Background

In 2003 Congress passed the Medicare Modernization Act (“MMA”), which provides outpatient prescription drug benefits for the first time to Medicare recipients effective January 1, 2006. Sometimes you will see this new Federal drug benefit referred to as Medicare Part D or as a PDP (Prescription Drug Plan). In the next several months you will see many communications from the government, insurance companies and pharmacy benefit companies describing new coverage options under the MMA. Hercules wants you to know ahead of time about this new benefit and how it affects our employees and retirees.

Many current Hercules employees and retirees are, or may become, eligible for the Hercules Group Health Program to Supplement Medicare (the “Medicare Supplement Plan”). You become eligible when you are totally disabled or when you are at least age 65 and retired. The Medicare Supplement Plan covers certain medical costs not paid by Medicare Parts A and B, and currently provides some prescription drug assistance.

Government Drug Coverage Better than Hercules Coverage

We have compared the average prescription benefits under the MMA with the Hercules Medicare Supplement Plan. For the comparison we looked at the average benefit paid by the prescription plan after the retiree has paid their deductibles, copays and coinsurance. Our conclusion, supported by our actuaries, is that the MMA offers better coverage than the Hercules Medicare Supplement Plan. On average the Medicare Supplement Plan reimburses less than 50% of retirees’ drug costs, before considering the additional cost of monthly premiums to retirees. Using Hercules claims experience as a measure, the new MMA plan will cover, on average, over 60% of retiree drug costs.

Savings on generic drug prescriptions will be especially good under Medicare. After satisfying the plan deductibles, Medicare will start paying 75% of the cost, while Hercules pays less than 60% because of the minimum generic copayment in the Hercules plan.

In addition, the premium that Medicare will charge for prescriptions (about $32 per month) is lower than what many Hercules retirees pay for Company coverage.

Another favorable aspect of the Medicare PDP model is the lack of a maximum compared to Hercules’ $5,000 maximum “lifetime” benefit, and after that, the lower $1,000 per year limit. About 40% of the participants in the Medicare Supplement Plan are subject to the $1,000 limit. Anyone who exceeds the $1,000 limit in the Hercules plan will greatly benefit from the new Medicare coverage. For instance retirees subject to the current $1,000 limit whose actual drug purchases are $2,500 or more per year could see their benefits double.

One more advantage to the Medicare PDP is future premium increases. Medicare premiums will likely rise more slowly than the Hercules premiums would have because Hercules has caps on what the Company will contribute in the future.

Next Steps

Effective January 1, 2006, prescription drug coverage will be eliminated from the Hercules Medicare Supplement Plan. Coverage for other medical services will continue. Any premium you pay to Hercules for the Medicare Supplement Plan will be reduced by about 40% since Hercules will not be providing prescription drug coverage.

If you are Medicare eligible and want to have prescription drug coverage, you must enroll in a Medicare Prescription Drug Plan (PDP) no later than May 15, 2006, to avoid paying a penalty for late enrollment.

• Pay close attention to mailings you receive from Medicare, as well as from insurance companies and Hercules. We expect our current prescription drug administrator Medco to offer you a PDP.
• Choose and enroll in a coverage option carefully. Hercules will not provide coverage after 12/31/05.
• Contact Medicare or Hercules as indicated on the attached notice with any questions. Also check the “Pensioner’s Corner” at www.herc.com for periodic updates.