Insurers move to protect Medigap policies

One often-cited way to reduce Medicare outlays is to make all beneficiaries pay at least some coinsurance on healthcare services. Last year’s health reform legislation took a small step in this direction, and now a Senate bill seeks to prohibit Medigap policies from covering the first $550 in healthcare costs as a way to make seniors more cost-conscious.

Insurers claim that supplemental Medicare policies provide peace of mind for elderly patients and protect them from catastrophic financial obligations, something that seniors value highly, according to a 2009 survey. Research indicates, moreover, that high co-pays and coinsurance discourage individuals from seeking needed care.

Yet, other analysts find that seniors with “gap” coverage use up to 25% more services than those with high co-pays, and that this increase in utilization does not improve health outcomes. Much of the higher spending by fully covered seniors, moreover, is borne by the broader Medicare program - and ultimately U.S. taxpayers - and not by the individual patient or insurance company writing the Medigap policy.

Nearly all Medicare fee-for-service enrollees have some kind of supplemental coverage to offset high Medicare copays for hospitalization and outpatient care; the fees can be catastrophic because there is no annual cap on Medicare cost-sharing obligations. To protect themselves from unexpected medical expenses, nearly 10 million Medicare beneficiaries purchase Medigap policies, despite premiums that run more than $2,000 a year. Even more seniors obtain “wrap-around” coverage from past employers or from Medicare Advantage plans, while low-income elderly patients gain assistance in meeting co-pays from state Medicaid programs. Only about 10% of Medicare beneficiaries have no supplemental protection from cost-sharing liabilities, which can add up to thousands of dollars a year.

A main concern for policymakers is that first-dollar Medigap policies tend to mask the financial consequences of beneficiaries’ choices about whether to seek care and which types of providers and therapies to use. Medigap policies also tend to be expensive (premiums on full coverage range from $2,000 to $4,000 a year) because they’re most attractive to sicker individuals who run up high health care bills, and the policies carry administrative costs of 20% or more, points out the June 2011 report from the Medicare Payment Advisory Commission (MedPAC).

Caps & cost-sharing
The desire to curb Medicare spending and to protect very ill individuals from accruing enormous medical costs is generating proposals to reform Medicare cost-sharing rules and Medigap policies. As a first step, the Patient Protection and Affordable Care Act of 2010 calls for all Medigap policies to have some level of cost sharing. The legislation directs the National Association of Insurance Commissioners (NAIC) to revise standards by January 2015 for the two Medigap policies that cover all cost-sharing.

The NAIC can build on extensive analysis by MedPAC and the Congressional Budget Office (CBO) on the impact of minimum deductibles and caps on out-of-pocket (OOP) spending. For example, conservative Congressman Paul Ryan (R-Wis.) and liberal economist Alice Rivlin issued a Medicare reform plan last year that recommends such reforms. Beginning in 2013, it would establish a single deductible of $600 for Part A and Part B Medicare services; beneficiaries then would pay 20% coinsurance for all subsequent services until they hit a $6,000 catastrophic cap on cost-sharing. In addition, all Medigap policies would carry a $500 deductible and require beneficiaries to pay at least $2,750 out of pocket. These changes, according to CBO, would save $110 billion over 10 years.

Another CBO analysis of options for reducing the federal deficit issued in March 2011 calculates that similar changes in Medicare cost-sharing requirements and Medigap plans could save $30 to $93 billion from 2012 and 2021. The most savings would come from setting a $550 combined deductible for Part A and Part B, which Medigap plans could not cover, plus a 10% coinsurance rate until beneficiaries hit a $5,500 annual limit.

In June, Senators Joe Lieberman (I-Conn) and Tom Coburn (R-Okla.) introduced legislation designed to save more than $600 billion over ten years through a range of Medicare reforms: raising the eligibility age for Medicare from 65 to 67, requiring more wealthy seniors to pay higher premiums and co-pays, and fixing the Medicare payment system for physicians.

A good chunk of the savings ($130 billion over 10 years) would come from Medigap and cost-sharing reform. This plan proposes a $7,500 annual out-of-pocket limit; a $550 combined annual deductible for Parts A & B; and a minimum $550 deductible on Medigap policies.

CBO says requiring enrollees to pay at least a portion of costs would encourage more prudent use of medical services and prompt insurers to lower premiums on Medigap policies. Setting a common cap on OOP spending also would be fairer because all Medicare beneficiaries would gain greater protection against catastrophic costs.

Insurers counter that Medigap plans protect beneficiaries from financial hardship, and that Medigap coverage does not lead to higher utilization of medical services. Studies that find higher spending by fully covered beneficiaries, industry argues, may result more from the fact that Medigap purchasers have higher medical needs, and not from the “insurance effect” of first-dollar coverage. Increased cost-sharing for elderly patients, moreover, has been linked to increased hospitalization in some studies, according to America’s Health Insurance Plans (AHIP).

Before imposing new restrictions on Medigap options, insurers propose that Congress monitor the impact of the newer Medigap plans with higher cost-sharing. The industry-sponsored Partnership to Protect Medigap (PPM) coalition warns beneficiaries that changes in Medigap policies could lead to individual liabilities up to $7,500 a year and urges seniors to tell members of Congress how much they value current Medigap plans. Proposals before Congress, PPM advises, would “force seniors who have Medigap to pay more - and maybe a lot more - out of pocket when they visit the doctor or go to a hospital.”

MedPAC analysts are looking to incorporate Medigap and coinsurance revisions into FFS benefit reforms designed to encourage use of high-value, low-cost services. Strategies being tested would raise co-pays for low-value services and reduce OOP contributions for high-value or low-cost services. Most of the proposed changes involve some kind of cost-sharing for most Medicare services.