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Lawsuit Will Test State Plan to Shift Retiree Drug Coverage to Medicare

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Connecting state and local government leaders

Maryland enacted changes to save billions of dollars on health care coverage for retired public employees. But a rollback of prescription drug benefits has led to a court challenge.

There's a court battle brewing in Maryland over the state’s plan to shift prescription drug coverage for some retired public employees from a state-run program to Medicare, beginning early next year.

Four retired state workers filed a lawsuit against the state earlier this month, alleging that the shift is a breach of contract that would violate their constitutional rights and saddle them with burdensome health care costs. The change stems from a 2011 overhaul of retirement benefits for state retirees expected to save Maryland billions of dollars.

The retirees are asking a federal court to reinstate their ability to participate in the state prescription drug coverage program, Maryland Rx. They’re seeking to have the suit certified as a class action, asserting there may be over 90,000 similarly situated retirees.

Court filings for the plaintiffs argue that health care benefits are a form of deferred compensation and constitute a property right.

The case could be significant because it hinges on questions about how strong the legal protections are for retiree health care benefits, sometimes called other post-employment benefits, or OPEB. As with pensions, the health care benefits add up to sizable costs for state governments.

Analysis by The Pew Charitable Trusts found states paid $20.8 billion in 2015 for “non-pension” retiree benefits—mostly health care. That amount is equal to about 3 percent of total state general fund spending during fiscal year 2015, which was roughly $750 billion, according to the National Association of State Budget Officers.

Commenting on the Maryland lawsuit, Moody’s Investors Service said that, “if the plaintiffs are successful, the result would significantly increase Maryland's OPEB liability and cast doubt on the degree of legal flexibility wielded by states to change retiree health benefits.”

Gov. Larry Hogan’s office declined to comment on the litigation itself. But Shareese DeLeaver-Churchill, a spokesperson for the governor, said by email on Friday that Hogan and lawmakers have agreed to measures meant to assist affected retirees, including $33 million to keep out-of-pocket drug costs below $1,500 a year, and in line with a cap in the current state plan.

“This will be available to all state retirees shifting to Medicare Part D prescription coverage,” she said, referring to the funding.

DeLeaver-Churchill said the issue of retiree prescription coverage would be addressed “at the very start the next legislative session as emergency legislation,” and that Hogan’s administration plans to work with lawmakers on a “long-term solution” for retirees facing high costs.

Hogan, a Republican who took office in 2015, is running for reelection this year against Democrat Ben Jealous, a former NAACP President.

The legislation Maryland lawmakers approved in 2011 to revamp state retiree benefits included provisions to end prescription drug coverage on July 1 of next year for retirees who are eligible for Medicare. People who qualify for the federal health care program include those who are 65 or older and younger people who are disabled.

Enacting the legislation helped Maryland to lower the state’s OPEB obligations to about $9.5 billion, from nearly $16 billion.

But from the outset the changes to prescription drug benefits proved to be controversial among retirees. “You feel like you’ve been slapped in the face by the people you voted for,” Josephine Ball-Savels, a retired clinical nurse specialist, told the Maryland Reporter around the time the legislation passed. “I think it’s disgusting.”

The reduction in the prescription drug benefits was set to take effect next July to coincide with the phase out of what has been called the Medicare Part D “doughnut hole.” That term refers to a coverage gap in Medicare prescription drug benefits that has resulted in people paying higher out-of-pocket drug costs after they reach a certain dollar threshold ($3,750 in total drug costs in 2018) until they reach a yearly out-of-pocket spending limit ($5,000 for this year).

But budget legislation President Trump signed in February accelerated changes meant to close the gap.

Following the change in federal law, Maryland state lawmakers moved up the effective date for the changes to the state’s prescription drug program to January. This means Medicare eligible retirees set to have their state prescription drug coverage end would have to sign up for Part D coverage during an enrollment period that begins on Oct. 15.

The retired state workers who brought the lawsuit claim they will get hit with much higher costs when they lose access to the state plan.

One of the plaintiffs, Kenneth Fitch, worked as a mechanic, maintenance chief and building manager for the state beginning in 1989. Fitch, who says he has diabetes and an injured back, requested and was granted disability retirement in 2012 at the age of 54. He currently qualifies for Medicare Part D because he is disabled.

Fitch said in an affidavit he currently pays $930 in co-pays annually for eight different medications that he takes. Under Medicare Part D, he says his yearly copay costs will rise to $11,683. “I will not be able to afford my medications,” he said in the court filing.

The lawsuit alleges that the changes to prescription drug benefits violate retirees’ constitutional due process rights, which are meant to protect people from states or the federal government depriving them of "life, liberty, or property, without due process of law.”

They also say that the shift in coverage amounts to a “governmental taking” of personal property without just compensation and that it is an unlawful impairment of a contract.

The prescription drug program, the plaintiffs argue, is no different than disability, pension, severance, and other employment benefits that Maryland courts have protected in prior cases.

Filed initially on Sept. 10 in Baltimore City Circuit Court, the case is now moving ahead in U.S. District Court for the District of Maryland.

The retirees are asking the court to issue a temporary restraining order, or preliminary injunction that would halt the changes to the prescription program from going into effect while the court considers the case. A hearing on that request is scheduled for Oct. 5.

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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