August 23, 2004
BB 04—89

CMS Holds Open Door Forum for Employers

On August 19, the Centers for Medicare and Medicaid Services (CMS) held a two-hour nationwide Open Door Forum on the options available under the Medicare Modernization Act of 2003 (MMA) and the CMS proposed regulations for employers that offer prescription drug coverage for retirees. This is one of a series of Open Door Forums CMS is hosting to improve the public's understanding of the implementation of the MMA and obtain the views of various stakeholders. CMS has also issued a new Discussion Paper with some additional information for employers.

CMS first provided a summary of the two primary ways employers are expected to coordinate with Medicare: receiving a subsidy for providing actuarially equivalent coverage or providing benefits that "wrap around" Medicare's Part D drug benefit. CMS also identified some of the key concerns that employer groups — including the Council — have raised such as accelerating the issuance of final agency guidance on the new drug benefit in order to meet the lead time required for employer group plans and how to make sure CMS collects the data it needs without imposing too much of a burden on employers. CMS also noted how important their waiver authority is to help employers work with Medicare to provide retiree coverage. They also reiterated several times that they expect to broadly interpret their authority to grant waivers to employers that opt to work with health plans to provide retiree drug coverage. One example CMS raised was a waiver to create a nationally available prescription drug plan to serve employers that have retirees in more than one Medicare region.

The majority of the forum was dedicated to receiving comments and questions from participants, primarily employers, unions, and health plans. Representatives from Aetna, Humana, United Health Group, and Kaiser Permanente all said that they stand ready to work closely with employers to make this program successful. Watson Wyatt provided information from a recent survey indicating that 38 percent of companies expect to qualify for and take the subsidy, 10 percent intend to wrap around Medicare, 1 percent expect to offer only financial support (such as paying retirees' Part D premiums), 4 percent expect to drop coverage, and 48 percent have not yet made a decision, largely due to the uncertainty about how the market will work for plans that want to coordinate with Medicare prescription drug plans. 28 percent of respondents expect not to qualify for the subsidy. (The responses do not add up to 100 percent because they apply to several different questions.)

Several people asked for more specific information about how the waiver process will work and when that authority will be available; CMS commented that it probably will not begin granting waivers until the regulations are finalized in early January 2005. Other people asked questions about the required creditable coverage notice and administrative flexibility, particularly for small employers.

Several representatives from different unions raised concerns related to an employer's ability to receive so-called "windfalls" (i.e., the employer would receive more from Medicare than it pays toward retiree benefits) and an employer's ability to shift costs to the retiree. The following suggestions were offered by almost all union representatives:

  • require employers to maintain their current plans in order to receive the subsidy;
  • require employers to disclose to both CMS and retirees their assumptions for calculating actuarial equivalence;
  • allow retirees to challenge an actuarial equivalence determination;
  • increase CMS enforcement activities similar to the Internal Revenue Service and Department of Labor activities; and
  • require that the employer pass subsidy amounts on to retirees or use subsidies only for health care.

The Council played a key role in the Open Forum conference call as the voice of employer interests, both on behalf of our own members and as a representative of the Employer's Coalition on Medicare (ECOM.) Susan Relland, Council health policy legal counsel, thanked CMS for the flexibility and wide variety of options offered by the proposed regulations. She also emphasized that employers are not trying to receive windfalls as a result of taking the subsidy and do not see retiree health benefits as a profit-center for the employer (as was claimed in past Wall Street Journal articles and implied by several comments made by union representatives.) Because CMS, unions, and employers all have the same policy position on windfalls, there is no reason for it to be a controversial issue in the final regulations. Relland noted that employers are concerned about the timing of the new guidance for employers that choose to take the subsidy and the new market for employers that choose to wrap around Medicare. She urged CMS to make as much information as possible available as early as possible, perhaps in the form of questions and answers, and to start working now with employers and health plans to approve waivers.

CMS noted that, while the dialogue during the call was very helpful for the agency, it can only consider written comments for purposes of finalizing the proposed regulations. The Council will be submitting comments on the proposed regulations and we welcome any input from members regarding issues and suggestions to include. In addition, the Council will hold a Benefits Briefing conference call on the employer subsidy on Wednesday, September 1 at 3:00 p.m. ET and a separate call on the other options available to employers on Wednesday, September 8 at 3:00 p.m. ET. If you would like additional information about the Open Door Forum or the CMS proposed regulations, please contact Susan Relland, Council health policy legal counsel, at (202) 289-6700.

SEC Finalizes Rules Prohibiting Investment Companies from Using Brokerage Commissions to Pay for Distributing Fund Shares

On August 17, the Securities and Exchange Commission (SEC) unanimously voted to adopt in final form proposed amendments to rule 12b-1 under the Investment Company Act of 1940 that would prohibit investment companies from paying for the distribution of their shares with brokerage commissions ("directed brokerage"). Despite the ongoing review of an overwhelming number of comment letters on this issue, SEC staff recommended that the SEC Commissioners adopt without change the proposed rule prohibiting use of brokerage commissions to finance distributions. SEC staff did not give any indication when such further recommendations might be forthcoming, but they noted that the National Association of Securities Dealers (NASD) will adopt a similar directed brokerage rule applicable to broker-dealers. SEC officials also agreed to continue to consider further amendments to rule 12b-1.

SEC has received more than 1,600 comment letters in response to the proposed rule. These comments ranged from recommending that rule 12b-1 be abolished in its entirety to emphasizing that rule 12b-1 is an important aspect of how funds are distributed. Officials noted that rule 12b-1 permits use of fund assets and, thus, rule 12b-1 needs to be used in the best interests of mutual funds; however, the best way to process costs associated with fund distribution have yet to be determined. One staff suggestion was to move these fees from the fund level to the investor level.

The Commissioners also questioned the decision not to provide a safe harbor and emphasized that the amendments to rule 12b-1 should not create a presumption that allocation of trades through a distributing broker is a violation. Guidelines for determining whether a broker is acting appropriately would include reviewing (1) policies and procedures already in place to guide allocation decisions to ensure broker selections are made for the right reasons, such as trader instructions and the priorities given to the trading desk, (2) the absence in brokerage budgets of a portion dealing with brokerage commissions, and (3) the absence of communication between the trading desk and those making the trade.

SEC Chairman Donaldson also said that only three proposed rules remain outstanding of the mutual fund initiatives undertaken in the last year by the SEC. He indicated that the SEC intended to finalize the remaining proposed rules by the end of the year. The Council continues to work diligently to address member concerns raised by the proposed rules such as those imposing a mandatory redemption fee and those intended to address late trading. As soon as finalized rules become available, they will be posted on the Council Web site. For more information on this issue, please contact Jan Jacobson, Council director, 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.