March 9, 2004
BB 04—28

HHS Secretary Thompson Replies to Medicare Chairman Thomas on Actuarial Equivalence and Employer Subsidy

In a March 4 letter, Secretary of Health and Human Services Tommy Thompson responded to a recent letter sent by House Ways and Means Committee Chairman Bill Thomas (R-CA), who chaired the Medicare conference, regarding the new employer drug subsidy in the Medicare prescription drug law. Under the new Medicare drug benefit, employers that sponsor a retiree prescription drug plan may receive a subsidy for 28 percent of eligible paid claims between $250 and $5,000 for each eligible Medicare beneficiary. To be eligible for the subsidy, the employer plan must be at least actuarially equivalent or greater in value to the Medicare prescription drug benefit.

Negative articles have appeared in the Wall Street Journal and other publications claiming that companies would be entitled to the federal subsidy even if all or substantially all of the cost of the plan was passed on to the retirees. In his letter to Thompson, Thomas wrote about congressional intent regarding the new employer drug subsidy in part to refute these articles. Thomas stated that the Medicare statute "clearly states that only those plans that are at least actuarially equivalent to the standard Medicare benefit are entitled to the new subsidy." Thompson responded that he "agree(s) with your conclusion that it is incorrect to assume that employers and union plans are entitled to the subsidy payment, regardless of how much cost sharing retirees are required to pay. As the law states, to qualify for a subsidy, employer and union plans must offer drug coverage that is 'at least equal to the actuarial value of standard prescription drug coverage' in Medicare Part D."

The Council sent a letter to the editor of the Wall Street Journal on this issue to highlight that "once this program gets underway, any prescription drug coverage where the retiree pays for most, or all, of the value of the benefits under the plan will surely be determined under the agency's guidance to be lower in value than Medicare's drug benefit and therefore ineligible for federal subsidies." For more information, contact Paul Dennett, vice president of health policy, at (202)289-6700.

Mental Health Parity Extension Offered as Part of Tax Extenders Amendment in the Senate

Senate Finance Committee Chairman Charles Grassley (R-IA) offered an amendment that would extend a number of tax provisions that have either expired or are set to expire later in the year (Senate Amendment No. 2687) to the Jumpstart our Business Strength (JOBS) Act (S. 1637). Included in the amendment is a provision to extend the existing mental health parity law for an additional year, until December 31, 2005. The amendment, which would amend ERISA, the Public Health Service Act and the Internal Revenue Code, is pending as the Senate considers S. 1637.

Current law, which is set to expire at the end of 2004, mandates parity in annual and lifetime dollar limits between medical and surgical benefits covered by a health plan and any mental health benefits covered by the same plan. Senators Pete Domenici (R-NM) and Edward Kennedy (D-MA) have introduced the Mental Health Equitable Treatment Act (S. 486) which would expand the mandate, but are also working on a compromise plan. The compromise would reportedly eliminate the requirement that all mental health diagnoses in the "DSM-IV," the compendium of mental health disorders, be included in the parity requirement and would permit some limits on mental health benefits if the health plan includes these limits on "substantially all" medical and surgical benefits, a term which is undefined.

The Council continues to emphasize to lawmakers that these modifications do not address all of the concerns that plan sponsors have raised with the expanded parity proposal. For more information, contact Maria Ghazal, Council director, health policy, at (202) 289-6700.

Joint Tax Committee Releases Bill Comparison, Revenue Estimates for H.R. 3108

With the House of Representatives and Senate conferees beginning negotiations for a final version of the Pension Funding Equity Act (H.R. 3108), the Joint Tax Committee has released a comparison of the tax and pension provisions (JCX-17-04) and the estimated revenue effects (JCX-18-04) for the House and Senate bills. The first meeting of the conference is scheduled to begin the evening of March 9.

Both bills contain a two-year replacement of the defunct 30-year Treasury bond rate with a composite rate based on conservatively invested long term corporate bonds. The Senate bill also includes two year relief from the amortization of investment losses for multiemployer pension plans and a partial deficit reduction contribution (DRC) relief provision that contains a controversial "application process" for companies other than those in the airline and steel industries. The final bill will likely draw elements from both the House and Senate bills.

According to the Joint Tax revenue estimate, the 30-year rate replacement provisions raise between $9 and $10 billion in revenue over the two-year window. The provisions raise money by providing a higher interest rate for funding calculations, thereby lowering required contributions and reducing the amount of corporate deductions. Additionally, the deficit reduction contribution provision in the Senate bill would raise about $730 million over the two years. Due to their temporary nature, the combined provisions are estimated to lose revenue over the ten-year window.

While the Senate version of H.R. 3108 addresses most of the technical concerns raised by the Council, some issues still remain. The Council has weighed in with appropriate staff members and asked that the final language clarify issues ensuring transparency of the methodology by which the Treasury determines the replacement rate, the public availability of rates used by the Treasury Department in its calculation, and clarification that any rate within the corridor will be an acceptable rate (See the November 20 Benefits Byte).

For more information contact Diann Howland, Council vice president, retirement policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.