Medigap Insurance

Millions of Medicare beneficiaries depend on private insurance to cover Medicare's deductibles and coinsurance. From 1988 through 1995, the Medigap insurance market grew from $7 billion to more than $12 billion, with most of the growth occurring before 1993. During this eight-year period, loss ratios--the percentage of premiums returned to policyholders as benefits--averaged 81 percent and ranged from a low of 76 percent in 1993 to a high of 86 percent in 1995. Loss ratio standards are currently set at 65 percent for policies sold to individuals and 75 percent for policies covering groups. In 1994 and 1995, more than 90 percent of the policies in effect for three years or more met these loss ratio standards. Although regulations provide for refunds if loss ratio standards are not met, no refunds were required in 1994 and only two were required in 1995 because most of these policies' loss experience was based on too few policyholders to be considered credible. A primary reason for requiring refunds was to give insurers an incentive to meet loss ratio standards, and it appears that the incentive is working.

GAO noted that: (1) from 1988 through 1995, the Medigap insurance market grew from $7 billion to over $12 billion with most of the growth occurring before 1993; (2) during this 8-year period, loss ratios averaged 81 percent in 1995; (3) in 1994 and 1995, over 90 percent of the policies in force for 3 years or more, representing most of the premium dollars, met loss ratio standards; (4) premiums for policies with loss ratios below standards totalled $448 million in 1994 and $203 million in 1995; (5) loss ratios varied substantially among states, among different benefit packages, and among insurers; (6) although thousands of individual policy forms had loss ratios below standards, no refunds were required in 1994 and only two were required in 1995; (7) the refund provision did not apply because most of these policies' loss experience was based on too few policyholders to be considered credible under the National Association of Insurance Commissioners' (NAIC) refund calculation methodology; (8) a number of policies had a cumulative loss ratio--the factor used to measure compliance--above that required under NAIC's refund calculation method; and (9) a primary reason for requiring refunds was to give insurers an incentive for meeting loss ratio standards, and the high proportion of premium dollars for policies doing so indicates the incentive is working.