The importance of evaluating RDS and EGWP trends to optimize plan value

Financial dynamics and an evolving regulatory environment in the group retiree pharmacy benefits market continue to influence the relative values of Employer Group Waiver Plans (EGWPs) and Retiree Drug Subsidy (RDS) plans. Plan sponsors should periodically monitor and evaluate emerging trends in these programs to optimize plan value in this still-changing market.

Last summer, for example, the Centers for Medicare and Medicaid Services (CMS) announced a large decrease in the monthly direct subsidy revenue to EGWPs. Additionally, the Medicare Payment Advisory Commission (MedPAC) recently proposed changes to the Medicare program with major implications for EGWP costs.

Figure 1 summarizes key recent and proposed market and regulatory dynamics that are already impacting the relative values of EGWPs and RDS plans—and which could potentially influence further shifts in these values.

Drivers of the shift from RDS plans to EGWPs
Since 2013, the number of beneficiaries covered by EGWPs has outnumbered those covered by RDS plans. When Medicare Part D was first introduced in 2006, the typical plan sponsor savings under EGWPs and RDS plans were comparable for a nontaxable entity. But, at that time, RDS plans were typically more favorable for taxable plan sponsors because of their tax-favored treatment.

Until the passage of the Patient Protection and Affordable Care Act (ACA), plan sponsors could deduct health benefit costs reimbursed by the RDS from their taxable incomes. However, starting in 2013, plan sponsors were no longer permitted to deduct health benefit costs reimbursed by the RDS, eliminating its once tax-free status and eroding one of its key advantages over EGWPs.

The ACA also introduced the Part D Coverage Gap Discount Program (CGDP) in 2011. Under this program, pharmaceutical manufacturers pay 50% of the cost of eligible brand medications in the coverage gap phase of the Part D benefit for non-low-income beneficiaries. EGWPs receive these CGDP payments, while RDS plans do not.

The elimination of the tax-favored treatment of RDS plans, combined with the increase in EGWP savings through the CGDP, made EGWPs a more attractive option for many plan sponsors. These changes prompted a relatively large shift from RDS plans to EGWPs in 2013, as plan sponsors reevaluated the financial opportunities associated with their group retiree pharmacy benefits. Figure 2 illustrates this enrollment shift from 2010 to 2015.6

Future outlook
Since 2013, regulatory and market dynamics continue to alter the group retiree pharmacy benefits landscape. These include the following changes described in Figure 1 above, among others:

• Reductions to the Part D direct subsidy
• Increasing pharmacy costs from specialty medications
• Regulatory clarifications regarding the EGWP claim adjudication methodology
• Recent proposals with the potential to affect EGWP revenue items and accounting

While EGWPs may continue to be more favorable than the RDS for a typical retiree plan in the current environment, these comparative values could change for some plan sponsors as a result of current proposals and future trends.

The group retiree pharmacy benefits market continues to evolve, with potential impacts on the relative financial values of RDS plans and EGWPs. The only constant in this market may be change. Plan sponsors should closely monitor their options. Periodic evaluations will likely help optimize plan sponsor value in this market.

This article first appeared in the February 2017 issue of Health and Group Benefits News and Developments.

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1 While some changes do not directly impact the financial position of RDS plans, any change that impacts the defined standard Part D benefit may affect RDS/creditable coverage testing, which may result in required changes to RDS benefits or pricing.

2 In December 2013, CMS issued claim adjudication guidance effective in 2014 that generally delays EGWP claims from reaching the catastrophic phase: CMS (December 2013), Prescription Drug Event (PDE) reporting examples for benefit year 2014, p. 34. Retrieved July 29, 2016, from$FIle/2014%20PDE%20Reporting%20Guidance%2012-13-2013.pdf.

3 MedPAC recommended reducing the federal reinsurance subsidy from 80% to 20%. MedPAC (June 2016). Report to the Congress: Medicare and the Health Care Delivery System. Retrieved July 29, 2016, from

4 MedPAC proposed that CGDP payments no longer count toward the member’s accumulation of costs toward reaching the catastrophic phase of the Part D benefit. Ibid.

5 The Governmental Accounting Standards Board (GASB) proposed that public sector entities cannot reduce the OPEB liability for Part D EGWP subsidies from CMS. Implementation Guide No. 201X-X, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, p. 45. Retrieved October 20, 2016, from

6 Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (June 22, 2016). 2016 Annual Report, p. 145. Retrieved July 29, 2016, from