Executive Summary  

Employers would generally prefer that Medicare-eligible active employees and their beneficiaries enroll in Medicare and drop the employer-provided medical coverage. However, the Medicare Secondary Payer (MSP) rules prohibit employers (except those with fewer than 20 employees) from forcing such active employees or their beneficiaries to drop the employer plan or incentivizing them to do so just because they are eligible for Medicare. This rule applies to employees and their beneficiaries who are currently eligible for or covered by the employer plan because of their employment and are also eligible for Medicare.

Historically, violations were discovered, if at all, after Medicare paid a claim. The Centers for Medicare and Medicaid Services (CMS) published regulations to require insurers and TPAs (primarily) to report potential circumstances where there may be overlap or face penalties. The final rule has been delayed for a year but is expected to be effective soon, which means it will be more likely that claims will be caught before being paid by Medicare and more likely that employer plans will have to cover those costs.

Background 

Employer-sponsored healthcare plans took advantage of the passage of Medicare in 1965 to shift their active employees (and beneficiaries) who were eligible for Medicare to enroll in Medicare as opposed to staying on the employer plan. Congress determined that Medicare intended to provide coverage for retired individuals, or those who otherwise did not have access to employer group health plans, rather than those with employer-based coverage as active employees. Therefore, it passed the Medicare Secondary Payor (“MSP”) Act in 1980. The MSP Act provides that there would be a division of responsibility between employer-group health plans (GHPs) and Medicare based on the circumstances of the individual. (Some additional rules apply to other types of plans, but we’ll focus on the employer plan arrangements.)

Summary of the MSP rules 

In general, if the individual is 65 or older (or otherwise eligible for Medicare, generally because of being disabled) and currently covered by the employer group health plan as an active employee (or the dependent of an active employee), and the employer has 20 or more employees, the group health plan will typically be the primary payer of any medical claims of that individual. If the employee (or the employee’s beneficiary) is also covered by Medicare, Medicare will generally pay secondary to the employer plan. 

The rules can be complex; CMS summarizes the rules as follows (as they apply to group health plans):

1. Working Aged (Medicare beneficiaries aged 65 or older) and Employer Group Health Plan (GHP):
   • An individual aged 65 or older is covered by a GHP through current employment or a spouse’s current employment AND the employer has less than 20 employees:
     Medicare pays Primary, GHP pays secondary.
   • An individual aged 65 or older is covered by a GHP through current employment or a spouse’s current employment, AND the employer has 20 or more employees (or at least one employer is a multi-employer group that employs 20 or more individuals): GHP pays Primary, Medicare pays secondary.
   • An individual aged 65 or older is self-employed and covered by a GHP through current employment or spouse’s current employment AND the employer has 20 or more employees (or at least one employer is a multi-employer group that employs 20 or more individuals): GHP pays Primary, Medicare pays secondary.
2. Disability and Employer GHP:
   • A disabled individual is covered by a GHP through their current employment (or through a family member’s current employment) AND the employer has 100 or more employees (or at least one employer is a multi-employer group that employs 100 or more individuals): GHP pays Primary, Medicare pays secondary.
3. End-Stage Renal Disease (ESRD):
   • An individual with ESRD, is covered by a GHP and is in the first 30 months of eligibility or entitlement to Medicare: GHP pays Primary, Medicare pays secondary during 30-month coordination period for ESRD.
   • An individual with ESRD, is covered by a Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA plan) and is in the first 30 months of eligibility or entitlement to Medicare
     COBRA pays Primary: Medicare pays secondary during 30-month coordination period for ESRD.
4. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) – the law that provides continuing coverage of group health benefits to employees and their families upon the occurrence of certain qualifying events where such coverage would otherwise be terminated.
   • An individual with ESRD, is covered by COBRA and is in the first 30 months of eligibility or entitlement to Medicare: 
     COBRA pays Primary, Medicare pays secondary during 30- month coordination period for ESRD.
   • An individual aged 65 years or older and covered by Medicare & COBRA: Medicare pays Primary, COBRA pays secondary. 
5. Retiree Health Plans
   • An individual aged 65 or older and has an employer retirement plan: Medicare pays Primary, Retiree coverage pays secondary.

In the event the employer GHP pays secondary to Medicare when it should have been the primary payer, or it does not pay claims at all because the individual is no longer on the employer plan (in certain circumstances) and CMS discovers the circumstances, the employer GHP will have to pay the claim after the fact as the primary payer. 

Over the last couple of decades, CMS spent a lot of energy in attempting to enforce those rules by auditing claims and investigating circumstances where it should have been the secondary payer. That effort was not garnering the hoped-for results. Therefore, CMS more recently issued regulations that would require insurers and TPAs (primarily), who are referred to as responsible reporting entities (RREs), to report to CMS on an annual basis any individual who is eligible for coverage under both the GHP and Medicare (based on age or disability) or be subject to a penalty of up to $1000 per day. In this way, CMS hopes to understand who might be subject to the MSP rules and permit CMS to find those claims before it pays them. That would avoid finding them after the fact and trying to recover the funds years later. Those rules were pushed out another year with the most recent announcement. But it serves to remind employers about these rules.

Structuring employer-sponsored GHPs to avoid MSP issues

Many employers, and in particular financial executives, have questioned whether it made sense to continue to cover Medicare-eligible employees and dependents on their healthcare plans when those individuals could get access to coverage under the federal Medicare system. Unfortunately, the MSP rules prohibit employers from forcing or even incentivizing active employees (or their beneficiaries) from dropping the employer-sponsored coverage in favor of Medicare. Note – there is no prohibition on the employee doing so voluntarily (or even having double coverage for that matter, but there are potential downsides with this approach, especially with respect to the interaction of Medicare and COBRA. See below for one area of potential confusion that can cost employees substantial penalties if they fail to elect Medicare timely.

Since there is no prohibition from individuals choosing to drop employer coverage for Medicare voluntarily, there are options for employers to consider. 

Education

Many individuals will find that their out-of-pocket costs will be substantially less in a Medicare option with a Medicare supplement. It may not be an obvious decision for those actively employed and on the employer plan. Therefore, employers are free to communicate the benefits of dropping employer coverage in favor of Medicare to those eligible. Care must be taken to ensure no coercion is involved with the process. There are various vendors (including those who specialize in selling Medicare supplements) who are well-versed in the rules and can provide that education effectively while avoiding any tactics that might be deemed coercive. 

One area for education concerns COBRA. COBRA qualified beneficiaries can retain both COBRA coverage and Medicare coverage. Except for the first 30 months of treatment for ESRD, Medicare will be the primary payer (which is different from the rule for active employees). Some COBRA qualified beneficiaries choose to elect COBRA and forgo Medicare even if Medicare-eligible during the COBRA continuation coverage period (typically 18 months for most former employees). However, doing so after active employment has ended will result in a penalty for late enrollment in Medicare. While coverage under an employer GHP while an active employee will not result in any late enrollment penalty under Medicare, even if eligible for enrollment, that is not the case for COBRA. So, COBRA qualified beneficiaries who are eligible for Medicare, in most cases, would be better off financially by taking the Medicare coverage and forgoing the COBRA coverage. 

Medical-plan opt-out options

As noted above, there is no prohibition against individuals choosing to opt out of the employer GHP and taking Medicare. Employers would naturally be willing to offer some incentive for them to do so. However, the MSP rules would prohibit offering that incentive to the Medicare-eligible group solely. Nevertheless, there is no prohibition to offering an incentive to opt out of the employer GHP that applies to the entire employee population. The incentive just cannot be targeted at the Medicare-eligible population. Therefore, employers can structure an incentive that would be attractive to employees who might have coverage elsewhere, or just prefer the incentive to the employer coverage. CMS has stated that even such broad-based programs might violate the MSP rules. If the only employees who take the offer, or a disproportionate number of them, are those who are Medicare-eligible CMS has indicated that it would consider that to violate the MSP rules as well. However, there is no language in the statute or regulations that would support that view and no precedent of CMS enforcing the MSP rules on that basis.

Conclusion

The MSP rules can be very confusing, and employers have significant financial incentives to try to skirt the enforcement mechanism. The newer enforcement option that will force the carriers and TPAs to inform CMS when there is a potential situation where MSP violations could occur has the potential to drive more enforcement activity from CMS around that occurrence. The rules have been put off for a year providing additional time for employers to review their activities and confirm that they are within those rules.