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Managing Medicare's Costs

Medigap policies: is lifetime guaranteed access on its way? (2 of 3)

In January 2014 Medigap policies will be the only type of health insurance that can deny coverage to unhealthy people. That’s when a provision in the new Health Reform law goes into effect that will prohibit insurance companies from declining coverage or charging higher premiums to people with pre-existing conditions.

But this Health Reform requirement does not apply to Medigap policies. And that means seniors – the group most likely to have pre-existing conditions – will be the only ones without guaranteed rights to buy health insurance. If that happens, it won’t take long for Congress to eliminate what will be perceived as discrimination against the elderly.

On the other hand, it’s possible that the Supreme Court will find one or more provisions of the Health Reform law unconstitutional. Depending on the scope of the Court’s ruling, the requirement that health insurers sell policies to people with chronic diseases might be tossed out. And that in turn will make it less likely that Congress will require Medigap insurers to issue policies to seniors who have health problems.

There’s a better-than-average chance that this particular Health Reform requirement will survive, though. And if it does, insurance companies will have to sell equally-priced policies to unhealthy and healthy people. One reason this provision may survive is that, according to polls, it enjoys broad popular support. Another is that America’s Health Insurance Plans (AHIP), the industry’s representative, agreed in 2010 not to deny coverage to children with pre-existing conditions. And in 2008 AHIP and the Blue Cross and Blue Shield Association, which represents 39 insurers, said they would stop denying coverage to people with pre-existing conditions — the tradeoff being that everyone would be mandated to buy coverage.

Under current law, Medigap insurers in most states can usually deny coverage or charge higher premiums to unhealthy people who want to buy policies after their initial six-month open enrollment periods have passed. There are exceptions for special situations such as when a retiree’s employer plan stops offering coverage or when people disenroll from Medicare Advantage plans during their first year of Medicare eligibility.

Aside from these and a few other limited exceptions, people do not have guaranteed access to a Medigap policy once they are past their first six months of Medicare eligibility. Even so, if they are healthy they will almost surely be able to buy a Medigap policy at premiums that are competitive. But if they have a serious pre-existing condition, they may not be able to buy one.

What would happen if insurance companies were not allowed to medically underwrite Medigap policies? If insurers could adjust Medigap premiums based only on seniors’ age, gender, and smoking status, as they can do now during the initial enrollment period? Who would be helped and who would be hurt by this change in policy?

For starters, Medigap premiums would rise. Today a few states like New York and Connecticut require Medigap insurers to sell policies on a guaranteed issue basis, regardless of seniors’ age and health. And these states’ Medigap premiums are among the highest in the nation.

Because they can easily switch coverage later, healthy retirees in New York and Connecticut can initially enroll in low-cost Advantage plans or buy one of the cheaper Medigap plans. Later, they can transfer to better coverage without going through underwriting. Indeed, it is facetiously said that in New York state, people often wait to buy health insurance until they are on their way to the hospital.

In these two states, then, Medigap premiums are expensive partly because many healthy retirees see no need to buy them until they need them. Meanwhile the high claims costs of the relatively unhealthy remaining group of policyholders push up premiums. This is particularly true of the most comprehensive Medigap policies, Plans C and F, which in New York and Connecticut not only have fewer policyholders than in most other states, but which likely have a higher percentage of people with health problems.

According to state data (Appendix A-1) reported to the National Association of Insurance Commissioners and published by AHIP, in 2010 only 43.2% of Connecticut’s Medigap policyholders owned Plan C or Plan F. This is compared to the 57.9% of policyholders nationally who owned one of these two plans. In New York state there was less difference, with 54.9% of the state’s Medigap policyholders having either Plan C or Plan F. State data from the Kaiser Family Foundation is similar, showing that in 2010 59% of the country’s Medigap policyholders owning Plan C or Plan F, but only 46% and 54% owning these two plans in Connecticut and New York, respectively.

From the perspective of the Medicare trustees, it’s good news when fewer people enroll in Plans C and F. Because these two plans provide first-dollar coverage, they are believed to drive up Medicare’s Part B costs. They do so by inadvertently encouraging patients and providers to use more medical services, where 80% of the costs are borne by Medicare.

Summarizing several reports that have analyzed the question of overuse by people with comprehensive Medigap plans, a recent issue brief from the Kaiser Family Foundation said: “These studies are consistent with numerous studies that show individuals use fewer services – both necessary and unnecessary – when confronted with new cost-sharing requirements” (page 1).

And in 2009 the Medicare Payment Advisory Commission found that total Medicare spending was 33 percent higher for beneficiaries with Medigap policies than for those with no supplemental coverage and almost twice as high as for those with employer-sponsored coverage (page 149).

Spurred by the desire to reduce Medicare’s costs, various government task forces and agencies have suggested solutions. The Obama Administration, for instance, recommended that beginning in 2017 a 30% surcharge be added to Part B premiums for people who purchase Medigap plans that provide first-dollar coverage. The Bowles-Simpson Commission proposed that Medigap insurers not cover the first $550 of medical expenses, and the Congressional Budget Office endorsed the idea of levying a five percent excise tax on Medigap insurers.

These proposals are opposed by a once-in-a-lifetime coalition of health insurance companies and Medicare consumer advocates. Health insurers are concerned that if Medigap coverage becomes more expensive, their profits will suffer. In a report issued last summer, AHIP said that “policymakers considering restricting Medigap coverage should weigh the potential disruption to Medicare beneficiaries against the possibility that actual Medicare savings could be much less than currently predicted”(page 8).

Medicare advocates worry that older beneficiaries, many of whom are moderate-income retirees in their 70s and 80s, will face higher cost-sharing without seeing offsetting reductions in their premiums. In August, a NAIC-commissioned group of 33 people that included state insurance regulators, health insurers, and consumer advocates recommended against modifying Plans C and F to include nominal cost-sharing.

A partial solution could come at the point when insurance companies are no longer able to deny Medigap coverage to seniors with pre-existing conditions. Then retirees could opt for lower-premium Medigap plans during their healthy years and later switch to more comprehensive plans if they need more medical services. In many cases this matching of coverage to needs would preserve peoples’ healthcare dollars during early retirement.

If widely adopted, such an approach could save money for retirees as well as for Medicare, since less comprehensive coverage is less likely to result in overuse of medical services. Instead, the way it is today many people buy the most comprehensive Medigap plans at the outset, perhaps out of fear that they may not be able to purchase these policies later.

Moreover, retirees may not understand how much these policies, whose premiums historically have increased by about six percent a year, will cost them over 20 or 30 years. Given the magnitude of retirement healthcare costs, planning with a long-term horizon is important for seniors, almost one-fifth of whom will live to age 95.

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