Overview

As America’s workforce ages, employers are seeking ways to retain valuable, experienced workers without breaking their benefits budget. In this piece, we will explore the legality and advisability of the creative ways in which employers are trying to address this issue.

Scenario:

ABC Company has 40 employees. Employees working 30 or more hours per week receive company medical benefits and there is no differentiation of benefits based on eligibility for Medicare.

ABC company presented the following set of questions in an effort to formulate a benefits policy for retention of older employees who may want to work a reduced work schedule.

Questions:

• Can ABC Company offer a supplemental health insurance policy to employees who are eligible for Medicare and are enrolled in Medicare? 
• Can the supplemental health insurance replace their enrollment in the current group health insurance plans (presumably at a less expensive monthly premium cost)?
• Can the premiums for this type of policy be paid for directly by ABC Company or do they have to be paid by the individual?
• Would it be possible to provide a supplemental health insurance policy to an employee who is eligible for Medicare and is enrolled in Medicare and currently works for ABC Company full-time but is interested in reducing their hours worked per week from 40 to 20?

Answer:

This line of questions addresses the root of (and the very reason for) the Medicare Secondary Payor (MSP) rules. All of these questions are good ones, and the intention to try to retain experienced employees is both honorable and smart. However, the short answer is that they can't do any of the proposed actions given that they are over the threshold for MSP (20 employees).

Explanation:

As a quick overview, following is a summary of the key rules that govern the MSP requirements:

1. “Taking into Account” Medicare Entitlement is Prohibited. As a general rule, the MSP statute prohibits a group health plan from “taking into account” the Medicare entitlement of a current employee or a current employee's spouse or family member. Taking Medicare into account includes not paying primary when required under the MSP rules. 

2. Same Benefits Under Same Conditions is Required. The MSP statute also requires a plan to provide a current employee or a current employee's spouse who is age 65 or older with the same benefits, under the same conditions, as are provided to employees and spouses who are under age 65. This is a separate and distinct requirement from the “taking into account” Medicare entitlement prohibition.

3. Offering Incentives is Prohibited. The MSP statute prohibits employers from discouraging employees from enrolling in their group health plans or from offering any “financial or other incentive” for an individual entitled to Medicare “not to enroll (or to terminate enrollment) under” a group health plan that would otherwise be a primary plan. For example, an employer is prohibited from offering an alternative to the employer's primary plan, such as a prescription drug plan, to Medicare beneficiaries unless such individuals have primary coverage other than Medicare, either through the employer or another source (e.g., a spouse's employer). CMS takes the position in its Medicare Secondary Payer (MSP) Manual that the prohibition applies “even if the payments or benefits are offered to all other individuals who are eligible for coverage under the plan.”

4. Employee Voluntary Opt Out. An employee may choose to voluntarily drop employer coverage (for example, because it costs too much) and rely on Medicare as the sole and primary payer of medical expenses. CMS has indicated that if an employee chooses not to take employer-provided group health plan coverage, then the employer can offer the employee a plan that will pay for services Medicare does not cover, such as eyeglasses. It cautions, however, that an employer “can't offer…a plan that pays supplemental benefits for Medicare-covered services or pays for these benefits in any other way.”

5. The Penalty. According to CMS, the Medicare law is violated “every time a prohibited offer is made regardless of whether it is oral or in writing.” A violation of the prohibition on financial incentives can lead to civil penalties of up to $5,000 per violation.

6. Excepted Employers. There is an exception to the MSP rules for employers with 20 or more employees (for each working day in at least 20 weeks in either the current or the preceding calendar year). If an employer falls under the exception, Medicare will be the primary payor.

So, in short, the MSP rules very tightly prohibit essentially every possible “workaround” where an employee would opt off of a group plan and the employer could subsidize Medicare premiums and/or Medicare supplemental coverage.

What about an ICHRA?

There is one possible way to get around this for some employers, but there are some pretty significant restrictions which make it very difficult for smaller MSP subject employers. Following is a summary of the key provisions for the potential partial solution, an ICHRA:

1. Must Work Less than 30 Hours Per Week. To qualify for this exception, an employer must establish an Individual Coverage HRA (ICHRA) for employees who work less than the 30-hour threshold for the regular group health plan. This is a big drawback as it could only be used if the employer wanted to offer coverage for Medicare-eligible employees working between, say, 20-30 hours per week. Thus this solution can only be used for a portion of all Medicare-eligible employees.

2. ICHRA must be Based on Actual Class of Employees. An ICHRA must be offered to a bona fide class of employees and offered on the same basis to all. For example, if an ICHRA was offered to employees who worked 20-30 hours per week, it would need to be offered to all employees in that category, not only those who are Medicare-eligible. Typical classes might include, part time employees (if full time employees are offered a traditional health plan) or non-salaried employees.

3. No “Regular” Group Health Plan. No other group health plan can be offered to the class of employees eligible for the ICHRA.

4. Minimum Size Requirement. There are additional size rules that govern the population of the class of employees offered an ICHRA. The minimum number of employees in the class is:

• 10, for an employer with fewer than 100 employees;
• A number (rounded down to a whole number) equal to 10% of the total number of employees, for an employer with 100 to 200 employees; and
• 20, for an employer with more than 200 employees.

As you can see, the class and size restrictions for ICHRAs make the viability of their use as a means to circumvent the MSP rules for smaller-but-MSP-subject employers very difficult.

Conclusion:

It is reasonable and even responsible to work toward a goal to reduce healthcare costs. However, the door to an option that would allow employers subject to MSP rules to offer alternate, less expensive coverage for Medicare-eligible employees is solidly closed. The expressed purpose of the MSP rules is, in fact, to redirect the cost of coverage for age 65+ working employees away from Medicare and toward employers. (The exception for small employers with fewer than 20 employees is intended to shield such small employers from this cost burden.)

For years, the MSP rules existed, but the implementation was lax. However, in this age of extreme cost escalation, both CMS and insurers have tightened up compliance to the letter of the law, which leaves essentially no options for employers in the search for “creative ways” to lower premium costs for Medicare-eligible employees.