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Managing Medicare's Costs

Medigap policies and the steep cost of comprehensive coverage

The popularity of Medigap policies has been slowly declining. In 2004, for instance, some 35% of retirees who were turning 65 purchased Medigap policies, but by 2010 only 19% did, according to an analysis by the Kaiser Family Foundation.

It’s not only new Medicare enrollees who are avoiding Medigap policies. The Medicare Payment Advisory Commission, or MedPAC, said in its March report that of the 2.5 million people who enrolled in Advantage plans in 2012, 76% of them were switching from Medigap policies. That’s 1.9 million people who owned Medigap policies and decided to change their coverage to Advantage plans. The likely reason they changed was to save money, according to the report.

But that is not to say that Medigap policies are in any danger of disappearing. Including employer-sponsored Medigap coverage, the number of policyholders is approaching an all-time high of 12 million and is projected to reach 19 million within seven years. But as Medicare’s total enrollment has continued to climb rapidly, sales of Medigap policies have not kept pace. Today fewer than 20% of all Medicare beneficiaries have Medigap polices, compared to 25% seven years ago — a decline of almost one percentage point a year.

Medigap policies are the only viable choices for many people. For starters, unless they live near a large urban center there may not be any good Advantage plans available to them. In the isolated states of North Dakota and South Dakota, for example, one-half of Medicare beneficiaries own Medigap policies.

Even in metropolitan areas, retirees may not be able to find Advantage plan networks that include all of their doctors. Also, people with serious chronic diseases often have difficulty in getting timely medical care in Advantage plans as they navigate around the plans’ network restrictions and utilization reviews. That leaves Medigap policies as their only good option.

Today’s pricy policies are the result of the way the plans were designed 25 years ago. In 1990 Congress asked the National Association of Insurance Commissioners to design the benefit packages for 10 new Medigap plans that would become the national standards. The NAIC came up with two basic-benefits plans and eight other plans with benefits so extensive that policyholders would almost never have to make any co-payments.

When insurance covers small and highly predictable losses, it will inevitably be expensive for consumers and profitable for insurance companies. The original eight comprehensive plans had coverage that was so complete that some of them included benefits having little to do with Medicare. Some covered medical emergencies while traveling in other countries, even though fewer than 15% of retirees ever go abroad. Two plans — C and F — fully covered every Medicare gap. Plan F even paid for excess charges by doctors who do not accept Medicare’s approved rates.

The new plans were first sold in 1992 and almost everyone seemed pleased with them. Seniors liked the convenience of almost never having to pay a medical bill and insurance companies enjoyed the handsome profits. There were a few critics who suspected that the new plans might encourage the overuse of medical services, but for the most part they were ignored.

At that time the United States was midway through a 30-year period when health care costs were growing more quickly than other kinds of inflation. And as Medigap premiums continued to increase at average annual rates of 6% or more, the policies were gradually becoming too expensive for many retirees.

Moreover, it was not just retirees who were being affected by the high costs of Medigap policies. So was Medicare. Studies showed that people with comprehensive fee-for-service plans – Medigap policies and employer supplements — went to their doctors more often and used medical services more intensively than did people with other types of insurance. There was growing evidence that people were getting more medical care than they needed, with Medicare paying 80% of the costs of this overuse.

Because people with comprehensive plans are insulated from the costs, if they have an ankle sprain they can request an expensive service like an MRI instead of an x-ray, even though the x-ray would be equally effective at one-tenth the cost. And their physicians often go along because providing extra services, even if they are not medically necessary, means extra income.

To address the problem of affordability and also to reduce the demand for unnecessary medical services, Congress voted to drop four comprehensive plans from the Medigap lineup beginning in mid-year of 2010 and replace them with lower-premium plans (Plans K, L, M, and N) that would require more cost-sharing. In an encouraging note, sales of the some of the newer plans have been increasing. The number of Plan N policyholders, for instance, jumped by 60% in 2013 according to a study by America’s Health Insurance Plans, the insurance industry trade group.

The less comprehensive plans still have a long way to go before they catch up. One headwind they face is that insurance agents often push the most comprehensive plans to earn larger commissions. Even after its record sales growth in 2013, Plan N accounted for only 6% of all currently owned Medigap policies. That was compared to a 55% market share for Plan F.

Congress may from time to time continue to chip away at the Medigap policies that are seen as being too comprehensive. Earlier this year a new law was enacted which among other things said that the Part B deductible can no longer be covered in policies that will sold in 2020 and later. That affects only two plans — C and F — and it’s only a small dent in their comprehensiveness, but it’s a move in the right direction. In theory, the premiums for those two plans will be slightly reduced in 2020 because they will have one less benefit.

Here are some ways to save money with Medigap policies.

• Decide whether you really need a comprehensive plan. If you have a serious health issue and see doctors frequently, a comprehensive plan like Plan F or Plan C might make sense. But you can get almost as good coverage with Plan N or Plan L. Even though you will have occasional co-payments, you’ll likely come out ahead due to the money you save in premiums.

• Consider buying a Medicare Select plan, which is a Medigap policy with network restrictions. Select policies have premiums between 10% and 15% lower than standard Medigap policies. Often the only network restriction is that if you have a scheduled operation, you will go to a specific hospital. If that’s the hospital you would choose anyway, you’ve lost nothing. And in emergencies you can go to any hospital and be covered.

• Take advantage of any special rules in your state that will allow you to switch your Medigap policy to another insurance company that has lower premiums. In four states – Connecticut, Massachusetts, New York, and Vermont – you can do this at any time of year without having to answer questions about your health. Despite that, 88% of Medigap policyholders in New York state are not in the lowest-premium policies for the specific plans they have, according report two years ago by the Kaiser Family Foundation.

• Other states have more limited rules to enable you to switch to a lower-premium insurer without answering health questions, but only during a specified period each year, e.g., during the 30 days following your birthday. Those states are California, Maine, Missouri, Oregon, and Washington. ◊◊

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