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What is considered "creditable" drug coverage for purposes of the Medicare Part D late-enrollment penalty?

Category: Employer Drug Coverage
Updated: Nov, 12 2023

In general, "creditable" prescription drug coverage is considered by Medicare to be "as generous as, or more generous than" (or at least as good as) standard Medicare Part D prescription drug coverage or is expected to pay on average as much as the standard Medicare prescription drug coverage.

If your drug plan is considered creditable - or at least as good as basic Medicare Part D coverage, then you will not be subject to a late-enrollment penalty if you ever decide to leave your present drug coverage and join a Medicare Part D plan (PDP) or Medicare Advantage plan that includes drug coverage (MAPD).

Question:  Is VA drug coverage creditable?

Yes.  Drug coverage provide by the VA or TRICARE is considered creditable coverage and - more importantly you can actually use your VA coverage with a Medicare Part D plan - possibly providing the most affordable drug coverage.  You can read more here:  Q1FAQ.com/272

Question:  Is my employer health plan drug coverage creditable?

Maybe.  You will need to speak with your employer health plan administrator to confirm that your employer drug coverage is creditable.  In fact, you probably received a letter from your employer plan telling you whether your drug coverage was creditable, but many people discard the letter without understanding the significance of creditable coverage.  For more information, please see our Frequently Asked Question, "What is the difference between creditable and non-creditable Employer Retiree Drug Coverage?"
The federal Medicare regulations addressing creditable drug coverage state that:

"[u]nder [42 C.F.R.] §423.56(a) of the final regulation, [prescription drug] coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of standard prescription drug coverage under Medicare Part D, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS actuarial guidelines. In general, the actuarial equivalence test measures whether the expected amount of paid claims under the entity's prescription drug coverage is at least as much as the expected amount of paid claims under the standard Part D benefit."

Additional guidance from the Center for Medicare and Medicaid Services (CMS) is provided in the "Creditable Coverage Simplified Determination" document that holds:

"If an entity is not an employer or union that is applying for the retiree drug subsidy, it can use the simplified determination of creditable coverage status annually to determine whether its prescription drug plan’s coverage is creditable or not.  The plan will be determined to be creditable if the plan prescription drug plan design meets all four of the following standards.

However, the standards listed under 4(a) and 4(b) may not be used if the entity’s plan has prescription drug benefits that are in with benefits other than prescription drug coverage (i.e. Medical, Dental, etc.).  Integrated plans must satisfy the standard in 4(c).

A prescription drug plan is deemed to be "creditable" if it:
1) Provides coverage for brand and generic prescriptions;
2) Provides reasonable access to retail providers;
3) The plan is designed to pay on average at least 60% of participants’ prescription drug expenses; and
4) Satisfies at least one of the following:
  a) The prescription drug coverage has no annual benefit maximum benefit or a maximum annual benefit payable by the plan of at least $25,000, or
  b) The prescription drug coverage has an a expectation that the amount payable by the plan will be at least $2,000 annually per Medicare eligible individual.
  c) For entities that have integrated health coverage, the integrated health plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000 and has no less than a $1,000,000 lifetime combined benefit maximum.
[Integrated Plan - An integrated plan is any plan of benefits that is offered to a Medicare eligible in where the prescription drug benefit is combined with other coverage offered by the entity (i.e., medic dental, vision, etc.) and the plan has all of the following plan provisions:

1) a combined plan year deductible for all benefits under the plan,
2) a combined annual benefit maximum for all benefits under the plan, and
3) a combined lifetime benefit maximum for all benefits under the plan.

A prescription drug plan that meets the above parameters is considered an integrated plan for the purpose of using the simplified method and would have to meet steps 1, 2, 3 and 4(c) of the simplified method If it does not meet all of the criteria, then it is not considered to be an integrated plan and would have to meet steps 1, 2, 3 and either 4(a) or 4(b).]

NOTE: If the entity cannot use the Simplified Determination method stated above to determine the creditable coverage status of the prescription drug plan offered to Medicare eligible individuals, then the entity must make an actuarial determination annually of whether the expected amount of paid claim under the entity’s prescription drug coverage is at least as much as the expected amount of paid claims under the standard Medicare prescription drug benefit." (Updated September 18, 2009)

(https://www.cms.gov/medicare/ prescription-drug-coverage/ creditablecoverage/ downloads/ ccsimplified091809.pdf)

see also:
https://www.cms.gov/medicare/ employers-plan-sponsors/creditable-coverage

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