Medigap

Although all supplemental insurance is sometimes referred to as "Medigap," true Medigap means something more specific: individually-purchased coverage that "wraps around" the benefits included in the traditional, fee-for-service Medicare program. Medigap policies always provide coverage for some or all of the copayments required of beneficiaries under Medicare, and often provide additional benefits that are not covered at all by Medicare.

More so than almost any other type of insurance, Medigap policies have been subject to a great deal of federal regulation. In 1980, Congress passed the Baucus amendments, which established voluntary certification standards subsequently adopted by nearly all states. This legislation specified that Medigap policies contain certain minimum benefits, meet minimum loss ratios (defined as the percentage of premiums collected that are spent on providing covered health care benefits), and provide various information to prospective purchasers.

Under the law, a Supplemental Health Insurance Panel, composed of the secretary of health and human services and four state insurance commissioners, determined whether the regulations in an applicant state met or exceeded the model standards established by the National Association of Insurance Commissioners. In states meeting these standards, Medigap policies issued in that state were considered to be in compliance with the legislation, and companies were allowed to use this information in their marketing. In cases where a state did not conform, insurance companies could ask the secretary to review their policies individually. If a policy was deemed to be conforming, then it would be viewed as receiving certification, just like in states that were in full compliance. All but a few states adopted these standards; those that did not established requirements of their own, which were often far from stringent.

Although the Baucus amendments were deemed a success in reducing marketing abuses and ensuring that policies provide decent benefits with reasonable payouts, the problem that remained was that with so many different configurations of benefits available, it was almost impossible for consumers to engage in effective comparison shopping. This problem was dealt with through the passage of the Omnibus Budget Reconciliation Act of 1990 (OBRA-90), which stipulated that all Medigap policies conform to one of ten particular sets of standardized benefits.

The ten different types of Medigap coverage are shown in Table 1. Each carrier selling Medigap coverage must cover policy type A, which includes several "core benefits" contained in all ten benefit packages: the inpatient daily hospital copayments for stays lasting more than 60 days; the 20 percent Part B co-insurance; and a deductible for the first three pints of blood used. Benefits that are contained in some of the other nine packages include coverage for:

• • The skilled nursing facility (SNF) daily copayment
• • The Part A hospital deductible
• • The $100 Part B deductible
• Table 1 Standardized benefits covered by Medigap policies under OBRA-90. SOURCE: National Association of Insurance Commissioners, Medicare Supplement Insurance Minimum Standards Model Act 6 (July 30, 1991). • Either 80 percent or 100 percent of nonassigned physician charges in excess of Medicare's reasonable charge
• • Medical emergencies while traveling outside of the United States
• • At-home visits when recovering from an acute illness when patients need help performing activities of daily living, with a limit of 40 visits per year and $40 per visit
• • Fifty percent of prescription drug costs after a $250 annual deductible is met, with a maximum annual limit of $1,250 or $3,000 in benefits
• • Coverage for preventive medical care visits with an annual limit of $120

Most analysts have considered Medigap policy standardization under OBRA-90 to have been successful, particularly because it has vastly simplified consumer understanding of, and shopping for, coverage. There are, nevertheless, a number of problems remaining in the Medigap market. First, the possession of Medigap policies results in higher utilization and, therefore, higher health care costs. Furthermore, because Medigap is tied to the fee-for-service system, there is a financial incentive for providers to deliver more services.

Although other types of insurance also encourage the use of more services, there is one peculiarity about Medigap: most of the extra costs are borne not by policy owners, but by the Medicare program as a whole. This is because ownership of such policies does indeed result in higher costs, but these extra costs are covered, and therefore mainly paid for, by Medicare. To illustrate, Medicare pays 80 percent of the costs of physician services. If owning a Medigap policy stimulates a person to use an extra service, Medicare pays for most of the associated costs. This allows Medigap insurers to sell policies more cheaply than they could otherwise. Thus, the Medicare program is essentially subsidizing the purchase of Medigap policies, which would be more expensive (and presumably less appealing) were it not for these cross-subsidies.

Another problem with Medigap concerns the benefit structure. Some of the benefits are not terribly useful, and there are some notable gaps in coverage as well. Some Medigap benefits being purchased do not provide real insurance coverage (e.g., under half of beneficiaries do not have coverage for the $100 annual Part B annual deductible) or do not seem worth the cost. For example, about 45 percent of Medigap owners have coverage for nonassigned physician services, often at a substantial cost. This covers physician billing above the amount Medicare deems to be "reasonable," but this is a very uncommon practice now, and there are strict limits on how much extra physicians can bill.

The benefits are also limited; the main limit being the lack of effective coverage for long-term care. In addition, beneficiaries cannot choose a "catastrophic coverage" option, where they are allowed to choose to pay a high annual deductible for lower premiums.

Medigap policies are very expensive, and, therefore, not evenly distributed among seniors. The most popular policy, Plan F, costs over $1,000 annually (in 1996) for a sixty-five-year old, and can cost much more for older beneficiaries. On average, Plan F premiums constituted about 8 percent of a 75-year old's total income in 1996. The plans with prescription drug coverage are particularly expensive, not only because they cover drugs, but because beneficiaries with higher overall utilization tend to join. For example, the additional premiums associated with the Medigap plans providing a maximum of $1,250 annually in prescription drug benefits average about $600 annually for a sixty-five-year old, $1,000 for a seventy-five-year old, and $1,300 for an eighty-five-year old.

Partly because of these costs, those who are better off are more likely to have Medigap coverage. In 1999, 12 percent of poor and near-poor seniors had no supplemental insurance of any kind, compared to 8 percent of middle-income seniors and 6 percent of high-income seniors.