Regulations at 42 C.F.R.§423.886(a)(1) specify how the subsidy is calculated. Those regulations read in relevant part:
For each Qualifying Covered Retiree enrolled with the Plan Sponsor of a qualified retiree prescription drug plan in a plan year, the Plan Sponsor receives a subsidy of 28 percent of the allowable retiree costs (as defined in §423.882) in the plan year for such retiree attributable to gross retiree costs between the cost threshold and cost limit as defined in paragraph (b) of this section. The subsidy payment is calculated by first determining gross retiree costs between the cost threshold and cost limit, and then determining allowable retiree costs attributable to the gross retiree costs.
Thus, for purposes of determining the subsidy for an application, consider the following example, where a Plan Sponsor has determined that the following data, in the aggregate, is correct for a given application.
Gross Costs: $1,000,000
Cost Threshold Reduction: $50,000
Cost Limit Reduction: $100,000
Price Concessions Attributed to Gross Costs Between the Cost Threshold and the Cost Limit: $30,000
In this example, gross retiree costs between the threshold and the limit are $850,000 ($1,000,000 minus $50,000 minus $100,000). From that $850,000, the Plan Sponsor would subtract price concessions of $30,000, yielding $820,000 in allowable retiree costs. Thus, the subsidy amount, based on the corrected cost data, would be 28% of $820,000, which equals $229,600.
For information on the RDS Mandatory Payment Reduction (i.e., sequestration) policy, refer to Mandatory Payment Reduction.