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Managing Medicare's Costs

Medigap policies (3 of 3): The coming changes

Since 1992 when standardized Medigap policies were first sold, they have been the most stable type of health insurance. Over the last 20 years, people who own these policies have never seen their benefits change if they’ve stayed in the same plans. On the few occasions when Congress has approved new Medigap designs or altered the benefits of existing plans, policyholders have been able to keep their old plans if they wished.

That happened in 2006, for instance, when the Medicare Modernization Act removed prescription drug coverage from Plans H, I, and J. People who already owned these plans could keep the drug coverage if they chose, although they would have been better off with a Part D plan. Even those individuals who bought non-standardized Medigap policies before 1992 could keep them, and more than 700,000 older retirees still have these plans.

Compared to other kinds of retiree health insurance, Medigap has been Gibraltar. Medicare Advantage has had three names and as many identities during the last 20 years. Employer supplemental plans have been discontinued by almost sixty percent of the companies that sponsored them 20 years ago, and most of the remaining ones have capped their benefits. Even Medicaid has undergone changes in recent years as states have cut benefits, with some states pushing retirees into managed-care plans.

But the stability that Medigap policies have always enjoyed is no longer a sure thing. They are under siege because they are believed by many to encourage retirees to consume too many medical services, adding billions of dollars to Medicare’s flow of red ink each year. The Obama Administration, the Medicare Payment Advisory Commission (MedPAC) and the Simpson-Bowles Commission have all proposed either charging a surtax for people who buy Medigap policies or revising plan benefit designs so that retirees are no longer fully insulated from cost-sharing.

Staunchly opposing Medigap reform are insurance companies and some senior advocacy groups. The insurance industry sponsors two retiree-focused websites to lobby against additional cost sharing — one site is the Partnership to Protect Medigap and the other is Coalition to Promote Choice for Seniors. In addition, a task force of the National Association of Insurance Commissioners has challenged in a discussion paper several assumptions behind a provision in the Health Reform law that will require nominal cost sharing in two Medigap plans beginning in 2015.

Those on both sides of the argument – for Medigap reform and against it — agree that beneficiaries with comprehensive Medigap plans use more medical services than do people with other types of coverage, as a number of independent analyses have shown. A large study prepared for MedPAC’s 2009 Report to Congress found that Medicare spending is highest for those with Medigap policies, trailed closely by spending for those with comprehensive employer plans.

The study said that Medicare pays 33% more per Medigap policyholder than it pays for someone without supplemental coverage. It also indicated that the higher costs were for discretionary treatments, although it could not say whether those treatments were medically necessary. In its last year’s Report to Congress, MedPAC cited other studies that support the 2009 findings.

The insurance industry has replied that the reason Medigap policyholders spend more of the government’s money is that they are less healthy than people with other kinds of supplemental coverage. While there are industry-sponsored studies which give that position some credibility, it doesn’t explain why people who have comprehensive employer supplements cost Medicare almost as much as those with Medigap coverage. With both types of coverage, retirees have negligible cost-sharing and almost no financial stake in using additional medical services.

Probably the least effective way to solve the problem of overuse is the one Congress has so far adopted. The Health Reform law requires that nominal cost-sharing be introduced to only two of the ten Medigap plans (Plans C and F). First off, there’s a legal issue of whether Congress has the authority to modify existing insurance contracts, which it has not done before (the NAIC task force’s discussion paper refers to this as a Constitutional question).

There’s also a huge loophole that’s created by selecting these two plans for benefit changes. The reason is that Plans C and F are near clones of two other plans that the Health Reform law does not mention —Plans D and G. The only difference between Plan C, which the law says should have added cost-sharing, and Plan G, which the law does not mention, is that Plan C covers the Part B deductible ($140 in 2012). If Plans C and F are modified, then Plans D and G will become the hot plans, and agents can promote Plan G as the most comprehensive option. Not much will have changed.

Even worse, this approach will make retiree healthcare more complicated and will barely nibble at the edges of the underlying causes – Medicare’s almost 50-year-old benefit design and a fee-for-service system that places few constraints on doctors who order extra medical services or patients who use them.

Rare are the retirees who question a doctor’s recommendations for extra tests if there’s no extra cost involved. And rare are the physicians who don’t want more revenue. By tinkering with a few Medigap plans, Congress postpones the more difficult decisions. What’s more, the approach it has chosen so far is backward. If Medigap plans are fixed first and Medicare’s benefit design is later renovated, then Medigap’s benefit design will need to be adjusted again.

From a financial planning perspective, comprehensive Medigap plans are terrible deals for the majority of retirees. The exceptions are those individuals who have serious chronic diseases or those who are so affluent that they’re indifferent to the high premiums. People purchase these pricy plans because a) they like the convenience of almost never having to pay a medical bill, b) they want the flexibility to see any provider who accepts Medicare, and c) they are unaware of the long-term costs.

Last year’s MedPAC Report to Congress found that beneficiaries with Medigap policies have out-of-pocket costs (including premiums) that are twice as high as people with any other type of supplemental coverage. By selecting the priciest comprehensive coverage, the vast majority of Medigap policyholders will pay tens of thousands of dollars more during retirement than they will save by avoiding relatively minor costs like the Part B deductible and small co-pays for doctors’ office visits.

The better option for people who want the flexibility that Medigap policies offer is to choose one of the four newest plans (K, L, M, and N). Each of these has some cost-sharing, but a person in good health will probably save between $300 and $1,000 a year, based on the plan he or she selects. There’s almost no chance that Congress will ask for re-designs of these four plans.

Of course if Congress takes the correct path and first repairs Medicare’s benefit design, then every Medigap policy will need to be changed in some way, but these four plans will need the fewest changes. Even better, these four plans’ premiums are discounted by insurers who know that the people most likely to have high claims will not buy them but will instead choose one of the most comprehensive plans.◊◊

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