Which pocket? A guide to paying retirement plan expenses out of plan assets
Retirement plan sponsors sometimes must determine which expenses are allowed to be paid from plan assets instead of business assets.
Since its inception in 1965, Medicare has evolved to meet the healthcare needs of the senior population1 in the United States. The program initially offered hospital (Part A) and physician (Part B) coverage on a fee-for-service (FFS) basis for those over the age of 65. These “Parts” are commonly referred to as “Original Medicare.” In 1997, Medicare Advantage (Part C) was introduced to offer a private alternative to Original Medicare. Part C offers the same coverage as Parts A and B through private insurance companies funded through the federal government. Due to more efficient medical management by private insurance companies, subsidy dollars may be left over, which are often used to enhance the benefit offerings.2
In 2003, Medicare expanded further to include prescription drug coverage (Part D) through private insurance companies. Unlike hospital and medical coverage, prescription drug coverage is only offered through private insurance companies and not offered through Original Medicare.
Adding dental coverage to Original Medicare has been considered, but never implemented, in numerous bills including the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3)3 and the Medicare Dental, Vision, and Hearing Benefit Act of 2021.4 Most recently, the proposed legislative framework for a $3.5 trillion budget resolution included plans to expand Medicare Part B to include dental coverage. The original budget included an estimated $238 billion increase in federal spending over five years to fund the benefit.5 Under this approach, dental coverage would be added to the Original Medicare covered services. As of the writing of this article, Medicare dental benefits have been excluded from the most recent version of the budget resolution.6
An alternate approach for providing dental coverage could be to create a separate Medicare “Dental Part” similar to Medicare Part D for prescription drug coverage.7 This article outlines the considerations for establishing a Medicare dental program through Part B or a separate Part D-like mechanism.
Medicare Part B and Medicare Part D have different government funding structures. Additionally, Part B has different funding mechanisms between Original Medicare and Medicare Advantage. Under Original Medicare, Part B services are paid for through FFS payments directly from the government to providers. Under Medicare Advantage, health insurers are provided a capitated payment to cover the costs of all Part A and Part B benefits. The health insurer handles paying providers for healthcare services. For the Part D pharmacy benefit, government funding is targeted to be 74.5% of the total program cost each year, paid to plan sponsors through a direct subsidy and federal reinsurance.8
Expanding Medicare to include dental benefits through Part B would likely mean that the benefit would be covered under an FFS structure in Original Medicare and would be added to the benefits covered under the capitation arrangement in Medicare Advantage. If dental benefits are added in a separate Part instead, there may be more flexibility in determining a funding arrangement. The funding could be set up to cover a certain percentage of total costs similar to Part D, have a capitation arrangement similar to Medicare Advantage, or have a unique arrangement. If setting up a Part D-style cost structure, the system could be structured to cover a percentage of projected costs and potentially remove reinsurance from the cost structure. Part D included reinsurance to cover high-cost medications and help with the unpredictability of claims; however, dental claims are comparably lower-cost, less variable, and do not have the same low probability but extremely high-cost outliers as pharmacy, so reinsurance may not be needed.
Low-income Medicare beneficiaries also eligible for Medicaid may be eligible for additional cost-sharing and/or premium assistance for benefits covered by Part A and Part B. Medicaid does not require dental coverage for adults, but some states choose to cover it in various ways. As such, the types of dental procedures covered and the limitations associated with such coverage vary widely by state, from no or very limited coverage in some states to comprehensive services in others. Because of the significant variation in benefits by state, adding dental benefits to Part B may cause additional complications in coordination with various state Medicaid programs. This may also lead to varying levels of low-income support across states, which could result in inconsistent access to dental care.
In contrast, Medicare Part D has its own low-income subsidies, which are funded by the federal government rather than state Medicaid programs. This ensures low-income beneficiaries receive the cost-sharing support they need and reduces coordination complications. Setting up a dental benefit as a separate Medicare Part with its own federal low-income subsidy may reduce the need to coordinate with each state’s Medicaid agency. This may lead to more consistent low-income support and more consistent access to dental care.
Under both Medicare Part B and Part D, beneficiaries face penalties if they do not enroll in the program immediately upon eligibility. The late enrollment penalties increase beneficiary premiums and are designed to discourage, and offset the cost of, anti-selection.9 Many dental procedures do not require immediate attention and can be delayed until insurance or other sources of funds can be obtained to cover them. Accordingly, a Medicare dental benefit would need a late enrollment penalty to discourage beneficiaries from only getting coverage when they had a major dental issue to address, such as crowns or dentures. The late enrollment penalty mechanism would need to be considered if dental is added as a standalone Medicare Part, but is already addressed in Part B if that were to include dental. If dental was added as a standalone Part, the late enrollment penalty could take many forms including permanent or temporary additions to premium.
Additionally, beneficiaries may be more likely to enroll in dental if it is offered under Part B, because the dental benefits would be included in the bundle of existing Part B benefits as opposed to being a separate enrollment decision in a standalone dental benefit. The Part B construct could reduce the anti-selection associated with a dental benefit compared with a construct that requires separate enrollment.
Under either Part B or a Part D-style construct, utilization of dental services might be higher in the initial coverage years, as people aging into Medicare may not have had prior access to dental insurance and may have unmet dental needs.
Offering dental benefits under Part B may cause challenges for some Medicare Advantage plan sponsors. Plan sponsors must cover all Part B benefits, and those who do not currently incorporate dental benefits would need to find a solution. Plan sponsors would either develop their own networks of dentists or could use subcontracted dental vendors. This would add complexity for plan sponsors, as the dental networks would be completely separate from the current providers they work with. The process of adding dental to Medicare Advantage plans could prove more difficult for some types of carriers, particularly smaller, regional plan sponsors.
In contrast, if dental benefits were offered under a standalone Medicare Part, additional insurers that focus on dental plans and do not offer medical or pharmacy services would be able to enter the market and create additional competition, similar to standalone Prescription Drug Plans (PDPs) in the Part D space. These dental plan sponsors would be able to sell standalone dental plans that beneficiaries could purchase on top of Original Medicare Parts A and B (FFS plans) or on top of MA plans that do not offer dental.
The Centers for Medicare and Medicaid Services (CMS) sets specific standards on provider network size and adequacy to ensure Medicare beneficiaries have reasonable access to medical and pharmacy services. A similar network of dentists would need to be constructed if a dental benefit is added to Medicare. If dental were added to Part B, CMS would have to construct a national network of dentists who accept Medicare FFS reimbursement. Typically, Medicare FFS reimbursement levels are below the fees that providers receive for privately insured commercial patients; if Medicare dental fees are set in a similar way, it remains to be seen how many dentists would elect to be part of the Medicare network. The American Dental Association (ADA) has expressed reservations about a Medicare Part B dental benefit, citing reimbursement as one of several reasons.10
Private Medicare Advantage insurers would need to use their own dental networks or develop or subcontract with a network if they do not currently maintain one. The majority of Medicare Advantage plans already offer dental as an additional benefit and have worked to establish dental networks within Medicare either via direct contracts or by using subcontracted dental vendors. If dental is added as a separate Medicare Part, insurers that specialize in dental insurance, but not health insurance, could potentially join as standalone plans (as noted above), and have established dental networks already. It is unclear how dental provider reimbursement levels under a separate Part would compare with reimbursement under Part B.
Various Medicare Parts have defined benefit structures that specify what services are included and standardized cost-sharing amounts. Medicare Part B typically has a deductible and a 20% member coinsurance on most services while Medicare Part D includes a deductible and a 25% member coinsurance.11 Medicare Advantage and alternative Part D plan designs allow plan sponsors to alter these defined benefits as long as the changes enhance the services or the cost sharing provided to beneficiaries (i.e., they can only decrease cost sharing or increase covered services).
Similarly Medicare dental benefits would need to have defined minimum coverage whether covered under Part B or as a separate Part. The decision on what constitutes minimum coverage could vary significantly depending on how much the government plans to fund and the specific funding structure set into place. Existing Medicare benefits are structured with the specific needs of the Medicare population in mind. For dental, services such as preventive and diagnostic procedures as well as prosthetics, such as dentures, may significantly benefit Medicare beneficiaries. A focus on the highest-value services for the Medicare population may result in broader benefit participation.
Commercial dental coverage is typically defined according to service class, commonly referred to as Preventive, Basic, and Major, or Classes I, II, and III.12 Within each class, specific services are covered; the specific services covered by Medicare within each class would need to be defined. Commercial dental plans often cover Preventive services fully or almost fully, with sequentially higher cost sharing for Basic and Major services; the most common commercial dental plans cover 100% for Class I, 80% for Class II, and 50% for Class III procedures. The Medicare program would also need to define the standard beneficiary cost sharing for each type of service.
Commercial dental plans also typically limit the benefit to an annual benefit maximum (or cap) to control cost. This mechanism might also be used in the development of a Medicare dental benefit to manage the overall cost of the program.
The budget reconciliation package proposed that Medicare cover 80% of Preventive and Basic services, 50% of Major services (after a phase-in period with higher coinsurance), and dentures at 80% every five years, with no annual cap on benefits. 13 Depending on the program’s goals, funding, and covered services, additional or alternative cost-sharing elements could be considered, such as:
Medicare Advantage (MA) rewards plan sponsors for managing costs through a shared savings, or “rebate” program. Rebate dollars are given to MA plans if their expected costs are lower than benchmarks published by CMS. These benchmarks are set at the county level based on the FFS spending for Original Medicare in the county. MA plans can use these rebates to reduce or eliminate Part C or D premiums and/or add additional benefits, such as dental, hearing, or vision.
Adding dental coverage either through Original Medicare (Part B) or as a separate Part presents rebate considerations. Expanding Part B to cover dental would impact the FFS spending for Original Medicare in each county as dental spending would then be included. This increase in spending could result in increases to the CMS-published benchmarks that are used to allocate rebates to MA plans. If MA plans are able to provide dental coverage at a lower cost than the Part B FFS schedule, there may be opportunity for additional MA rebates. Additionally, under the current structure, some MA plans use rebates to add dental benefits. If dental were included in Part B, the rebates previously spent on dental benefits would need to be reallocated to other benefits.
If dental is offered as a separate Medicare Part, MA plans could also allocate rebates to increase dental benefits, similar to the Original Medicare structure. MA plans could also use rebates to reduce or eliminate dental premiums for MA plans that include the dental Part. The rebate amount and benchmarks would not be affected by the inclusion of dental coverage in this scenario. This is similar to how MA plans today can use rebates to enhance the Part D benefits and reduce or eliminate Part D premiums in MA prescription drug (MAPD) plans.
Alternatively, a standalone dental benefit could incorporate its own benchmarking system to incentivize plans to manage costs and share savings. Additional considerations could be taken to incorporate a quality management program similar to the star rating14 program for Medicare Advantage.
Creating a new Medicare Part to cover dental care provides more flexibility but could also add additional implementation complexities. Reviewing the mechanisms employed under the Medicare Part D prescription drug benefit and applying them to dental may provide some insight as to which complexities may be encountered by a new Medicare dental Part.
Medicare Part D plans can be offered either as a standalone Prescription Drug Plan (PDP) that augments Original Medicare or as part of a Medicare Advantage (Part C) plan that offers combined medical and prescription drug coverage (MAPD). Similarly, a dental benefit offered as a separate Medicare Part could potentially be sold as a standalone plan or as part of a combined Medicare Advantage plan. Considerable coordination is required for MAPD plans between the Part C and Part D components. If dental is added as a separate Medicare Part, additional coordination would be required to integrate it into the MAPD plan. These considerations would not apply to standalone dental plans.
The considerations above would apply to Medicare Advantage plans that integrate pharmacy and dental coverage, similar to how MAPD plans integrate pharmacy today. However, not all MA plans integrate pharmacy today and not all will integrate dental if it is offered under a separate Part. For standalone dental benefits, like standalone PDPs, beneficiaries may need to sign up for three separate plans to obtain health (Parts A and B or Part C), pharmacy (Part D), and dental coverage (new Part). This could involve paying three different monthly premiums to three different carriers and navigating three separate plan designs for their coverage.
Medicare Parts C and D are risk-adjusted programs. Members are assigned risk scores to indicate their health relative to the average member. Plans that cover members with higher-than-average risk scores receive higher federal subsidies to cover the additional costs of their members relative to plans covering members with lower risk scores. Risk-adjusted programs prevent insurers from focusing marketing efforts on attracting healthier populations and prevent selection issues.
While risk adjustment is a critical mechanism for Medicare health and prescription drug coverage due to the potential for extremely high-cost claimants, it may not be necessary, or even realistic, for a Medicare dental benefit. Dental diagnosis coding is not commonplace, and as such there is no commonly used or accepted risk adjustment model for dental. Additionally, while risk adjustment is used to offset high-cost medical and pharmacy costs, dental costs are much lower overall. A high-cost medical/pharmacy claimant may incur millions of dollars in care costs, while even catastrophic dental costs may total only in the tens of thousands of dollars.
Over the past several decades Medicare has evolved to meet the healthcare needs of the senior population in the United States. This evolution has included expanding covered benefits and adding new Parts. Including dental coverage in Medicare could be accomplished through either structure. The considerations outlined above should be explored further as policies to adapt Medicare are introduced and moved through the legislative process.
2Backes, K., Herrle, G., & Rodrigues, D. (November 2019). Medicare Advantage: Strategies to increase plan revenue. Milliman White Paper. Retrieved November 11, 2021, from https://us.milliman.com/-/media/milliman/pdfs/articles/medicare_advantage-strategies_to_increase_plan_revenue.ashx.
3See Section 601 of H.R.3, Elijah E. Cummings Lower Drug Costs Now Act. Full text may be seen at https://www.congress.gov/116/bills/hr3/BILLS-116hr3pcs.pdf.
4See Section 2 of H.R. 4311, Medicare Dental, Vision, and Hearing Benefit Act of 2021. Full text may be seen at https://www.congress.gov/117/bills/hr4311/BILLS-117hr4311ih.pdf.
5Snager-Katz, M. (August 29, 2021). Five decades later, Medicare might cover dental care. New York Times. Retrieved August 30, 2021, from https://www.nytimes.com/2021/08/29/upshot/medicare-dental-care.html (subscription required).
6Quinn, M. & Watson, K. (October 28, 2021). What's in Democrats' new $1.75 trillion social spending and climate bill? CBS News. Retrieved November 11,, 2021, from https://www.cbsnews.com/news/budget-reconciliation-bill-build-back-better-act/.
8The direct subsidy is determined based off of national average projected bid amounts and projected reinsurance, such that the combined total of the projected reinsurance and direct subsidy target the 74.5% of costs. Federal reinsurance covers 80% of costs for members in the catastrophic phase.
10ADA (September 1, 2021). Letter to Members of Congress. Retrieved October 28, 2021, from https://www.ada.org/-/media/project/ada-organization/ada/ada-org/files/advocacy/210901_medicare_congress_dentalbenefit_nosig.pdf
12The Preventive service class (Class I) covers diagnostic and preventive services such as cleanings, exams, X-rays, and other labs and tests. The Basic service class (Class II) covers basic services such as fillings, extractions, endodontics (root canals), and periodontics (gum treatment). The Major service class (Class III) covers major services such as crowns, bridges, dentures, and repairs.
13Keith, K. (September 12, 2021). Unpacking the coverage provisions in the House’s Build Back Better Act. Health Affairs. Retrieved November 11, 2021, from https://www.healthaffairs.org/do/10.1377/hblog20210912.160204/full/.
14Star ratings on a scale of 1 to 5 are awarded to plans based on their quality and performance. These ratings are used to determine what percentage of savings or rebate dollars plans are allocated, with 1 star resulting in the lowest shared savings percentage and 5 stars resulting in the highest shared savings percentage.