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Value-based insurance design and Medigap plans (2 of 2)

There should not be any financial barriers to the medical services that have the highest long-term value. They should be free or almost free. And minus any financial barriers, people will be less likely to skip high-value services such as getting preventive tests and taking maintenance medications. Over the longer term, moreover, insurance companies will likely come out ahead by fully subsidizing high-value services, since they are the services most likely to prevent later, expensive-to-treat complications.

In a nutshell, that’s the concept of value-based insurance design (or V-BID), a decade-old approach that is gaining traction. V-BID is not a free ride for policyholders, who will in some cases pay more than they do now for services that are perceived to have less value. Ideally, a V-BID health plan is revenue neutral, with the most valuable services costing people little or nothing and the least valuable ones costing people much more.

One person’s value-based design may not be the same as another’s. For someone with severe respiratory problems, V-BID might make maintenance drugs either free or low cost. For someone recovering from a severe stroke, V-BID might make physical therapy free or inexpensive. And for someone in good health, V-BID might simply provide free preventive tests and screenings.

V-BID plans need to be adaptable, then, to specific diseases and conditions. In a 2009 issue brief, the American Academy of Actuaries said (page 2) that if V-BID plans become prevalent, “treatments could be personalized to a specific individual’s needs rather than relying on what works best for the broader population with similar symptoms.” And that might lead to flexible benefit designs within a V-BID framework.

Benefit designs customized for specific diseases are a fairly new idea. Beginning in 2006,for example, a new type of Medicare Advantage plan called a Special Needs Plan was created. One kind of Special Needs Plan targeted certain chronic conditions, e.g., diabetes and/or hypertension. This particular kind of Special Needs Plan has a benefit design which makes it simpler and less costly for enrollees to get treatments for one or more chronic diseases.

It’s less clear, though, what V-BID means to retirees in good health. Original Medicare now pays 100% for all recommended preventive tests and annual wellness visits, and so for healthy individuals it complies with V-BID’s objectives. Part D does not, however, since it can impose high costs on some maintenance medications.

Because for healthy retirees V-BID is already baked in to Original Medicare’s benefit design, it raises a question: are these healthy people paying too much for benefits further down the value chain that they are unlikely to need? It’s a good question partly because most retirees fall somewhere in the good health category. Last year’s Medpac Data Book reported that 40% of Medicare beneficiaries rate their health as excellent or very good and another 51% as good or fair – percentages that include the 8 million disabled people with Medicare.

One way of answering the question of whether retirees in good health often pay too much for insurance is to consider the most expensive benefit packages – those of the comprehensive Medigap plans, and in particular Plans C and F. More than one-half of people who own Medigap policies have Plan F (38%) or Plan C (16%), according to data from Mark Farrah & Associates.

Plan F and Plan C are so comprehensive that policyholders have little or no cost-sharing for Medicare-covered services. They are also expensive plans. Someone who buys Plan F for $150 a month at age 65 will pay more than $66,000 in premiums over the next 20 years, assuming 6% annual premium increases, and more than $140,000 if he or she lives to age 95.

Those numbers do not include Part B premiums or the cost of stand-alone drug coverage, dental and vision benefits, over-the-counter drugs, and long-term care. At insurance conferences there are anecdotal reports of sizable numbers of people in their 80s and 90s having to drop comprehensive Medigap policies because they can no longer afford them.

Besides the fact that they offer excellent coverage, Medigap plans are pricy for other reasons. Two years ago an academic study found among other things that Medigap insurers as a group have low medical-loss ratios, paying out 30% less in benefits than they collect in premiums. The study said that insurers are able to charge lofty premiums because the market is inefficient, with two companies accounting for roughly 75% of sales. And because people with health problems adversely select these plans (making them even more expensive), people in good health typically overpay for the benefits they can reasonably expect.

Still another reason the comprehensive Medigap plans are expensive is that they over-insure, filling almost all of Medicare’s gaps. Traditional insurance is supposed to protect people from large losses and let them pay for small ones. Because large losses occur infrequently, this type of design makes policies affordable. But the comprehensive Medigap plans provide full coverage for small amounts that are highly likely to be spent. Because these amounts have a high probability of being spent, insurers typically assume that they will be and, after adding overhead, increase premiums by similar amounts.

The only difference between Medigap Plan C and Plan D, for instance, is that Plan C covers the Part B deductible, which is $162 this year. But Plan C typically costs $175 more per year, which means that the insurers will recover the full deductible plus an overhead surcharge, as well as a surplus from those individuals whose spending levels are less than the Part B deductible amount.

High Medigap premiums may be tolerable for affluent people. But most retirees are not affluent, and those in good health can save tens of thousands of dollars during retirement by choosing a less expensive option, including one of the newer Medigap plans (K, L, M, and N) or a good Medicare Advantage plan. Even though small co-pays can discourage some retirees from seeking treatments, if they consider the premium savings they will realize in one of these less comprehensive plans, they should not be concerned about occasional small co-pays.

In later retirement, they can likely switch to one of the more comprehensive Medigap plans if they choose to, paying the higher premiums with some of the dollars saved in early retirement (one large Medigap insurer allows its policyholders to change plans at any time). Even if they cannot find an affordable comprehensive Medigap plan in later retirement, they will still have the luxury in a less comprehensive Medigap plan of choosing any doctor or hospital who accepts Medicare, with virtually all of their large costs being covered.

From a V-BID perspective, then, it may not make financial sense for healthy retirees to choose a comprehensive Medigap plan unless they are indifferent to cost. Some policy analysts feel that these plans are often abused, perhaps by physicians recommending additional services that cost the patient nothing. Based partly on these concerns as well as on those of affordability, the Health Reform law requires Plans C and F to be modified by 2015 in ways that have yet to be determined but that will make them less comprehensive.

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