuable for employers.
- Removing future drug benefit costs from current balance sheets. By turning future obligations into a fully insured benefit, public agencies can reduce the amount reflected in their current budgets for retiree health benefits. Some experts have estimated EGWPs reduce these liabilities by about 20 percent.
- Elimination of RDS auditing. The costly process of attesting to the expenses and benefits under RDS no longer applies.
By working closely with third-party benefit partners who understand EGWP+Wrap, agents can bring this solution to their public agency customers. It is a ripe opportunity because of federal programs, and one that is increasingly attractive to struggling local governments. Whipping up this business can be a win-win for both employers and their retirees.