Medigap

Since the enactment of Medicare in 1965, there has been a market for supplemental insurance designed to fill the gaps in the program's coverage. The possession of supplemental insurance is essential for most Medicare beneficiaries because there are a number of gaps in Medicare coverage, some of which can result in catastrophically high out-of-pocket costs. Under Part A (Hospital Insurance), patients face very high daily co-payments ($792 in 2001) in the unlikely event that they experience a hospitalization lasting over sixty days, and no coverage whatsoever if a hospital stay exceeds 150 days. Under Part B (Supplemental Medical Insurance), there is no cap on out-of-pocket payments for the 20 percent co-payment that is applied to the costs of physician and other professional services. There is also no coverage provided for other potentially costly goods and services used by beneficiaries, particularly prescription drugs and long-term nursing home stays. Consequently, most beneficiaries feel the need to acquire additional health coverage.

Supplemental insurance is the norm, therefore, and not the exception. An estimated 91 percent of Medicare beneficiaries have such coverage, with only 9 percent having Medicare as their sole protection. Of the 91 percent, 17 percent are enrolled in Medicare managed care programs, 27 percent have individually purchased (or "Medigap") coverage, 36 percent have coverage from an employer or former employer, and 11 percent are covered by Medicaid. Each of these sources of coverage are discussed below.