Medigap
Current Polices Contain Coverage Gaps, Undermine Cost Control Incentives Gao ID: GAO-02-533T March 14, 2002Medicare provides valuable and extensive health care coverage for 40 million elderly and disabled beneficiaries. Nevertheless, significant gaps leave some beneficiaries vulnerable to sizeable out-of-pocket expenses. Medicare provides no limit on out-of-pocket spending and no coverage for most outpatient prescription drugs. Most beneficiaries have supplemental coverage that helps to fill Medicare coverage gaps and pay some out-of-pocket expenses. Privately purchased Medigap policies are a widely available source of supplemental coverage. The other sources--employer-sponsored policies, Medicare + Choice plans, and Medicaid--are not available to all beneficiaries. Medigap policies help to fill in some of Medicare's gaps but also have shortcomings. In 1999, premiums paid for Medigap policies averaged $1,300, with more than 20 percent going to administrative costs. Medigap plans typically cover Medicare's required deductibles, coinsurance, and copayments but do not fully protect beneficiaries from potentially significant out-of-pocket costs. Medigap policies offering prescription drug coverage can be inadequate because beneficiaries still pay most of the cost and the Medigap benefit is capped.
GAO-02-533T, Medigap: Current Polices Contain Coverage Gaps, Undermine Cost Control Incentives
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Health, Committee on Ways and Means, House
of Representatives:
For Release on Delivery:
Expected at 2:15 p.m.
Thursday, March 14, 2002:
Medigap:
Current Policies Contain Coverage Gaps, Undermine Cost Control
Incentives:
Statement of William J. Scanlon:
Director, Health Care Issues:
GAO-02-533T:
Madam Chairwoman and Members of the Subcommittee:
I am pleased to be here today as you consider the role of "Medigap"
policies in supplementing the Medicare benefit. Medicare provides
valuable and extensive coverage for the health care needs of 40
million elderly and disabled beneficiaries. Nevertheless, recent
discussions have underscored the significant gaps that leave some
beneficiaries vulnerable to sizeable financial burdens from out-of-
pocket costs. Most beneficiaries have additional supplemental coverage
that helps to fill Medicare's coverage gaps and pay some out-of-pocket
expenses. Privately purchased Medigap policies are an important source
of this supplemental coverage because they are widely available to
beneficiaries. The other sources--employer-sponsored policies,
Medicare+Choice plans, and Medicaid programs”-are not available to all
beneficiaries. However, concerns exist that Medigap policies can be
expensive and may undermine the legitimate role of cost-sharing in a
health insurance plan”that is, to encourage the cost-effective use of
services. Moreover, due to statutory restrictions, these policies
provide only limited prescription drug coverage, leaving an important
gap in beneficiary protection against high health care expenses.
In this context, the president has proposed adding 2 new types of
Medigap plans to the existing 10 standard plan types.[Footnote 1] The
new plans would provide protection against catastrophic expenses for
Medicare-covered services and would include different levels of
prescription drug coverage. To help keep premiums affordable, the new
plans would also require beneficiary cost-sharing. At this point,
detailed specifications for these plans are not available.
To assist the subcommittee as it considers ways to improve protections
for beneficiaries, my remarks today focus on the design of Medicare's
benefit package and the role that Medigap plays in providing
supplemental coverage. Specifically, I will discuss (1) beneficiaries'
potential financial liability under Medicare's current benefit
structure and cost-sharing requirements, (2) the cost of Medigap
policies and the extent to which they provide additional coverage, and
(3) concerns that Medigap's so-called "first dollar" coverage”its
coverage of Medicare's required deductibles and coinsurance”undermines
the cost control incentives of Medicare's cost-sharing requirements.
My comments are based on our prior and ongoing work on Medicare and
Medigap as well as other published research.[Footnote 2]
In summary, Medicare's benefit package and cost-sharing requirements
leave beneficiaries liable for high out-of-pocket costs. As currently
structured, Medicare provides no limit on out-of-pocket spending and
no coverage for most outpatient prescription drugs”a component of
medical care that is of growing importance in treatment and rapidly
increasing in cost. Recent estimates suggest that about 45 percent of
Medicare beneficiaries' health care costs are not covered.
Medigap policies help to fill in some of Medicare's gaps but also have
shortcomings. They are often expensive. In 1999, premiums paid for
Medigap policies averaged $1,300, with more than 20 percent going to
administrative costs. Medigap plans typically cover Medicare's
required deductibles, coinsurance, and copayments but do not fully
protect beneficiaries from potentially significant out-of-pocket
costs. Medigap policies offering prescription drug coverage can be
inadequate because beneficiaries still pay most of the cost and the
Medigap benefit is capped. In addition, Medigap's first-dollar
coverage eliminates the effect Medicare's cost-sharing requirements
could have to promote prudent use of services. The danger is that some
services may be overused, ultimately increasing costs for
beneficiaries and the Medicare program.
Background:
Individuals who are eligible for Medicare automatically receive
Hospital Insurance (HI), known as part A, which helps pay for
inpatient hospital, skilled nursing facility, hospice, and certain
home health care services. Beneficiaries pay no premium for this
coverage but are liable for required deductible, coinsurance, and
copayment amounts. (See table 1.) Medicare-eligible beneficiaries may
elect to purchase Supplementary Medical Insurance (SMI), known as part
B, which helps pay for selected physician, outpatient hospital,
laboratory, and other services. Beneficiaries must pay a premium for
part B coverage, currently $54 per month[Footnote 3] Beneficiaries are
also responsible for part B deductibles and coinsurance.
Table 1: Medicare Coverage and Beneficiary Cost-Sharing, 2002:
Part A Coverage: Inpatient hospital;
Copayments and deductibles: For each benefit period:
* $812 deductible for up to 60 days[A];
* $203/day for days 61 through 90;
* $406/day for days 91 through 150[B];
* All costs beyond 150 days.
Part A Coverage: Skilled nursing facility;
Copayments and deductibles: For each benefit period:
* Nothing for up to 20 days;
* $101.50/day or less for days 21 through 100;
* All costs beyond 100 days.
Part A Coverage: Home health;
Copayments and deductibles:
* Nothing;
* 20 percent of approved amount for durable medical equipment.
Part A Coverage: Hospice;
Copayments and deductibles:
* $5 or less for outpatient drugs;
* 5 percent of approved amount for inpatient respite care.
Part A Coverage: Blood;
Copayments and deductibles:
* Cost of first 3 pints.
Part B Coverage[C]: Physician and Medical;
Copayments and deductibles:
* $100 deductible each year;
* 20 percent of approved amount;
* 50 percent of approved amount for mental health.
Part B Coverage[C]: Clinical laboratory;
Copayments and deductibles:
* Nothing.
Part B Coverage[C]: Home health;
Copayments and deductibles:
* Nothing;
* 20 percent of approved amount for durable medical equipment.
Part B Coverage[C]: Outpatient hospital;
Copayments and deductibles:
* Coinsurance or copayment varies according to service (after
part B deductible).
Part B Coverage[C]: Blood;
Copayments and deductibles:
* Cost of first 3 pints;
* 20 percent of approved amount (after part B deductible) for
additional pints.
[A] No deductible is charged for second and subsequent hospital
admissions if they occur within 60 days of the beneficiary's most
recent covered inpatient stay.
[B] After the first 90 days of inpatient care, Medicare may help pay
for an additional 60 days of inpatient care (days 91 through 150).
Each beneficiary is entitled to a lifetime reserve of 60 days of
inpatient coverage. Each reserve day may be used only once in a
beneficiary's lifetime.
[C] No cost-sharing is required for certain preventive services”
including specific screening tests for colon, cervical, and prostate
cancer and flu and pneumonia vaccines.
Source: Centers for Medicare and Medicaid Services, Medicare & You
2002, CMS-10050 (Baltimore: Sept. 2001).
[End of table]
Most Medicare beneficiaries have some type of supplemental coverage to
help pay for Medicare cost-sharing requirements as well as for some
services not covered by Medicare. They obtain this coverage either
through employers, Medicare+Choice plans, state Medicaid programs, or
Medigap policies sold by private insurers.
About one-third of Medicare's 40 million beneficiaries have employer-
sponsored supplemental coverage. These plans, which typically include
cost-sharing requirements, pay for some costs not covered by Medicare,
such as shares of coinsurance and deductibles and the cost of
prescription drugs. However, many beneficiaries do not have access to
employer-sponsored coverage. A recent survey found that more than 70
percent of large employers with at least 500 employees did not offer
these health benefits to Medicare-eligible retirees.[Footnote 4] Small
employers are even less likely to offer retiree health benefits.
Approximately 14 percent of Medicare beneficiaries are enrolled in
Medicare+Choice plans, which include health maintenance organizations
(HMO) and other private insurers who are paid a set amount each month
to provide nearly all Medicare-covered services. Compared to
Medicare's traditional fee-for-service program, HMOs typically offer
lower cost-sharing requirements and additional benefits, including
prescription drugs, in exchange for a restricted choice of providers.
However, Medicare+Choice HMOs are not available in all parts of the
country. In 2002, about 40 percent of all beneficiaries live in
counties where there are no Medicare+Choice HMOs.
In 1997, about 17 percent of Medicare beneficiaries received
assistance from Medicaid, the federal-state health financing program
for low-income aged and disabled individuals. Depending upon state-
defined eligibility policies, some of these low-income individuals are
entitled to full Medicaid benefits (so called "dual eligibles"), which
include coverage for certain services not available through Medicare,
such as most outpatient prescription drugs. Under federal law, all
Medicare beneficiaries with incomes below the federal poverty level
are entitled to have their Medicare premiums and cost-sharing paid for
by Medicaid. Similarly, Medicare beneficiaries with incomes slightly
above the poverty level are eligible to have all or part of their
Medicare premiums paid for by Medicaid.[Footnote 5]
Medigap is the only supplemental coverage option available to all
beneficiaries when they initially enroll in Medicare at age 65 or
older. Medigap policies are offered by private insurance companies in
accordance with state and federal insurance regulations. In 1999, more
than 10 million individuals”about one-fourth of all beneficiaries”were
covered by Medigap policies.[Footnote 6] The Omnibus Budget
Reconciliation Act of 1990 (OBRA) required that Medigap policies be
standardized and allowed a maximum of 10 different benefit packages
offering varying levels of supplemental coverage.[Footnote 7] Policies
sold in most states since July 31, 1992, are modeled on 1 of the 10
standardized packages, known as plans A through J. (See table 2.)
Policies sold prior to this time were not required to comply with the
standard benefit package requirements. The Balanced Budget Act of 1997
permitted insurers to offer high-deductible versions of the existing F
and J plans.[Footnote 8]
Table 2: Benefits Covered by Standardized Medigap Policies:
Benefits: Coverage for:
* Part A coinsurance;
* 365 additional hospital days during lifetime;
* Part B coinsurance;
* Blood;
Plan A: [Check];
Plan B: [Check];
Plan C: [Check];
Plan D: [Check];
Plan E: [Check];
Plan F[A]: [Check];
Plan G: [Check];
Plan H: [Check];
Plan I: [Check];
Plan J[A]: [Check].
Benefits: Skilled nursing facility coinsurance;
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Check];
Plan D: [Check];
Plan E: [Check];
Plan F[A]: [Check];
Plan G: [Check];
Plan H: [Check];
Plan I: [Check];
Plan J[A]: [Check].
Benefits: Part A deductible;
Plan A: [Empty];
Plan B: [Check];
Plan C: [Check];
Plan D: [Check];
Plan E: [Check];
Plan F[A]: [Check];
Plan G: [Check];
Plan H: [Check];
Plan I: [Check];
Plan J[A]: [Check].
Benefits: Part B deductible;
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Check];
Plan D: [Empty];
Plan E: [Empty];
Plan F[A]: [Check];
Plan G: [Empty];
Plan H: [Empty];
Plan I: [Empty];
Plan J[A]: [Check].
Benefits: Part B balance billing[B];
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Empty];
Plan D: [Empty];
Plan E: [Empty];
Plan F[A]: [Check];
Plan G: [Check];
Plan H: [Empty];
Plan I: [Check];
Plan J[A]: [Check].
Benefits: Foreign travel emergency;
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Check];
Plan D: [Check];
Plan E: [Check];
Plan F[A]: [Check];
Plan G: [Check];
Plan H: [Check];
Plan I: [Check];
Plan J[A]: [Check].
Benefits: Home health care;
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Empty];
Plan D: [Check];
Plan E: [Empty];
Plan F[A]: [Empty];
Plan G: [Check];
Plan H: [Empty];
Plan I: [Check];
Plan J[A]: [Check].
Benefits: Outpatient prescription drugs;
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Empty];
Plan D: [Empty];
Plan E: [Empty];
Plan F[A]: [Empty];
Plan G: [Empty];
Plan H: [Check][C];
Plan I: [Check][C];
Plan J[A]: [Check][D].
Benefits: Preventive medical care;
Plan A: [Empty];
Plan B: [Empty];
Plan C: [Empty];
Plan D: [Empty];
Plan E: [Check];
Plan F[A]: [Empty];
Plan G: [Empty];
Plan H: [Empty];
Plan I: [Empty];
Plan J[A]: [Check].
Note: This chart does not apply in Massachusetts, Minnesota, and
Wisconsin, where alternative standards for supplemental health
policies exist.
[A] Plans F and J also have a high-deductible option ($1,620 in 2002)
under which beneficiaries also pay deductibles for prescriptions ($250
per year for plan J) and foreign travel emergency ($250 per year for
plans F and J).
[B] Some providers do not accept the Medicare rate as payment in full
and "balance bill" beneficiaries for additional amounts that can be no
more than 15 percent higher than the Medicare payment rate. Plan G
pays 80 percent of balance billing; plans F, I, and J cover 100
percent of these charges.
[C] Plans H and I pay 50 percent of drug charges up to $1,250 per year
and have $250 annual deductibles.
[D] Plan J pays 50 percent of drug charges up to $3,000 per year and
has a $250 annual deductible.
Source: Health care Financing Administration, 2001 Guide to Health
Insurance for People with Medicare, HCFA-02110 (Baltimore: 2001).
[End of table]
Currently, Medicare beneficiaries aged 65 and older are guaranteed
access to Medigap policies within 6 months of enrolling in part B,
regardless of their health status.[Footnote 9] Subsequent laws have
added guarantees for certain other beneficiaries. Beneficiaries who
enroll in a Medicare+Choice plan when first becoming eligible for
Medicare at age 65 and then leave the plan within 1 year are also
guaranteed access to any Medigap policy. Those who terminate their
Medigap policies to join a Medicare+Choice plan can return to their
previous policies or, if the original policies are not available, be
guaranteed access to plans A, B, C, and F, none of which covers
prescription drugs. Also, individuals whose employers eliminate
retiree benefits or whose Medicare+Choice plans leave the program or
stop serving their areas are guaranteed access to these four
standardized Medigap policies.[Footnote 10] Beneficiaries who do not
meet any of these conditions may be denied coverage or be charged
higher premiums.
Medicare's Cost-Sharing Requirements and Gaps in Prescription Drug
Coverage Put Beneficiaries at Considerable Financial Risk:
In Medicare, the lack of dollar limits on beneficiaries' cost-sharing
obligations”deductibles, coinsurance, and copayments”puts
beneficiaries with extensive health care needs at risk for very large
expenses for Medicare-covered services. Similarly, Medicare's lack of
coverage for certain services, especially most outpatient prescription
drugs, can expose beneficiaries to substantial financial risk. The
increasingly important role of pharmaceuticals in medical care and the
continuing rapid increases in drug prices accentuate this risk.
Unlike most employer-sponsored plans for active workers, Medicare does
not limit beneficiaries' cost-sharing liabilities, which can represent
a significant share of their personal resources. In 2000, premiums,
deductibles, coinsurance, and copayments that beneficiaries were
required to pay for services that Medicare covers equaled an estimated
23 percent of total Medicare expenditures. For Medicare-covered
services alone, beneficiaries who obtained services in 1998 had an
average liability of $1,458, consisting of $932 in Medicare cost-
sharing in addition to the $526 in annual part B premiums for that
year.
However, the burden of Medicare cost-sharing can be much higher for
beneficiaries with extensive health care needs. In 1998, the most
current year of available data on the distribution of these costs,
about 3.4 million beneficiaries (11.5 percent of beneficiaries who
obtained services) were liable for at least $2,000 for Medicare cost-
sharing and part B premiums. Approximately 736,000 of these
beneficiaries (2.5 percent) were liable for at least $5,000, and about
167,000 beneficiaries (0.6 percent) were liable for at least $10,000.
In contrast, private employer-sponsored health plans for active
workers in 2000 typically limited maximum annual out-of-pocket costs
for covered services to less than $2,000 per year for single coverage.
[Footnote 11]
Furthermore, Medicare provides no coverage for certain health care
services, such as most outpatient prescription drugs. These
limitations put beneficiaries at additional risk of incurring
potentially catastrophic expenses. Current estimates suggest that the
combination of Medicare's cost-sharing requirements and limited
benefits leaves about 45 percent of beneficiaries' health care costs
uncovered. In 2000, the average beneficiary is estimated to have
incurred about $3,100 in total out-of-pocket expenses for health care”
an amount equal to about 22 percent of beneficiary income.[Footnote 12]
The combination of Medicare cost-sharing and costs of uncovered
services represents a much greater financial burden for some
beneficiaries. For example, in 2000, elderly beneficiaries in poor
health and with no Medicaid or supplemental insurance coverage are
estimated to have spent 44 percent of their incomes on health care.
Low-income single women over age 85 who are in poor health and not
covered by Medicaid are estimated to have spent more than half (about
52 percent) of their incomes on health care services.[Footnote 13]
These percentages are expected to increase over time as Medicare
premiums and costs for prescription drugs and other health care goods
and services rise faster than incomes.
Current Medigap Policies Address Some Medicare Shortcomings But Are
Expensive:
The shortcomings in Medicare's benefit package underscore the
importance of supplemental health insurance for program beneficiaries.
More than one-fourth of beneficiaries have Medigap policies to fill
Medicare coverage gaps, but these policies can be expensive and do not
fully protect beneficiaries from catastrophic out-of-pocket expenses.
Medigap policies that provide drug coverage offer only limited
protection from prescription drug expenses because of high cost-
sharing and low coverage caps. The extent to which the president's
proposed plan types”which include catastrophic coverage protection, a
prescription drug benefit, and beneficiary cost-sharing requirements”
would address these shortcomings will depend on the details of the new
policies.
Medigap Fills Some Needs:
More than 10 million Medicare beneficiaries have Medigap policies to
cover some potentially high costs that Medicare does not pay,
including cost-sharing requirements, extended hospitalizations, and
some prescription drug expenses. By selecting from among a group of
standardized plans, beneficiaries can match their coverage needs and
financial resources with plan coverage. Medigap policies are widely
available to beneficiaries, including those who are not eligible for,
or do not have access to, other insurance to supplement Medicare, such
as Medicaid or employer-sponsored retiree benefits. In fact, most
Medicare beneficiaries who do not otherwise have employer-sponsored
supplemental coverage, Medicaid, or Medicare+Choice plans purchase
Medigap policies, demonstrating the value of this coverage to the
Medicare population.
Medigap Policies Can Have High Premiums:
Medigap policies can be expensive. In 1999, the average annual Medigap
premium was more than $1,300. Premiums varied based on the level of
coverage purchased. Plan A, which provides the fewest benefits, was
the least expensive, with average premiums of nearly $900 per year.
(See table 3.) The most popular plans”C and F”had average premiums of
about $1,200. The most comprehensive plans that provide some drug
coverage”-I and J-”were the most expensive, with average annual
premiums around $1,700.
Table 3: Distribution of Medigap Plans and Annual Premiums Per Covered
Life, 1999:
Medigap plan: A;
Covered lives: 2.7%;
Average annual premium: $877.
Medigap plan: B;
Covered lives: 7.8%;
Average annual premium: $1,093.
Medigap plan: C;
Covered lives: 15.7%;
Average annual premium: $1,158.
Medigap plan: D;
Covered lives: 3.7%;
Average annual premium: $1,032.
Medigap plan: E;
Covered lives: 1.5%;
Average annual premium: $1,067.
Medigap plan: F;
Covered lives: 22.9%;
Average annual premium: $1,217.
Medigap plan: G;
Covered lives: 1.5%;
Average annual premium: $981.
Medigap plan: H;
Covered lives: 1.4%;
Average annual premium: $1,379.
Medigap plan: I;
Covered lives: 1.5%;
Average annual premium: $1,698.
Medigap plan: J;
Covered lives: 2.6%;
Average annual premium: $1,672.
Medigap plan: Prestandard (policies sold before July 1992);
Covered lives: 34.9%;
Average annual premium: $1,525.
Medigap plan: Plans in states in which insurers are exempt from
offering standardized plan[A];
Covered lives: 4.0%;
Average annual premium: $1,368.
Medigap plan: Total[B];
Covered lives: 100.0%[C];
Average annual premium: $1,311.
[A] Massachusetts, Minnesota, and Wisconsin have alternative plans in
effect and waivers that exempt them from selling the national standard
Medigap plans.
[B] Data reported by insurers to the National Association of Insurance
Commissioners (NAIC) do not include plan type for policies
representing less than 8 percent of Medigap policy covered lives, with
an average paid premium of $1,275. These plans are not included in the
table.
[C] Percentages do not add to 100 due to rounding.
Source: GAO analysis of data collected by the NAIC from the 1999
Medicare Supplement Insurance Experience Exhibit.
[End of table]
Medigap premiums also varied across geographic areas and insurers. For
example, in 1999, average annual premiums in California were 35
percent higher than the national average for policies conforming to
the standard plans. While premiums may reflect geographic differences
in use of Medicare and supplemental services and costs, beneficiaries
in the same state may face widely varying premiums for a given plan
type offered by different insurers.[Footnote 14] For example, in
Illinois, plan A premiums for a 65-year-old ranged from $467 to
$1,202, depending on the insurer. Similarly, in New York, plan F
premiums for a 65-year-old ranged from $1,617 to $2,800, and in Texas,
plan J premiums ranged from $2,059 to $5,658.
Medigap policies are becoming more expensive. One recent study
reported that, from 1999 to 2000, premiums for the three Medigap plan
types offering prescription drug coverage (H, I, and J) increased the
most rapidly”by 17 to 34 percent. Medigap plans without prescription
drug coverage rose by 4 to 10 percent.[Footnote 15]
A major reason premiums are high is that a significant share of
premium dollars is used for administrative costs rather than benefits.
On average, more than 20 cents from each Medigap premium dollar is
spent for costs other than medical expenses, including administration.
Administrative costs are high, in part, because nearly three-quarters
of policies are sold to individuals rather than groups.[Footnote 16]
The share of premiums spent on benefits varies significantly among
carriers. The 15 largest sellers of Medigap policies spent from 64 to
88 percent of premiums on benefits in 1999. The share of premiums
spent on benefits is lower for Medigap plans than either typical
Medicare+Choice plans or health benefits for employees of large
employers. In comparison, 98 percent of Medicare fee-for-service funds
are used for benefits.
Medigap Provides Limited Coverage for Prescription Drugs:
Medigap policies can leave beneficiaries exposed to significant out-of-
pocket costs for prescription drugs. Medigap policies with a drug
benefit are expensive, yet the drug benefit offered can be of limited
value to many beneficiaries. The Medigap annual prescription drug
benefit has a $250 deductible, requires 50 percent coinsurance, and
limits coverage to $1,250 or $3,000, depending on the plan purchased.
These dollar amounts have not been increased since they were
established in 1992. As a result of the deductible and coinsurance
provisions, a beneficiary with Medigap plan type J would have to incur
$6,250 in prescription drug costs to get the full $3,000 benefit.
Moreover, Medigap policies offering drug coverage typically cost much
more than policies without drug coverage. For example, plan type J”-
the most popular plan with prescription drug coverage-”costs, on
average, $450 a year more than the most popular plan without drug
coverage (plan F).
Having a Medigap policy with drug coverage versus one without has
little effect on beneficiaries' out-of-pocket spending on drugs. In
1998, Medigap policyholders with prescription coverage spent, on
average, $548 out of pocket on prescription drugs. Medigap paid only
27 percent of policy holders drug costs. Medigap policyholders without
prescription drug coverage spent, on average, $618 out of pocket on
drugs”about 13 percent more than beneficiaries with drug coverage.
The high cost and limited benefit of existing Medigap plans may
explain why more than 90 percent of beneficiaries with Medigap
coverage purchased standard plans that do not include drug benefits
[Footnote 17] Another reason is that, in most states, Medicare
beneficiaries who do not purchase Medigap policies when they initially
enroll in part B at age 65 or older are not guaranteed access to the
Medigap policies with prescription drug coverage. For those
beneficiaries, insurers may either deny coverage or charge higher
premiums.
First-Dollar Coverage Increases Medigap Premiums and Weakens
Medicare's Cost Control Features:
The most popular Medigap plans are fundamentally different from other
health insurance policies, which typically include cost-sharing
provisions in the form of deductibles, coinsurance, and copayments.
Cost-sharing requirements are intended to make beneficiaries aware of
the costs associated with the use of services and encourage them to
use these services prudently. In contrast, Medigap's first-dollar
coverage”the elimination of any deductibles or coinsurance associated
with the use of covered services”undermines this objective. All
standard Medigap plans cover hospital and physician coinsurance, with
some of them also covering the full hospital deductible, skilled
nursing facility coinsurance, or the part B deductible. Nearly all
beneficiaries purchasing a standard Medigap plan choose one that
covers the full hospital deductible, and most select plans that cover
the full skilled nursing home coinsurance and part B deductible. The
president's proposed plan types would be different from the existing
popular Medigap plans in that they would not include first-dollar
coverage.
Medigap's first-dollar coverage reduces financial barriers to health
care, but it also diminishes beneficiaries' sensitivity to costs and
likely increases beneficiaries' use of services, adding to total
Medicare spending. Having first-dollar coverage may also add to
Medigap premiums. The extra spending induced by first-dollar coverage
causes insurers' outlays to rise and likely increases Medigap
premiums. The premiums may increase not only to cover the additional
expected health care expenses but also insurers' administrative costs.
Our analysis and other research indicate that Medicare spends more on
beneficiaries with supplemental insurance than on beneficiaries who
have Medicare coverage only. For example, our analysis of the 1998
Medicare Current Beneficiary Survey data found that annual Medicare
expenditures for beneficiaries with Medigap insurance were about
$2,000 higher than for beneficiaries with Medicare only.[Footnote 18]
Medicare annual spending for beneficiaries with employer-sponsored
plans was about $1,700 higher than for beneficiaries with Medicare
only.
Some evidence suggests that first-dollar, or near first-dollar,
coverage may partially be responsible for the higher spending. For
example, one study found that beneficiaries with Medigap insurance use
28 percent more medical services (outpatient visits and inpatient
hospital days) compared to beneficiaries who did not have supplemental
insurance but were otherwise similar in terms of age, sex, income,
education, and health status.[Footnote 19] Service use among
beneficiaries with employer-sponsored supplemental insurance was
approximately 17 percent higher than the service use of beneficiaries
with Medicare coverage only.
Unlike Medigap policies, employer-sponsored supplemental insurance
policies and Medicare+Choice plans typically reduce beneficiaries'
financial liabilities but do not offer first-dollar coverage. Although
there is a wide variety in design of employer-sponsored insurance
plans, many retain cost-sharing provisions. Medicare+Choice plans also
typically require copayments for most services. Moreover, unlike the
traditional fee-for-service program, Medicare+Choice plans require
referrals or prior authorization for certain services to minimize
unnecessary utilization.
Under the president's Medigap proposal, the two new plan types would
require beneficiary cost-sharing and, in this way, would be similar to
the features of employer-sponsored insurance plans. In eliminating
first-dollar coverage, the proposal seeks to keep the new policies
more affordable for beneficiaries and create incentives to restrain
overall program spending.
Concluding Observations:
Interest remains high in improving supplemental coverage available to
Medicare beneficiaries while fostering the prudent use of health care
services. The president's proposal to create two new plan types that
require cost-sharing and provide coverage for prescription drugs seeks
to balance access and affordability with incentives for beneficiaries
to be cost-conscious. The exclusion of first-dollar coverage from the
new Medigap policies would make them more like employer-sponsored
supplemental insurance policies that include incentives to minimize
unnecessary use. These reforms could serve the interests both of
beneficiaries and the program, making drug coverage more affordable
while helping to moderate program expenditures. Details of the
president's proposal will reveal the extent to which the new plan
types offer better value for beneficiaries' premium dollars than the
existing Medigap plan types. In our view, an effective health
insurance plan would discourage the inappropriate use of services and
protect beneficiaries from catastrophic health expenses, including
prescription drug costs. We look forward to working with this
subcommittee as it considers various options to reform Medigap and
improve health care coverage for individuals.
Madam Chairwoman, this concludes my statement. I would be happy to
answer any questions that you or members of the subcommittee may have.
Contacts and Acknowledgments:
For more information regarding this testimony, please contact me or
James Cosgrove at (202) 512-7118. Other contributors to this product
were Rashmi Agarwal, John Dicken, Hannah Fein, Jennifer Podulka, and
Lisa Rogers.
[End of section]
Footnotes:
[1] Budget of the United States Government, Fiscal Year 2003
(Washington, D.C.: Government Printing Office, Feb. 4, 2002).
[2] U.S. General Accounting Office, Medigap Insurance: Plans Are
Widely Available but Have Limited Benefits and May Have High Costs,
[hyperlink, http://www.gao.gov/products/GAO-01-941] (Washington, D.C.:
July 31, 2001).
[3] The premium amount is adjusted each year so that expected premium
revenues equal 25 percent of expected part B spending.
[4] William M. Mercer, Incorporated, Mercer/Foster Higgins National
Survey of Employer-sponsored Health Plans 2000 (New York, N.Y.: 2001).
[5] Many low-income Medicare beneficiaries who are eligible for
Medicaid and other federal-state programs that provide assistance with
premiums and cost-sharing requirements may not enroll, in part due to
limited awareness of these programs and the administrative complexity
of demonstrating eligibility. See U.S. General Accounting Office, Low-
Income Medicare Beneficiaries: Further Outreach and Administrative
Simplification Could Increase Enrollment, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-99-61] (Washington, D.C.: Apr. 9,
1999).
[6] The National Association of Insurance Commissioners reports that
Medigap enrollment has declined from about 14 million in 1994.
[7] Pub. L. 101-508, § 4351, 104 Stat. 1388-30, 1388-127 (1990).
[8] Pub. L. No. 105-33, § 4032, 111 Stat. 251, 359 (1997).
[9] 42 USC § 1395ss(s)(2)(A).
[10] These protections, which applied to beneficiaries aged 65 and
older, were added by the Balanced Budget Act, Pub. L. 105-33, §
403,111 Stat. 251, 330. In addition to these federal protections, 21
states provided for additional Medigap protections in 2000.
[11] The Kaiser Family Foundation and Health Research and Educational
Trust, Employer Health Benefits: 2000 Annual Survey (Menlo Park,
Calif. and Chicago: 2000).
[12] Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in
Medicare and Out-Of-Pocket Spending: Impact on Vulnerable
Beneficiaries (Washington, D.C.: Urban Institute, 2000).
[13] Maxwell, Moon, and Segal.
[14] Premium quotes are from 2000 and 2001 state consumers guides on
Medigap policies.
[15] Weiss Ratings Inc, "Prescription Drug Costs Boost Medigap
Premiums Dramatically," (Palm Beach Gardens, Fla.: Mar. 26, 2001).
[hyperlink,
http://www.weissratings.com/NewsReleases/Ins_Medigap/20010326Medigap.htm
] (downloaded May 3, 2001).
[16] Federal law requires Medigap plans to spend at least 65 percent
of premiums over time on benefits for policies sold to individuals and
75 percent for policies sold to groups. See 42 USC § 1395ss(r)(1)(A).
[17] While less is known about the benefits offered by prestandardized
plans that were sold prior to 1992”representing about one-third of
Medigap enrollment in 1999”one expert estimated that most are likely
to have some coverage for prescription drugs but that this coverage is
even more limited than that offered by the standardized plans. See
Deborah J. Chollet, Mathematica Policy Research Inc., "Medigap
Coverage for Prescription Drugs," testimony before the U.S. Senate
Committee on Finance, April 24, 2001.
[18] [hyperlink, http://www.gao.gov/products/GA0-01-941].
[19] Sandra Christensen, Ph.D. and Judy Shinogle, M.S., "Effects of
Supplemental Coverage on Use of Services by Medicare Enrollees,"
Health Care Financing Review 19 (1997).
[End of section]
