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Medicare and the pending re-design of Medigap policies

These days no other type of Medicare coverage is getting as much attention as Medigap policies. In July the Kaiser Family Foundation released an analysis of three alternatives for re-designing Medigap benefits, legislation was introduced in Congress to increase Medigap medical-loss ratios, and Medigap cost-cutting proposals from the Congressional Budget Office and Bowles-Simpson Commission re-surfaced during the debt-limit negotiations. And the month before, the Medicare Payment Advisory Commission suggested ways that comprehensive Medigap policies might be changed.

The flurry of proposals was partly caused by the new Health Reform law’s requirement that the two most comprehensive Medigap plans – Plans C and F – be modified starting in 2015. The exact changes to these two plans will be determined by the National Association of Insurance Commissioners. The new law establishes that as a guideline, the changes should include “nominal cost sharing to encourage the use of appropriate physicians’ services under Part B.”

But the required 2015 changes may be overtaken by more sweeping revisions that will be implemented sooner. Any changes, however, will not likely affect current policyholders. In the past, when Medigap plans have been re-designed or discontinued, people have been allowed to continue to renew the plans they already own, even if those plans are no longer sold.

Most re-design proposals focus on the four comprehensive Medigap Plans – C, D, F, and G. These plans, as well as many employer plans, are often criticized for their high premiums and — because retirees have no skin in the game — for driving up Medicare’s costs. Because they are so comprehensive, these plans rarely require any cost-sharing for medical services.

Together these four plans accounted for 63% of the 9.7 million Medigap policies in existence at the end of 2010, according to a study (page 3) released last month by America’s Health Insurance Plans (AHIP), an industry association. If you include the comprehensive plans that are no longer sold but that are still owned by many people (Plans E, H, I, and J), then 86% of Medigap policies owned in 2010 were comprehensive plans with first-dollar coverage for most services.

Comprehensive plans are appealing to retirees in part because of the convenience they provide. Policyholders pay premiums but rarely see a medical bill, since the plans cover most cost-sharing. Doctors and other providers submit their claims to Medicare, which pays what it owes and then forwards the remaining balances to the Medigap insurance companies for payment.

Health insurance was initially designed in the early 1930s to provide affordable coverage that required people to pay small medical costs while protecting them from large ones. This traditional design is still used in policies for people under 65. Today a good employer plan for current workers might have a moderate premium, a $200 deductible, $20 and $30 co-pays for doctors office visits, and 10% or 20% co-insurance requirements for other services. This type of plan will almost always have an out-of-pocket limit to protect people from catastrophic losses.

The comprehensive Medigap plans have turned this traditional approach on its head. They cover routine medical costs but have only fair catastrophic coverage. As an example of a routine cost, Plans C and F (as well as many employer retiree supplements) cover Medicare’s Part B deductible, which is $162 this year. Such costs are not only relatively small, but are highly likely to be incurred. Because they cover almost all of the small costs, comprehensive Medigap plans have expensive premiums, particularly for older individuals whose rates are age-adjusted.

But despite their high price tags, the comprehensive Medigap plans do not have out-of-pocket limits. If someone exceeds 100 days in a skilled nursing facility, for instance, the additional days are not covered by Medicare or a comprehensive Medigap plan. As it turns out, approximately three percent of beneficiaries do exceed the 100-day limit, and in a few cases they can rack up tens of thousands of dollars in uncovered costs even though they own the most expensive type of Medicare supplemental coverage available.

The Medicare Payment Advisory Commission and other critics of the current plans’ overly rich benefit designs and inadequate catastrophic coverage all propose the same type of solution: move back toward the traditional model, which will result in increased cost-sharing by beneficiaries, but will also require that plans have out-of-pocket limits. Ideally, premiums will also be reduced, although perhaps not as much as some would expect.

In a recent analysis the Kaiser Family Foundation evaluated three possible Medigap reform options, all of them variations on the theme of increased cost-sharing and improved catastrophic protection. The first option would require the greatest cost-sharing. It is similar to one proposed by the Congressional Budget Office and, with minor modifications, by the Bowles-Simpson Commission.

This first option has a $550 combined Part A and Part B deductible, with 50% cost-sharing thereafter until policyholders reach a $3,025 out-of-pocket limit. Four out of five seniors would save money under this option, according to the Kaiser analysis, and one in five would see their net out-of-pocket costs, including premiums, reduced by $1,000 or more.

The second and third options that were analyzed in the Kaiser analysis would require less cost-sharing, and they are similar to currently sold Medigap plans L and N. According to the analysis, both of these options would also result in net savings for roughly four out of five policyholders.

In all three options, though, approximately one in five people will pay more than they do now, and these individuals will tend to have lower incomes and/or poorer health. While it’s understandable that people with health problems will pay more in plans that require higher cost-sharing, it’s less clear why people with lower incomes will pay more.

If lower-income people have more health problems than others, that might explain why they are more likely to lose money under Medigap reform, even after premium savings are taken into account. But the Kaiser analysis says that the correlation between low income and poor health is negligible. And because comprehensive Medigap policies are pricy, it’s doubtful that very many low-income people own them. Also, under the reform proposals the additional costs for low-income people (and others) will be capped, unlike today.

The Kaiser analysis highlights what many retirees know intuitively: if they are healthy they can save money by choosing a slightly less comprehensive policy that includes some cost sharing. The four Medigap plans that do this best are K and L (the only two Medigap plans that have out-of-pocket limits) and M and N.

The study by America’s Health Insurance Plans (linked above in paragraph five) indicates that Medigap Plan N, which was introduced in June 2010, is gaining in popularity. The AHIP study also summarizes the health insurance industry’s opinion that the four newest plans (K, L, M and N) as well as the yet unknown 2015 changes to Plans C and F increase cost-sharing sufficiently, and that there may be little need for additional reform.


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