Medigap

In recent years, many beneficiaries have chosen to receive their supplemental benefits through Medicare managed-care plans. These plans, which, unlike Medigap policies, do not have standardized benefits, usually provide benefits in addition to those provided by Medicare. In 2000, for example, two-thirds offered coverage for pharmaceuticals. Although plans are allowed to charge a premium in addition to the Medicare Part B premium, many (42 percent in 2000) do not, and those that do tend to charge much less than for Medigap policies.

Growth in such plans was rapid through 1998—from 1.3 to 6.3 million beneficiaries between 1990 and 1998. Enrollment fell by about 10 percent between 1998 and 2001, mainly because many plans pulled out of the market due to reduced payments from the federal government. Between 1998 and 2000, the number of Medicare managed care plans fell by almost 30 percent.

A second concern involves selection bias. Prior to 2001, healthier beneficiaries tended to join Medicare managed-care plans, leaving those who are in poorer health in the fee-for-service program. The main reason for this is that seniors who are in poor health are more likely to have a relationship with a doctor that they want to preserve. To many of them, the great advantage of the traditional Medicare program is that it offers complete freedom of provider choice. A second reason for selection bias is that healthier beneficiaries are likely to be better informed than others, and thus more likely to avail themselves of managed-care options. Finally, although Medicare HMOs are required to accept all applicants, they have a strong incentive to aim their marketing to those who are younger and healthier.

Selection bias is a problem for two reasons. First, it means that those who are sicker and who could most benefit from the coordinated care provided by HMOs are less likely to avail themselves of it. Second, it drives up premiums for those who remain in fee-for-service, making Medigap coverage increasingly unaffordable.