According to the U.S. Census Bureau projections, the Baby Boomer wave will result in all Baby Boomers being over age 65 in 2030, and one in five Americans will be retirement age.1 These Baby Boomers will have access to Medicare and Medicare Advantage (MA), which includes prescription drug coverage through Part D and is administered by health plans. A growing segment of the MA and PDP products is the Employer Group Waiver Plans (EGWPs), which represent about 19% of total MA enrollment in 2021.
For this paper, references to MA means the Medicare beneficiaries are enrolled in a health plan that provides coverage for medical services only (MA-only) or medical and prescription drug coverage (MAPD) while PDP means stand-alone prescription drug coverage.
EGWPs are vehicles health plans can use to enroll employer group retirees in MA or PDP products. The Centers for Medicare and Medicaid Services (CMS), which oversees the MA and PDP programs, allows the waiver of certain requirements for EGWPs, enabling more flexibility in benefits, enrollment, marketing, premiums, service areas, and other operations for the private health plans due to unique differences between individual and employer-sponsored products. The details of all waivers are outlined in the CMS Medicare Managed Care Manual and Prescription Drug Benefit Manual.
Employer groups have access to MA and PDP programs in one of three ways, listed from least flexible to most flexible for an employer group:
- Purchase a CMS-approved individual product from a private health plan.
- Purchase an EGWP product from a private health plan.
- Create and administer its own product (referred to as Direct Contract).
The remainder of this paper will focus on the EGWP market, basics of offering an EGWP, pricing considerations for an EGWP, and potential opportunities.
As of June 2021, about 9.6 million Medicare beneficiaries were enrolled in EGWP products. The graph in Figure 1 shows the composition of the market.2
Figure 1: June EGWP members by year
Overall EGWP enrollment has increased 9.6% between June 2018 and June 2021. MA enrollment is the driver of this increase, with a 20.6% increase, while PDP enrollment has been relatively flat over this same time period. MA-only products (separate prescription drug coverage offered such as through a PDP) saw a 15.9% increase in enrollment in 2019. However, in 2021, MA-only and PDP enrollment declined while MAPD enrollment grew by 13.1%. This could imply that more employers are looking for an integrated product to cover their retirees.
Starting in 2020, two health plans had over 1 million MA EGWP beneficiaries each. While most private health plans offer EGWPs, the top six currently represent 89% of the market. The graph in Figure 2 shows the June 2021 market share for the 5 million EGWP beneficiaries.2
Figure 2: MA EGWP - June 2021 market share
Five of the top six private health plans are licensed in multiple states, which provides a broader service area to serve retirees of employer groups. Geographical diversity may be greater for MA than in the traditional employer-sponsored market, as former employees may be more inclined to move post-retirement. This can create a challenge for regional health plans, which are generally licensed in one state, and Blue Cross and Blue Shield (BCBS) plans, which have brand marketing limitations. Regional and BCBS plans must be able to build provider networks, implement medical management, and ensure diagnosis coding outside of their core geography. Combining the enrollment of all BCBS plans would move them to third in MA EGWP market share.
The PDP EGWP market is even more concentrated, with the top three representing about 85% of the market. Each of the top three owns or is affiliated with one of the leading pharmacy benefit managers (PBMs). This allows the PDP to leverage the PBM relationship and purchasing power to provide lower-cost solutions to employers. The graph in Figure 3 shows the June 2021 market share for the 4.6 million PDP EGWP beneficiaries.2
Figure 3: PDP EGWP - June 2021 market share
The fourth-largest is a Direct Contract PDP, where the employer group contracts directly with CMS to administer the program.
Information about EGWPs can be difficult to find so we have listed three valuable resources below:
- Medicare Managed Care Manual, Chapter 9: Employer/Union Sponsored Group Health Plans
- Prescription Drug Benefit Manual, Chapter 12: Employer/Union Sponsored Group Health Plans
- Actuarial User Group Calls
The basic structure for developing the group premium rates is:
|Projected Claims Costs|
|plus||Projected Administrative Costs|
|minus||CMS Subsidies Net of Sequestration|
The employer group can then determine how much of the group premium it pays (0% to 100%) versus the retirees.
The projection of required revenue is like any other insurance product: projected claims, administrative costs, and profit. MA and PDP premium development deviates from other insurance products due to the subsidies provided by CMS.
The subsidies are as follows:
- Medical Benchmark (CMS published EGWP benchmark by star rating x projected risk score)
- Part D Direct Subsidy (CMS national average bid amount x projected risk score minus CMS national average member premium amount)
- Part D Federal Reinsurance
- Part D Coverage Gap Discount Program (CGDP)
- Part D Low-Income Cost-Sharing Subsidy (LICS)
- Part D Low-Income Premium Subsidy (LIPS)
Unlike individual products where private health plans submit bids to CMS, CMS publishes the EGWP benchmarks. The EGWP benchmarks are based on the prior year’s relationship between the bids and the benchmarks for individual products by quartile. For 2022, the bid-to-benchmark (B-to-B) ratios are shown in the table in Figure 4.3
Figure 4: Bid-to-benchmark
The quartiles are used by CMS to develop the individual product benchmarks. They apply at the county level and are based on the fee-for-service (FFS) rate rankings.4
The table in Figure 5 shows how the individual benchmarks, the EGWP bid-to-benchmark, and the EGWP benchmarks reconcile using Fulton County, Georgia, as an example.
Figure 5: Fulton County, Georgia
|EGWP Base Rate||c = a x b||$915.08|
|EGWP Savings||d = a – c||$192.26|
|Rebate Percentage**, 4||E||65%|
|EGWP Rebate||f = d x e||$124.97|
|EGWP Benchmark**||g = c + f||$1,040.05|
* Fulton County is 1.075 quartile.5
** Assumes 4.0 stars.
The projection of risk scores can be one of the most challenging assumptions in developing group premium rates, mainly when trying to procure a new group. The challenges vary depending on the structure of the retiree medical plan.
If the incumbent offers retirees the active employee benefit plan along with a Medicare wrap or Medicare Supplement, then base period risk scores may not be available. Base period claims data could be requested and used to calculate the risk scores; however, the incumbent may be unwilling to provide this level of detail so CMS has published FFS risk scores and individual risk scores. Risk scores for other EGWPs would need to be used as estimates.
This can also impact the projected coding and the effect of initiatives. If the members are moving from FFS to MA, then there may be greater risk score opportunities; however, these opportunities may not occur until year 2. Because risk scores are based on the prior year's claims, year 1 risk scores would be based on FFS claims data, and year 2 risk scores would be based on MA claims from year 1.
If the incumbent offers an MA plan, then base period risk scores should be available. It is important to communicate with the group’s benefits consultant to understand the timing of the base period risk scores so that the appropriate adjustments can be added for midyear and/or final diagnosis submissions. This can also be a difficult assumption as the coding differences between the incumbent and bidder will not be known. Many of the same providers will likely be in both networks; however, the incumbent may have incentives in place to encourage more accurate diagnosis coding. There may also be operational differences in the administrative review of charts up to 13 months after the contract year.
When Baby Boomers crest over age 65, they age in to Medicare eligibility. The risk scores for age-ins are based on new enrollee factors, which are determined by the member’s demographics. Diagnoses are not incorporated into the risk scores until the member has 12 consecutive months of Medicare enrollment in a calendar year. For members with January birthdays, the risk scores would reflect diagnoses in the second contract year. For a member with February or later birthdays, the health plan would receive new enrollee risk scores for 23 months before diagnoses are reflected.
The new enrollee risk scores can create a mismatch between revenue and claims. The new enrollee risk scores represent the average risk across new enrollees with the same age, gender, disability, and Medicaid status, which may not be reflective of the risk or claims of enrolled EGWP members. Enrolling a significant number of age-ins can put pressure on a group’s loss ratio and profitability as well as the ability to meet premium rate guarantees. Health plans should apply the same operational initiatives to new enrollees as existing members, as the risk score increase from adding diagnoses can be meaningful.
Care should be given to the projected coding and impact of initiatives even when the incumbent is an MA plan. In year 1, there will not be access to the prior year’s claims information, so the impact of administrative chart reviews could be limited. In addition, if the incumbent knows it will be replaced, it may limit operational activities to improve coding because it would only benefit the new health plan the following year.
Similar challenges exist in projecting claims costs. If the incumbent offers retirees the active employee benefit plan along with a Medicare wrap or Medicare Supplement, then base period claims costs do not reflect the first dollar coverage provided by MA. In this case, a manual rate based on FFS data, consultant data like the Milliman Health Cost GuidelinesTM – Ages 65 and Over, individual MA data adjusted for group characteristics and selection, or other EGWP data can be used. If the incumbent offers MA, then the underwriting should reflect expected changes in managed care effectiveness, network breadth, and provider contracting similar to traditional large group underwriting.
Prior to 2021, the coverage of end-stage renal disease (ESRD) beneficiaries was unique to EGWPs, as it was optional for health plans to offer individual plans. However, beginning in 2021, ESRD beneficiaries can enroll directly in individual MA products. ESRD benchmarks, risk scores, and costs vary from non-ESRD beneficiaries and can have a significant impact on EGWP pricing.
ESRD beneficiaries fall into the three categories shown in the table in Figure 6, each with its own risk score model.6
Figure 6: ESRD beneficiaries
|Transplant||ESRD||• Month of transplant
• Following 2 months
|Post-Graft||Community||• 4-9 months after*
• 10+ months after*
* And not returned to dialysis.
EGWPs have a lot of latitude in the benefit design for individual employers; however, there are some considerations during underwriting that are outlined in the Medicare manuals.
- Modify cost sharing and/or benefits offered as long as minimum required Medicare coverage levels are met.
- Test actuarial equivalence in total and then test for discriminatory cost sharing.
- Add supplemental benefits, including Part B buy-downs.
- Coverage can differ from defined standard coverage if certain actuarial equivalence standards are met.
- Formulary is linked to a Plan Benefit Package (PBP) with only enhancements allowed.
- Use of defined standard plus wrap to take advantage of federal reinsurance and CGDP. Many states require rate or methodology filings for the wrap. These subsidies are material and can impact the competitiveness of the EGWP quote if not reflected in the pricing.
Employers, especially public ones, typically issue requests for proposals (RFPs) for EGWPs. The RFP outlines the employer’s current situation, challenges, and goals, and then gives health plans an opportunity to “put their best foot forward” and showcase their abilities to serve the group. The RFP can also include the following types of provisions:
- Fully insured vs. self-insured opportunities
- Performance guarantees (e.g., timing on claims payment or answering customer service calls)
- Premium guarantees
- Star rating guarantees
Health plans should devise their strategies around the goals of the employer and the RFP responses to address the employer’s goals.
EGWPs provide a unique opportunity for membership growth. This market will have continued growth as the Baby Boomers age and reach Medicare eligibility. These opportunities can come through RFPs as mentioned above or by targeting current commercial groups with retiree coverage. Before health plans jump in and “hang 10” with the Baby Boomers, it is important to balance the risk of new groups versus the reward of additional membership, along with the relationship building and sales effort versus other health plan initiatives that could achieve similar goals.
4CMS (October 30, 2020). Advance Notice of Methodological Changes for Calendar Year (CY) 2022 for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies – Part II, pages 14-15, 19.