Medicare: Cost Sharing Policies Problematic for Beneficiaries and
Program (09-MAY-01, GAO-01-713T).				 
								 
Medicare provides valuable and extensive coverage for		 
beneficiaries' health care needs. Nevertheless, significant gaps 
leave some beneficiaries vulnerable to sizeable financial burdens
from out-of-pocket expenses. Medigap is an important source of	 
this supplemental coverage because it is widely available to	 
beneficiaries. This testimony discusses (1) beneficiaries'	 
potential financial liability under Medicare's current benefit	 
structure and cost-sharing requirements, (2) the cost of Medigap 
policies and the extent to which they provide additional	 
coverage, and (3) concerns that Medigap's so-called ''first	 
dollar'' coverage undermines the cost control incentives of	 
Medicare's cost-sharing requirements. GAO found that (1)	 
Medicare's benefits package and cost-sharing requirements leave  
beneficiaries liable for high out-of-pocket costs, (2) Medigap	 
policies pay for some or all Medicare cost-sharing requirements  
but do not fully protect beneficiaries from potentially 	 
significant out-of-pocket costs such as prescription drug	 
coverage, and (3) Medigap first-dollar coverage eliminates the	 
effect Medicare's cost-sharing requirements could have to promote
prudent use of services.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-713T					        
    ACCNO:   A00971						        
  TITLE:     Medicare: Cost Sharing Policies Problematic for	      
             Beneficiaries and Program                                        
     DATE:   05/09/2001 
  SUBJECT:   Drugs						 
	     Health insurance					 
	     Health insurance cost control			 
	     Insurance premiums 				 
	     Cost sharing (finance)				 
	     Medicaid Program					 
	     Medicare Choice Program				 
	     Medicare Program					 
	     Medigap						 
	     Supplementary Medical Insurance Trust		 
	     Fund						 
								 

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GAO-01-713T
     
Testimony Before the Subcommittee on Health, Committee on Ways and Means,
House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 2: 00 p. m. Wednesday, May 9, 2001
MEDICARE

Cost- Sharing Policies Problematic for Beneficiaries and Program

Statement of William J. Scanlon Director, Health Care Issues

GAO- 01- 713T

Page 1 GAO- 01- 713T

Madam Chairwoman and Members of the Subcommittee: I am pleased to be here
today as you consider the need to modernize and strengthen the Medicare
program and review the role of supplemental ?Medigap? policies that many
seniors buy to help improve their Medicare coverage. Medicare provides
valuable and extensive coverage for beneficiaries? health care needs.
Nevertheless, recent discussions have underscored the significant gaps that
leave some beneficiaries vulnerable to sizeable financial burdens from out-
of- pocket costs. Most beneficiaries have additional supplemental coverage
that helps to fill Medicare?s coverage gaps and pay some out- of- pocket
expenses. Privately purchased Medigap is an important source of this
supplemental coverage because it is widely available to beneficiaries. The
other sources- employersponsored policies, Medicare+ Choice plans, and
Medicaid programs- are not as widely available to all beneficiaries.
However, concerns exist that supplemental coverage can be expensive and may
undermine the legitimate role of cost sharing in a health insurance plan- to
encourage cost- effective use of services.

To assist the Subcommittee as it considers proposals to improve coverage for
beneficiaries and the financial health of the Medicare program, my remarks
today focus on the design of Medicare?s benefit package and the role of
private supplemental coverage. Specifically, I will discuss (1)
beneficiaries? potential financial liability under Medicare?s current
benefit structure and cost- sharing requirements, (2) the cost of Medigap
policies and the extent to which they provide additional coverage, and (3)
concerns that Medigap?s so- called ?first dollar? coverage undermines the
cost control incentives of Medicare?s cost- sharing requirements. My
comments are based on our prior and ongoing work 1 on Medicare and Medigap
as well as other published research.

In summary, Medicare?s benefits package and cost- sharing requirements leave
beneficiaries liable for high out- of- pocket costs. As currently
structured, Medicare provides no limit on out- of- pocket spending and no
coverage for most outpatient prescription drugs- a component of medical care
that is of growing importance in treatment and rapidly increasing in cost.
At the same time, Medicare?s cost- sharing requirements are poorly targeted
and fail to promote prudent use of services.

1 The Consolidated Appropriations Act of 2000 mandated that we report to the
Congress by July 2001 on various aspects of Medigap coverage.

Page 2 GAO- 01- 713T

Medigap policies that many Medicare beneficiaries purchase help to fill in
some of Medicare?s gaps but are themselves problematic. Premiums paid for
Medigap policies averaged $1,300 in 1999, with 20 percent going to
administrative costs. While these policies pay for some or all Medicare
cost- sharing requirements, they do not fully protect beneficiaries from
potentially significant out- of- pocket costs. In particular, some Medigap
policies offer prescription drug coverage, however, this coverage can be
inadequate because beneficiaries still pay most of the cost and the maximum
Medigap benefit is capped. In addition, Medigap first- dollar coverage
eliminates the effect Medicare?s cost- sharing requirements could have to
promote prudent use of services. The danger is that some services may be
overused- ultimately increasing costs for beneficiaries and the Medicare
program.

Individuals who are eligible for Medicare automatically receive Hospital
Insurance (HI), known as part A, which helps pay for inpatient hospital,
skilled nursing facility, hospice, and certain home health care services.
Beneficiaries pay no premium for this coverage but are liable for required
deductibles, coinsurance, and copayment amounts. (See table 1.) Medicare
eligible beneficiaries may elect to purchase Supplementary Medical Insurance
(SMI), known as part B, which helps pay for selected physician, outpatient
hospital, laboratory, and other services. Beneficiaries must pay a premium
for part B coverage, currently $50 per month. 2 Beneficiaries are also
responsible for part B deductibles, coinsurance, and copayments.

2 The premium amount is adjusted each year so that expected premium revenues
equal 25 percent of expected part B spending. Background

Page 3 GAO- 01- 713T

Table 1: Medicare Coverage and Beneficiary Cost- Sharing for 2001 Part A
Coverage Beneficiary copayments, coinsurance, and deductibles

Inpatient hospital $792 deductible per admission a $198 copayment per day
for days 61- 90 $396 copayment per day for days 91- 150 b All costs beyond
150 days Skilled nursing facility No cost sharing for first 20 days

$99 copayment or less for days 21- 100 All costs beyond 100 days Home health
No cost sharing

20 percent coinsurance for durable medical equipment Hospice $5 copayment
for outpatient drugs

5 percent coinsurance for inpatient respite care Blood Cost of first 3 pints

Part B Coverage c Physician and medical $100 deductible each year

20 percent coinsurance for most services 50 percent coinsurance for mental
health services Clinical laboratory No cost sharing Home health No cost
sharing

20 percent coinsurance for durable medical equipment Outpatient hospital
Coinsurance varies by service and may exceed 50 percent Blood Cost of first
3 pints

20 percent coinsurance for additional pints a No deductible is charged for
second and subsequent hospital admissions if they occur within 60 days

of the beneficiary?s most recent covered inpatient stay. b After the first
90 days of inpatient care, Medicare may help pay for an additional 60 days
of inpatient

care (days 91- 150). Each beneficiary is entitled to a lifetime reserve of
60 days of inpatient coverage. Each reserve day may be used only once in a
beneficiary's lifetime. c No cost- sharing is required for certain
preventive services- including specific screening tests for colon, cervical,
and prostate cancer, and flu and pneumonia vaccines. Source: Medicare & You
2001, Health Care Financing Administration.

Most Medicare beneficiaries have some type of supplemental coverage to help
pay for Medicare cost- sharing requirements as well as some benefits not
covered by Medicare. They obtain this coverage either through employers,
Medicare+ Choice plans, state Medicaid programs, or Medigap policies sold by
private insurers.

About one- third of Medicare?s 39 million beneficiaries have
employersponsored supplemental coverage. These benefits typically pay for
some or all of the costs not covered by Medicare, such as coinsurance,
deductibles, and prescription drugs. However, many beneficiaries do not have
access to employer- sponsored coverage. A recent survey found that more than
70 percent of large employers with at least 500 employees did

Page 4 GAO- 01- 713T

not offer these health benefits to Medicare- eligible retirees. 3 Small
employers are even less likely to offer retiree health benefits.

Approximately 15 percent of Medicare beneficiaries enroll in Medicare+
Choice plans, which include health maintenance organizations and other
private insurers who are paid a set amount each month to provide all
Medicare- covered services. These plans typically offer lower cost- sharing
requirements and additional benefits compared to Medicare?s traditional fee-
for- service program, in exchange for a restricted choice of providers.
However, Medicare+ Choice plans are not available in all parts of the
country. As of February 2001, about a third of all beneficiaries lived in
counties where no Medicare+ Choice plans were offered.

About 17 percent of Medicare beneficiaries receive assistance from Medicaid,
the federal- state health financing program for low- income aged and
disabled individuals. All Medicare beneficiaries with incomes below the
federal poverty level can have their Medicare premiums and cost sharing paid
for by Medicaid. Beneficiaries with incomes slightly above the poverty level
may have all or part of their Medicare premium paid for by Medicaid. Also,
some low- income individuals may be entitled to full Medicaid benefits (so
called ?dual eligibles?), which include coverage for certain services not
available through Medicare, such as outpatient prescription drugs. However,
the income level at which beneficiaries qualify for full Medicaid benefits
varies, as determined by each state, and many Medicare beneficiaries with
low incomes may not qualify. 4

Medigap is the only supplemental coverage option available to all
beneficiaries when they initially enroll in Medicare at age 65 or older.
Medigap policies are offered by private insurance companies in accordance
with state and federal insurance regulations. In 1999, more

3 Mercer/ Foster Higgins National Survey of Employer- sponsored Health Plans
2000

William M. Mercer, Incorporated (New York, New York). 4 In addition, many
low- income beneficiaries who are eligible for Medicaid and other federal/
state programs to provide assistance with premiums and cost- sharing
requirements may not enroll, in part due to limited awareness of these
programs and the administrative complexity of demonstrating eligibility. See
Low- Income Medicare Beneficiaries: Further Outreach and Administrative
Simplification Could Increase Enrollment

(GAO/ HEHS- 99- 61, April 9, 1999). Aiming to increase awareness and
enrollment in these programs, the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 directed the Social Security
Administration to identify and notify potentially eligible individuals and
the Department of Health and Human Services to develop and distribute to
states a simplified uniform enrollment application.

Page 5 GAO- 01- 713T

than 10 million individuals- more than one- fourth of all beneficiaries-
were covered by Medigap policies. 5 The Omnibus Budget Reconciliation Act
(OBRA) of 1990 6 required that Medigap policies be standardized and allowed
a maximum of 10 different benefit packages offering varying levels of
supplemental coverage to be provided. All policies sold since July 31, 1992
have offered one of the 10 standardized packages, known as plans A through
J. (See table 2.) Policies sold prior to this time were not required to
comply with the standard benefit package requirements.

Table 2: Benefits Covered by Standardized Medigap Policies Benefits Plan

A Plan B Plan

C Plan D Plan

E Plan F a Plan

G Plan H

Plan I

Plan J a

Coverage for: Part A coinsurance 365 additional hospital days during
lifetime Part B coinsurance Blood products

XXXXXXX XX X Skilled nursing facility coinsurance X X X X X X X X Part A
deductible X X X X X X X X X Part B deductible X X X Part B balance billing
b X X XX Foreign travel emergency X X X X X X X X Home health care X X X X
Prescription drugs X c X c X d Preventive medical care X X

Source: HCFA 2001 Guide to Health Insurance for People with Medicare.

Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin,
where alternative standards exist. a Plans F and J also have a high
deductible option of $1,580, under which beneficiaries also pay deductibles
for prescriptions ($ 250 per year for Plan J) and foreign travel emergency
($ 250 per year for Plans F and J). b Some providers do not accept the
Medicare rate as payment in full and ?balance bill? beneficiaries for

additional amounts that can be no more than 15 percent higher than the
Medicare payment rate. Plan G pays 80 percent of balance billing; Plans F,
I, and J cover 100 percent of these charges. c Plans H and I pay 50 percent
of drug charges up to $1, 250 per year and have a $250 annual

deductible. d Plan J pays 50 percent of drug charges up to $3, 000 per year
and has a $250 annual deductible.

5 The National Association of Insurance Commissioners (NAIC) reports that
Medigap enrollment has declined from about 14 million in 1994. 6 P. L. 101-
508, Nov. 5, 1990.

Page 6 GAO- 01- 713T

Under OBRA 1990, Medicare beneficiaries are guaranteed access to Medigap
policies within 6 months of enrolling in part B regardless of their health
status. Subsequent laws have added guarantees for certain other
beneficiaries. Beneficiaries who enrolled in a Medicare+ Choice plan when
first becoming eligible for Medicare and then leave the plan within one year
are also guaranteed access to any Medigap policy; those who terminated their
Medigap policy to join a Medicare+ Choice plan can return to their previous
policy or, if the original policy is not available, be guaranteed access to
plans A, B, C, or F. Also, individuals whose employers eliminate retiree
benefits or whose Medicare+ Choice plans leave the program or stop serving
their areas are guaranteed access to these 4 standardized Medigap policies.
However, none of these 4 guaranteed policies include prescription drug
coverage. 7 Otherwise, insurers can either deny coverage or charge higher
premiums to beneficiaries who are older or in poorer health.

Medicare?s design has changed little since its inception 35 years ago, and
in many ways has not kept pace with changing health care needs and private
sector insurance practices. Medicare cost- sharing requirements are not well
designed to discourage unnecessary use of services. At the same time, they
can create financial barriers to care. In addition, the lack of a cost-
sharing limit can leave some beneficiaries with extensive health care needs
liable for very large Medicare expenses. Moreover, gaps in Medicare?s
benefit package can contribute to substantial financial burdens on
beneficiaries who lack supplemental insurance or Medicaid coverage.

Health insurers commonly design cost- sharing provisions- in the form of
deductibles, coinsurance, and copayments- to ensure that beneficiaries are
aware there is a cost associated with the provision of services and to
encourage them to use services prudently. Ideally, cost sharing should
encourage beneficiaries to evaluate the need for discretionary care but not
discourage necessary care. Optimal cost- sharing designs would generally
require coinsurance or copayments for services that may be discretionary

7 These protections were added by section 4003 of the Balanced Budget Act of
1997 (P. L. 105- 33, 111 Stat. 330). In addition to these federal
protections, 21 states provide for additional Medigap protections in 2000.
Medicare CostSharing

Requirements And Benefit Design Are Out Of Step With Current Private Sector
Practices

Medicare?s Cost- Sharing Requirements Not Well Structured

Page 7 GAO- 01- 713T

and could potentially be overused, and would also aim to steer patients to
lower cost or better treatment options. Care must be taken, however, to
avoid setting cost- sharing amounts so high as to create financial barriers
to necessary care.

The benefit packages of Medicare+ Choice plans illustrate cost- sharing
arrangements that have been designed to reinforce cost containment and
treatment goals. Most Medicare+ Choice plans charge a small copayment for
physician visits ($ 10 or less) and emergency room services (less than $50).
Relatively few Medicare+ Choice plans charge copayments for hospital
admissions. Plans that offer prescription drug benefits typically design
cost- sharing provisions that encourage beneficiaries to use cheaper generic
drugs or brand name drugs for which the plan has negotiated a discount.

Medicare fee- for- service cost- sharing rules diverge from these common
insurance industry practices in important ways. For example, as indicated in
table 1, Medicare imposes a relatively high deductible for hospital
admissions, which are rarely optional. In contrast, Medicare requires no
cost sharing for home health care services, even though historically high
utilization growth and wide geographic disparities in the use of such
services have raised concerns about the potentially discretionary nature of
some services. 8 Medicare also has not increased the part B deductible since
1991. For the last 10 years the deductible has remained constant at $100 and
has thus steadily decreased as a proportion of beneficiaries? real income.

Also unlike most employer- sponsored plans for active workers, Medicare does
not limit beneficiaries? cost- sharing liability, which can represent a
significant share of their personal resources. Premiums, deductibles,
coinsurance, and copayments that beneficiaries are required to pay for
services that Medicare covers equaled an estimated 23 percent of total
Medicare expenditures in 2000. The average beneficiary who obtained services
in 1997 had a total liability of $1,451, consisting of $925 in Medicare
copayments and deductibles in addition to the $526 in annual part B premiums
required that year.

8 See Medicare Home Health Care: Prospective Payment System Will Need
Refinement as Data Become Available (GAO/ HEHS- 00- 9, Apr. 2000). Medicare
Does Not Limit

Beneficiaries? Cost- Sharing Liability

Page 8 GAO- 01- 713T

The burden of Medicare cost sharing can be much higher, however, for
beneficiaries with extensive health care needs. In 1997, the most current
year of available data on the distribution of these costs, slightly more
than 3.4 million beneficiaries (11.4 percent of beneficiaries who obtained
services) were liable for more than $2,000. Approximately 750, 000 of these
beneficiaries (2.5 percent) were liable for more than $5,000, and about
173,000 beneficiaries (0.6 percent) were liable for more than $10,000. In
contrast, private employer- sponsored health plans typically limit maximum
annual out- of- pocket costs for covered services to less than $2,000 per
year for single coverage. 9

Medicare does not cover some services that are commonly included in private
insurers? benefit packages. The most notable omission in Medicare?s benefit
package is coverage for outpatient prescription drugs. This benefit is
available to most active workers enrolled in employersponsored plans. More
than 95 percent of private employer- sponsored health plans for active
workers cover prescription drugs, typically providing comprehensive coverage
with relatively low cost- sharing requirements.

Current estimates suggest that the combination of Medicare?s cost- sharing
requirements and limited benefits leaves about 45 percent of beneficiaries?
health care costs uncovered. The average beneficiary in 2000 is estimated to
have incurred about $3,100 in out- of- pocket expenses for health care- an
amount equal to about 22 percent of the average beneficiary?s income. 10

Some beneficiaries potentially face much greater financial burdens for
health care expenses. For example, elderly beneficiaries in poor health and
with no Medicaid or supplemental insurance coverage are estimated to have
spent 44 percent of their incomes on health care in 2000. Lowincome single
women over age 85 in poor health and not covered by Medicaid are estimated
to have spent more than half (about 52 percent) of their incomes on health
care services. 11 These percentages are expected to

9 The Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits: 2000 Annual Survey.

10 Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in Medicare and
Out- OfPocket Spending: Impact on Vulnerable Beneficiaries, (Urban
Institute, Dec. 2000). 11 Maxwell, Moon, and Segal. Cost of Uncovered

Services Adds to Beneficiaries? Financial Burden

Page 9 GAO- 01- 713T

increase over time as Medicare premiums and costs for prescription drugs and
other health care goods and services rise faster than incomes.

While more than one- fourth of beneficiaries have Medigap policies to fill
Medicare coverage gaps, these policies can be expensive and provide only
limited protection from catastrophic expenses. Medigap drug coverage in
particular offers only limited protection because of high cost sharing and
low coverage caps.

More than 10 million Medicare beneficiaries have Medigap policies to cover
some potentially high costs that Medicare does not pay, including cost-
sharing requirements, extended hospitalizations, and some prescription drug
expenses. By offering a choice among standardized plans, beneficiaries can
match their coverage needs and financial resources with plan coverage.
Medigap policies are widely available to beneficiaries including those who
are not eligible for or do not have access to other insurance to supplement
Medicare, such as Medicaid or employersponsored retiree benefits. In fact,
most Medicare beneficiaries who do not otherwise have employer- sponsored
supplemental coverage, Medicaid, or Medicare+ Choice plans purchase a
Medigap policy, demonstrating the value of this coverage to the Medicare
population.

Medigap policies can be expensive. The average annual Medigap premium was
more than $1,300 in 1999. Premiums varied widely based on the level of
coverage purchased. Plan A, which provides the fewest benefits, was the
least expensive with average premiums paid of nearly $900 per year. The most
popular plans- C and F- had average premiums paid of about $1,200. The most
comprehensive plans- I and J- were the most expensive, with average premiums
around $1,700. (See table 3.) Medigap Policies

Address Some Medicare Shortcomings But Are Expensive

Medigap Fills Some Needs Medigap Policies Can Have High Cost

Page 10 GAO- 01- 713T

Table 3: Distribution of Medigap Plans and Annual Premiums Per Covered Life,
1999

Medigap plan Covered lives (percentage) Average annual premium

earned per covered life

A 2.7 $877 B 8.0 $1,093 C 15.9 $1,151 D 3.8 $1,032 E 1.5 $1,067 F 23.4
$1,217 G 1.5 $980 H 1.5 $1,379 I 1.5 $1,704 J 2.7 $1,669 Pre- standard
(policies originally sold before July 31, 1992) 32.9 $1,573 Plans in states
exempt from plan standards a 4.5 $1,405

Total b 100.0 $1,322

a Massachusetts, Minnesota, and Wisconsin have alternative plans in effect
and waivers that exempt them from selling the national standard Medigap
plans. b Data reported by insurers to NAIC do not include plan type for
policies representing less than 9 percent of Medigap policy covered lives,
with an average paid premium of $1,016. These plans are not included in the
plan distribution or average premiums reported in the table.

Source: GAO analysis of data collected by NAIC from the 1999 Medicare
Supplement Insurance Experience Exhibit.

Premiums also vary widely across geographic areas and insurers. For example,
average annual premiums in Massachusetts ($ 1,915) were 45 percent higher
than the national average. While varying average premiums may reflect
geographic differences in terms of use of Medicare and supplemental services
and costs, beneficiaries in the same state may face widely varying premiums
for a given plan type offered by different insurers. For example, in Nevada,
plan A premiums for a 65- year- old ranged from $446 to as much as $1,004,
depending on the insurer. Similarly, in Florida, plan F premiums for a 65-
year- old male ranged from $1,548 to $2,123; and in Maine, plan J premiums
ranged from $2,697 to $3,612. 12

12 Premium quotes for policies available in 2000 and 2001 from most recently
available state guides for consumers on Medigap policies.

Page 11 GAO- 01- 713T

Medigap policies are becoming more expensive. One recent study reports that
premiums for the three Medigap plan types offering prescription drug
coverage (H, I, and J) have increased the most rapidly- by 17 to 34 percent
in 2000. Medigap plans without prescription drug coverage rose by 4 to 10
percent in 2000. 13

A major reason premiums are high is that a large share of premium dollars
are used for administrative costs rather than benefits. More than 20 cents
from each Medigap premium dollar is spent for costs other than medical
expenses, including administration. Administrative costs are high, in part,
because nearly three- quarters of policies are sold to individuals rather
than groups. 14 The share of premiums spent on benefits varies significantly
among carriers. The 15 largest sellers of Medigap policies spent between 64
and 88 percent of premiums on benefits in 1999. The share of premiums spent
on benefits is lower for Medigap plans than either typical Medicare+ Choice
plans or health benefits for employees of large employers. Also, 98 percent
of Medicare fee- for- service funds are used for benefits.

While Medigap policies cover some costs beneficiaries would otherwise pay
out of pocket, Medigap policies have limits and can still leave
beneficiaries exposed to significant out- of- pocket costs. Medigap
prescription drug coverage in particular leaves beneficiaries exposed to
substantial financial liability. Prescription drugs are of growing
importance in medical treatment and one of the fastest growing components of
health care costs. Medigap policies with a drug benefit are the most
expensive yet the benefit offered can be of limited value to many
beneficiaries. For example,

 Medigap policies offering drug coverage typically cost much more than
policies without drug coverage- the most popular plan with prescription drug
coverage (plan J) costs on average $450 more than the most popular plan
without drug coverage (plan F)- although the benefit is at most $1,250 or
$3,000, depending on plan type, and

13 Weiss Ratings, ?Prescription Drug Costs Boost Medigap Premiums
Dramatically,? March 26, 2001, at http:// www. weissratings. com/
NewsReleases/ Ins_ Medigap/ 20010326Medigap. htm.

14 Federal law requires Medigap plans to spend at least 65 percent of
premiums on benefits for policies sold to individuals, and 75 percent for
policies sold to groups. Remaining Gaps Leave

Beneficiaries at Significant Risk

Page 12 GAO- 01- 713T

 under the Medigap plan with the most comprehensive drug coverage, type J,
a beneficiary would have to incur $6,250 in prescription drug costs to get
the full $3,000 benefit, because of the plan?s deductible and coinsurance
requirements.

The high cost and limited benefit may explain why more than 90 percent of
beneficiaries with one of the standardized Medigap plans purchased standard
Medigap plans that do not include drug benefits. 15 Further, Medicare
beneficiaries who do not purchase Medigap policies when they initially
enroll in part B at age 65 or older are not guaranteed access to the Medigap
policies with prescription drug coverage in most states. Insurers may then
either deny coverage or charge higher premiums, especially to Medicare
beneficiaries with any adverse health conditions.

The Medigap standard prescription drug benefit differs greatly from that
typically offered by employer- sponsored plans for active employees or
Medicare- eligible retirees. The Medigap prescription drug benefit has a
$250 deductible, requires 50 percent coinsurance, and is limited to $1,250
or $3,000 depending on the plan purchased. In contrast, employersponsored
plans typically require small copayments of $8 to $20 or coinsurance of
about 20 to 25 percent, depending on whether the enrollees purchase generic
brands, those for which the plan has negotiated a price discount, or other
drugs. Further, few employer- sponsored health plans have separate
deductibles or maximum annual benefits for prescription drugs. These plans
may also offer enrollees access to discounted prices the plans have
negotiated even when the beneficiary is paying the entire cost.

Even though Medicare?s original design has been criticized as outmoded, it
included various cost- sharing requirements intended to encourage prudent
use of services. These requirements have also traditionally been features of
private insurance. However, Medigap?s first- dollar coverage- the
elimination of any deductibles or coinsurance associated with the use of
specific services- undermines this objective. All standard Medigap plans

15 While less is known about the benefits offered by prestandardized plans
that were sold prior to 1992- representing about 30 percent of Medigap
enrollment in 1999- one expert estimated that most are likely to have some
coverage for prescription drugs but that this coverage is even more limited
than that offered by the standardized plans. See Deborah J. Chollet,
Mathematica Policy Research Inc., ?Medigap Coverage for Prescription Drugs,?
Testimony before the U. S. Senate Committee on Finance, April 24, 2001.
First- Dollar Coverage

Through Medigap Distorts Medicare's Cost Control Features

Page 13 GAO- 01- 713T

cover hospital and physician coinsurance, while nearly all beneficiaries
with standardized Medigap plans purchase plans covering the full hospital
deductible, and most purchase plans covering the full skilled nursing home
coinsurance and part B deductible. First- dollar coverage reduces financial
barriers to health care, but it also diminishes beneficiaries? sensitivity
to costs and could thus increase unnecessary service utilization and total
Medicare program costs.

A substantial body of research clearly indicates that Medicare spends more
on beneficiaries with supplemental insurance relative to beneficiaries who
have Medicare coverage only. For example, an analysis of 1993 and 1995 data
found that Medicare per capita expenditures for beneficiaries with Medigap
insurance were from $1,000 to $1,400 higher than for beneficiaries with
Medicare only. Medicare per capita spending on beneficiaries with employer-
sponsored plans was $700 to $900 higher than for beneficiaries with Medicare
only.

Some evidence suggests that first- dollar, or near first- dollar, coverage
may partially be responsible for the higher spending. For example, one study
found that beneficiaries with Medigap insurance use 28 percent more medical
services (outpatient visits and inpatient hospital days) relative to
beneficiaries who did not have supplemental insurance, but were otherwise
similar in terms of age, sex, income, education, and health status. 16
Service use among beneficiaries with employer- sponsored supplemental
insurance (which often reduces, but does not eliminate, cost sharing) was
approximately 17 percent higher than the service use of beneficiaries with
Medicare coverage only.

Unlike Medigap policies, employer- sponsored supplemental insurance policies
and Medicare+ Choice plans typically reduce beneficiaries? financial
liabilities but do not offer first- dollar coverage. Although there is a
wide variety in design of employer- sponsored insurance plans, many retain
cost- sharing provisions. Medicare+ Choice plans also typically require
copayments for most services. Moreover, unlike the traditional feefor-
service program, Medicare+ Choice plans require referrals or prior
authorization for certain services to minimize unnecessary utilization.

16 ?Effects of Supplemental Coverage on Use of Services by Medicare
Enrollees,? Christensen and Shinogle, Health Care Financing Review, Fall
1997.

Page 14 GAO- 01- 713T

As Congress continues to consider proposals to reform Medicare, it is
important to examine all facets of the program and how they relate to other
coverage that beneficiaries may have. Current Medicare cost- sharing
provisions do not reflect common insurance practices that have evolved over
time to promote prudent use and protect beneficiaries from catastrophic care
costs. Medigap policies also fail to provide the comprehensive coverage
needed by some beneficiaries. In addition, by offering first- dollar
coverage, they may undermine incentives for prudent use of Medicare
services. In light of how prevailing private sector coverage and practice
have evolved, reconsideration of coverage and cost- sharing policies, both
within the Medicare program and within any supplemental options that may be
available, would be valuable to improve both coverage for beneficiaries and
the financial health of the Medicare program.

Madam Chairwoman, this concludes my statement. I would be happy to answer
any questions that you or Members of the Subcommittee may have.

For more information, regarding this testimony, please contact me or Laura
Dummit at (202) 512- 7114. Rashmi Agarwal, Susan Anthony, James Cosgrove,
Paul Cotton, John Dicken, and Carmen Rivera- Lowitt also made key
contributions to this statement. Concluding

Observations GAO Contacts and Staff Acknowledgments

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