Medigap Insurance: Plans Are Widely Available but Have Limited	 
Benefits and May Have High Costs (31-JUL-01, GAO-01-941).	 
								 
Millions of Medicare beneficiaries depend on private insurance to
cover expenses not covered by Medicare, such as deductibles,	 
copayments, coinsurance, and prescription drugs. To protect	 
themselves against large out-of-pocket costs and help fill	 
Medicare's coverage gaps, most beneficiaries purchase Medicare	 
supplemental insurance (known as Medigap), contribute towards	 
employer-sponsored retiree health benefits to supplement	 
Medicare's coverage, or enroll in private Medicare+Choice plans  
as an alternative to the traditional fee-for-service Medicare	 
plan. Since Medicare+Choice plans are not available in many parts
of the country and many employers do not offer retiree health	 
benefits, Medigap may be the only supplemental insurance option  
widely available to seniors. As Congress continues to examine	 
potential changes to the Medicare program, it is important to	 
consider the role that Medigap supplemental coverage has on	 
beneficiaries' use of services and expenditures. Medicare	 
beneficiaries who purchase Medigap plans have coverage for	 
essentially all major Medicare cost-sharing requirements,	 
including coinsurance and deductibles. But offering this	 
''first-dollar'' coverage may undermine incentives for prudent	 
use of Medicare services, especially with regard to discretionary
services, which could ultimately increase the costs for 	 
beneficiaries and the entire Medicare program. While the lack of 
coverage for outpatient prescription drugs through Medicare has  
led to various proposals to expand Medicare benefits, relatively 
few beneficiaries purchase standardized Medigap plans offering	 
these benefits. Low enrollment in these plans may be due to fewer
plans being marketed with these benefits, their relatively high  
cost, and the limited nature of their prescription drug benefit, 
which still requires beneficiaries to pay more than half of their
prescription drug costs while receiving a maximum of $3,000 in	 
benefits. As a result, Medigap beneficiaries with prescription	 
drug coverage continue to incur substantial out-of-pocket costs  
for prescription drugs and other health care services.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-941 					        
    ACCNO:   A01492						        
  TITLE:     Medigap Insurance: Plans Are Widely Available but Have   
             Limited Benefits and May Have High Costs                         
     DATE:   07/31/2001 
  SUBJECT:   Health care cost control				 
	     Health insurance cost control			 
	     Managed health care				 
	     Health insurance					 
	     Cost analysis					 
	     Drugs						 
	     Cost sharing (finance)				 
	     Medicare Choice Program				 
	     Medicare Program					 
	     Medigap						 

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GAO-01-941
     
Report to Congressional Committees

United States General Accounting Office

GAO

July 2001 MEDIGAP INSURANCE

Plans Are Widely Available but Have Limited Benefits and May Have High Costs

GAO- 01- 941

Page i GAO- 01- 941 Medigap Insurance Letter 1

Results in Brief 2 Background 3 Medigap Enrollment Exceeds 10 Million,
Mostly Concentrated in

Two Plans 7 Medigap Plans Are Widely Available in Most States, But Access

May Be Limited for Certain Beneficiaries 10 Beneficiaries With Medigap
Policies May Still Incur Significant Outof- Pocket Costs 12 Concluding
Observations 20

Appendix I Methodology 23

Appendix II Insurers Offering Standardized Medigap Plans During Open-
Enrollment Periods 27

Appendix III Average Annual Premiums by State 30

Related GAO Products 32

Tables

Table 1: Medicare Coverage and Beneficiary Cost Sharing for 2001 4 Table 2:
Benefits Covered by Standardized Medigap Policies 5 Table 3: Insurers
Offering Medigap Plans to 65- Year- Olds During

Open Enrollment 11 Table 4: Annual Premiums Per Covered Life, 1999 13 Table
5: Range of Annual Premium Prices for Selected Plans for a

65- Year- Old in Five States with Large Medicare Populations 15 Table 6:
Expenditures by Payer for Beneficiaries With an

Individually Purchased Medigap Policy, 1998 a 19 Table 7: Number and Percent
of Beneficiaries by Insurance

Category, 1998 26 Contents

Page ii GAO- 01- 941 Medigap Insurance

Table 8: Number of Insurers Offering Standardized Medigap Policies by Plan
Type and by State to 65- Year- Olds in Their Initial Open- Enrollment Period
28 Table 9: Average Annual Premiums Per Covered Life by State, 1999 30

Figures

Figure 1: Percentage Enrolled in Standardized Medigap Plans by Plan Type,
1999 8 Figure 2: Out- of- Pocket Costs (Excluding Long- Term Facility Care

Costs) for Medicare Beneficiaries, 1998 17

Page 1 GAO- 01- 941 Medigap Insurance

July 31, 2001 Congressional Committees Millions of Medicare beneficiaries
depend on private insurance to cover expenses not covered by Medicare, such
as deductibles, copayments, coinsurance, and prescription drugs. To protect
themselves against large out- of- pocket costs and help fill Medicare?s
coverage gaps, most beneficiaries purchase Medicare supplemental insurance
(known as Medigap), contribute towards employer- sponsored retiree health
benefits to supplement Medicare?s coverage, or enroll in private Medicare+
Choice plans as an alternative to the traditional fee- for- service Medicare
plan. Since Medicare+ Choice plans are not available in many parts of the
country and many employers do not offer retiree health benefits, Medigap may
be the only supplemental insurance option widely available to seniors. In
particular, federal law guarantees beneficiaries the right to purchase a
Medigap policy during the first 6 months after they are 65 and elect
Medicare coverage for physician services, outpatient care, and certain other
services.

The role of Medicare supplemental insurance is one of several issues that
Congress has considered as part of its ongoing deliberations on Medicare
reform, including proposed prescription drug coverage and other coverage
alternatives for beneficiaries. 1 The Consolidated Appropriations Act for
2000 required us to report on Medigap insurance, including (1) enrollment
levels; (2) availability across states and to individuals, especially those
outside of their initial 6- month enrollment period; and (3) premiums and
other out- of- pocket costs for health care expenses incurred by
beneficiaries who purchase Medigap plans. 2 To provide information on these
issues, we analyzed data collected on the National Association of Insurance
Commissioners? (NAIC) 1999 Medicare Supplement Insurance Experience Exhibit
and the Health Care Financing Administration?s

1 See also Medicare: Cost Sharing Policies Problematic for Beneficiaries and
Program (GAO- 01- 713T, May 9, 2001). 2 See Consolidated Appropriations Act
for Fiscal Year 2000, P. L. 106- 113, Appendix F, Medicare, Medicaid, and
SCHIP Balanced Budget Refinement Act of 1999, Section 553( a).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 941 Medigap Insurance

(HCFA) 3 1998 Medicare Current Beneficiary Survey (MCBS). We also examined
consumer guides for Medicare beneficiaries issued by most states and HCFA.
In addition, we interviewed selected insurers, HCFA officials and state
insurance regulators, and trade association representatives. Appendix I
provides additional information on our methodology. We conducted our work
from March 2001 through July 2001 in accordance with generally accepted
government auditing standards.

About 10.7 million Medicare beneficiaries- more than one- fourth of all
beneficiaries- relied on Medigap policies in 1999 to cover some out-
ofpocket costs and services not covered by Medicare. More than 60 percent
purchased 1 of 10 standardized policy types, while the remainder had
policies sold before federal law required the standardization of benefits in
July 1992 or were in one of three states in which insurers are exempt from
offering the federally standardized plans. Nearly two- thirds of those with
a standardized Medigap policy purchased two mid- level policies that cover
Medicare?s cost- sharing requirements and selected other benefits but do not
have any prescription drug coverage. Relatively few Medigap purchasers (8
percent of those purchasing a standardized Medigap policy) have bought the
standardized plans that include prescription drug coverage. Low enrollment
in these Medigap plans may be due to fewer plans with prescription drug
benefits being marketed, higher premiums for these plans, and limits in
coverage whereby beneficiaries are required to pay more than half of their
drug costs while catastrophic prescription drug expenses are not covered.

Medigap policies are widely available to 65- year- old Medicare
beneficiaries during the initial 6- month open- enrollment period guaranteed
by federal law. In nearly every state, multiple insurers offer every Medigap
policy, but the extent to which beneficiaries can select from among insurers
offering different plan types and at different prices varies depending on
where they live and other circumstances. All insurers that market Medigap
must offer the standardized plan with the fewest benefits. Most insurers
also offer other plans with additional standardized optional benefits, but
comparatively few offer the three standardized plans that include
prescription drug coverage. For example, in New York only a single

3 On June 14, 2001, the Secretary of Health and Human Services announced
that the name of HCFA had been changed to the Centers for Medicare and
Medicaid Services (CMS). In this report, we will continue to refer to HCFA
where our findings apply to information provided by the agency under that
name. Results in Brief

Page 3 GAO- 01- 941 Medigap Insurance

insurer offers one of the three plans with prescription drug benefits, in
Rhode Island only a single insurer offers any of the plans with prescription
drug benefits, and in Delaware no insurer offers one of the plans with
prescription drugs. In general, access may be more limited to beneficiaries
who are not in the initial 6- month open- enrollment period or otherwise
eligible for federal guarantees applying to certain other circumstances,
such as when an employer terminates health benefits or their Medicare+
Choice plan withdraws from their area. Depending on their health status,
beneficiaries purchasing Medigap outside these periods or who want to switch
to a plan with more benefits may find coverage alternatives limited or
expensive.

Some Medigap policies can have relatively high premiums and may still leave
Medicare beneficiaries with significant out- of- pocket costs for health
care services. Overall, the average annual premium was more than $1,300 in
1999. Standardized plans with prescription drug coverage were more
expensive- averaging more than $1,600 compared to about $1,150 for
standardized plans without prescription drug coverage. Average premiums
varied widely by state. For example, the average premium for standardized
plans in California was 35 percent higher than the national average and more
than twice as high as in New Hampshire, New Jersey, and Utah. Premiums also
varied widely within the same state. For example, a Medicare beneficiary can
find that premiums offered by different insurers for the same plan type
often vary by two times and sometimes even more depending on several
factors, including the premium rating methodology insurers use. In addition
to their premium payments, Medigap purchasers continue to have significant
out- of- pocket costs for health care services, averaging about $1,400 in
1998.

Medicare is typically the primary source of health insurance coverage for
seniors. Individuals who are eligible for Medicare automatically receive
Hospital Insurance, known as part A, which helps pay for inpatient hospital
care, skilled nursing facility services following a hospital stay, hospice
care, and certain home health care services. Beneficiaries generally pay no
premium for this coverage but are liable for required deductibles,
coinsurance, and copayments. Medicare- eligible beneficiaries may elect to
purchase Supplemental Medical Insurance, 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. Beneficiaries are also responsible for part B deductibles,
coinsurance, and copayments. See table 1 for a summary of Medicare?s
beneficiary cost- sharing requirements for 2001. Background

Page 4 GAO- 01- 941 Medigap Insurance

Table 1: Medicare Coverage and Beneficiary Cost Sharing for 2001 Part A
coverage Beneficiary cost- sharing requirements

Inpatient hospital $792 deductible per admission a $198 copayment per day
for days 61- 90 $396 copayment per day for days 91- 150 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 b Physician and medical $100 deductible per 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
Cost sharing 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 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: HCFA, Medicare & You 2001.

To help pay for some of Medicare?s cost- sharing requirements as well as
some benefits not covered by Medicare parts A or B, most Medicare
beneficiaries have some type of supplemental coverage. Privately purchased
Medigap is an important source of this supplemental coverage. Other
supplemental coverage options may include coverage through an employer,
enrolling in a Medicare+ Choice plan that typically offers lower cost-
sharing requirements and additional benefits such as prescription drug
coverage in exchange for a restricted choice of providers, or assistance
from Medicaid, the federal- state health financing program for low- income
individuals, including aged or disabled individuals.

Page 5 GAO- 01- 941 Medigap Insurance

The Omnibus Budget Reconciliation Act (OBRA) of 1990 4 required that Medigap
plans be standardized in as many as 10 different benefit packages offering
varying levels of supplemental coverage. All policies sold since July 1992
(except in three exempted states) have conformed to 1 of these 10
standardized benefit packages, known as plans A through J. (See table 2.) In
addition, beneficiaries may purchase Medicare Select, a type of Medigap
policy that generally costs less in exchange for a limited choice of
providers. A high- deductible option is also available for plans F and J.
Policies sold prior to July 1992 are not required to comply with these 10
standard packages. Insurers in Massachusetts, Minnesota, and Wisconsin are
exempt from offering these standardized plans because these states
standardized their Medigap policies prior to the establishment of the
federal standardized plans.

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 X X X X X X X X X X

Skilled n ursing f acility c oinsurance X X X X X X X X Part A d eductible X
X X X X X X X X Part B deductible X X X Part B balance billing b X X X X
Foreign t ravel e mergency X X X X X X X X Home health care X X X X
Prescription drugs X c X c X c Preventive medical care X X

a Plans F and J also have a high- deductible option that requires the
beneficiary to pay $1,580 before receiving Medigap coverage. This deductible
is in addition to separate deductibles for prescription drugs ($ 250 per
year for plan J) and foreign travel emergency ($ 250 per year for plans F
and J) which are required in these plans with or without the high-
deductible option. 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. Plan J pays 50 percent of drug charges up to $3,000 per year and
has a $250 annual deductible.

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

4 P. L. 101- 508, section 4351, 104 Stat. 1388, 1388- 127.

Page 6 GAO- 01- 941 Medigap Insurance

Medigap coverage is widely available to most beneficiaries. Federal law
provides Medicare beneficiaries with guaranteed access to Medigap policies
offered in their state of residence during an initial 6- month
openenrollment period, which begins on the first day of the month in which
an individual is 65 or older and is enrolled in Medicare Part B. During this
initial open- enrollment period, an insurer cannot deny Medigap coverage for
any plan types they sell to eligible individuals, place conditions on the
policies, or charge a higher price because of past or present health
problems. 5 Additional federal Medigap protections include ?guaranteedissue?

rights, which provide beneficiaries over age 65 access to plans A, B, C, or
F in certain circumstances, such as when their employer terminates retiree
health benefits or their Medicare+ Choice plan leaves the program or stops
serving their area. 6 Depending on laws in the state where applicants reside
and their health status, insurers may choose to offer more than these four
plans. Federal law also allows individuals who join a Medicare+ Choice plan
when they first become eligible for Medicare 7 and who leave the plan within
1 year of joining to purchase any of the 10 standardized Medigap plans sold
in their respective states. 8

5 Policies sold during the open- enrollment period can exclude coverage for
any preexisting conditions for up to 6 months. However, if the beneficiary
had prior coverage and applied for Medigap within 63 days after this prior
coverage ends, he or she receives credit to reduce or eliminate the length
of the preexisting- condition exclusion period.

6 Individuals must apply for a Medigap plan no later than 63 days after
their prior health coverage ends for these guarantees to apply. During the
guaranteed- issue periods no preexisting- condition exclusion period may be
applied.

7 This right to join any Medigap plan when a beneficiary leaves a Medicare+
Choice plan within one year also exists for beneficiaries who have been
involuntarily terminated by a prior Medicare+ Choice plan, such as when a
plan withdraws from their area.

8 To be eligible for these federal access protections, beneficiaries must
apply no later than 63 calendar days after their Medicare health plan
coverage ends. In addition, federal protections allow individuals who
dropped their Medigap plan to join a Medicare+ Choice plan or buy a Medicare
Select policy to return to their former Medigap policy if they leave the new
plan within 1 year. In the event the original plan is not available, these
individuals become eligible for plans A, B, C, or F.

Page 7 GAO- 01- 941 Medigap Insurance

In 1999, about 10.7 million Medicare beneficiaries- more than one- fourth of
all beneficiaries- had a Medigap policy to help cover Medicare?s costsharing
requirements as well as some benefits not covered by Medicare parts A or B.
9 Of those having Medigap coverage in 1999, about 61 percent purchased 1 of
the 10 standardized plans (A through J), while about 35 percent had
supplemental plans that predate standardization. The remaining 4 percent had
Medigap plans meeting state standards in the three states- Massachusetts,
Minnesota, and Wisconsin- in which insurers are exempt from offering the
federally standardized plans.

Among the 10 standardized plans, over 60 percent of purchasers were enrolled
in two mid- level plans (C or F), which cover part A and part B cost-
sharing requirements but do not cover prescription drugs. There are several
reasons why these plans may be particularly popular among beneficiaries. For
example, both plans cover the part B deductible, which insurers report is a
popular benefit for purchasers. 10 They also represent two of the four plans
that insurers are required to guarantee issue during special enrollment
periods. 11 With the exception of plan B, in which 13 percent were enrolled,
less than 7 percent of beneficiaries selected any one of the remaining seven
plans. (See fig. 1.)

9 NAIC reports that Medigap enrollment has declined from about 14 million in
1994. In part, this decline may be related to increasing enrollment in
Medicare health maintenance organizations (HMOs), including the development
of Medicare+ Choice options, which HCFA reports grew from about 2.3 million
beneficiaries in 1994 to 6.3 million in 1999. HCFA reported that Medicare+
Choice enrollment declined to about 5. 7 million in 2001 as some Medicare+
Choice plans have withdrawn from the program.

10 Plans C, F, and J are the only Medigap plans that cover the Medicare Part
B deductible, which was $100 per year in 2000. 11 Only insurers that sell
plans A, B, C, and F are required to guarantee issue them during special
enrollment periods. Medigap Enrollment

Exceeds 10 Million, Mostly Concentrated in Two Plans

Page 8 GAO- 01- 941 Medigap Insurance

Figure 1: Percentage Enrolled in Standardized Medigap Plans by Plan Type,
1999

Note: Total does not equal 100 due to rounding. Source: GAO Analysis of NAIC
data.

Enrollment in the three plans with prescription drug coverage- H, I, and J-
is relatively low (a total of 8 percent of standardized plan enrollment) for
several reasons. Insurance representatives noted that the drug coverage
included in these plans is limited while the premium costs are higher than
plans without this coverage. For example, under the Medigap plan with the
most comprehensive drug coverage (plan J), a beneficiary would have to incur
$6,250 in prescription drug costs to receive the full $3,000 benefit because
of the benefit?s deductible and coinsurance requirements. Moreover, insurers
often medically underwrite these plans- that is, screen for health status-
for beneficiaries enrolling outside

4 13

26 6

2 37

2 2 2 4

0 5

10 15

20 25

30 35

40 Percent of enrollees A B CD EFGHIJ

Plan type Does not include prescription drug coverage Includes prescription
drug coverage

Page 9 GAO- 01- 941 Medigap Insurance

of their open- enrollment period. Thus, individuals in poor health who want
to purchase a plan with drug coverage may be denied or charged a higher
premium. Further, insurers may be reluctant to market Medigap plans with
prescription drug coverage because they would be required to offer them to
any applicant regardless of health status during beneficiaries? initial
6month open- enrollment period, according to NAIC officials. Finally, an
insurance representative attributed low enrollment in these plans to
beneficiaries who do not anticipate a need for a prescription drug benefit
at the time they enroll.

Relatively few beneficiaries have purchased the Medicare Select and
highdeductible plan options, which were created to increase the options
available to beneficiaries. 12 About 9 percent of beneficiaries enrolled in
standardized Medigap plans had a Medicare Select plan in 1999. With Medicare
Select, beneficiaries buy 1 of the 10 standardized plans but are limited to
choosing among hospitals and physicians in the plan?s network except in
emergencies. 13 In exchange for a limited choice of providers, premiums are
typically lower, averaging $979 in 1999, or more than $200 less than the
average Medigap premium for a standardized plan. Similarly, insurers report
that few individuals choose the typically lower priced highdeductible option
available for plans F and J. These options require beneficiaries to pay a
$1,580 deductible before either plan covers any services. 14 An NAIC
official noted that these options may have relatively low enrollment because
beneficiaries may prefer first- dollar coverage and no restrictions on
providers. In addition, an insurance representative noted that
administrative difficulties and higher costs associated with operating these
plans have discouraged some insurers from actively marketing these products,
which likely contributes to the low enrollment. Beneficiaries do not have
access to Medicare Select plans in all states- NAIC reports that 15 states
do not have insurers within the state selling Medicare Select plans.

12 Medicare Select plans were authorized by the Medigap Improvements Act of
1990 (P. L. 101- 508, section 4358, 104 Stat. 1388, 1388- 135) and were
first made available in a limited number of states in 1992. Section 4032 of
the Balanced Budget Act of 1997 (P. L. 105- 33, 111 Stat. 355, 359)
authorized the addition of high- deductible Medigap policies.

13 Medicare Select options are also available in Minnesota and Wisconsin
even though insurers are exempt from selling the standard Medigap plans in
these states. 14 In addition, beneficiaries purchasing the high- deductible
option are responsible for the deductibles for prescription drugs ($ 250 per
year for plan J) and emergency coverage during foreign travel ($ 250 per
year for plans F and J) that are required in these plans with or without the
high- deductible option.

Page 10 GAO- 01- 941 Medigap Insurance

While consumers typically have access to all 10 standardized Medigap plans
during their 6- month open- enrollment periods, the extent to which they can
choose from among multiple insurers offering these plans varies depending on
where they live. Insurance companies marketing Medigap policies must offer
plan A and frequently offer plans B, C, and F, but are less likely to offer
the other six plans, particularly those plans with prescription drug
coverage. 15 (See table 3.) Our review of state consumer guides and other
information from states and insurers shows that during the 6- month open-
enrollment period applicants typically have access to multiple Medigap
insurers, with the most options available for plans A, B, C, and F. 16 For
example, in 19 states, every Medigap insurer offered plan F to these
beneficiaries. In contrast, fewer insurers offer Medigap plans with
prescription drug benefits. Although in most states several insurers offer
these plans, state consumer guides indicate that only one insurer offers
plan J in New York and plans H, I, and J in Rhode Island. In addition, no
insurers market plan H in Delaware or plans F, G, or I in Vermont. 17
Appendix II includes a summary of the number of insurers estimated to offer
Medigap plans in each state.

15 Insurers that sell plans A, B, C, and F are required to offer them to
eligible beneficiaries during special enrollment periods. 16 Most states
publish a consumer guide for Medicare beneficiaries, which typically
describes Medigap benefits and rights, as well as provides a list of
insurers who offer Medigap plans. Some of these consumer guides note that
not all insurers reported information on plans offered in the state. To
supplement information provided in the consumer guides of certain states, we
also called state insurance regulators and individual insurers.

17 Vermont generally prohibits insurers from selling these plans because
state law generally does not permit physicians to balance bill for charges
higher than Medicare?s agreed rates. Since plans F, G, and I vary from other
standardized plan types only in that they cover Part B balanced billing,
they do not provide additional value to beneficiaries in Vermont. See
Vermont Statutes Annotated, Title 33, section 6502; Vermont Medicare
Supplement Insurance Minimum Standards, CVR section 21- 040- 13 paragraph
9B. Medigap Plans Are

Widely Available in Most States, But Access May Be Limited for Certain
Beneficiaries

Page 11 GAO- 01- 941 Medigap Insurance

Table 3: Insurers Offering Medigap Plans to 65- Year- Olds During Open
Enrollment Plan type

A BCDEFGHIJ Percent of insurers estimated to offer Medigap plans 100 67 92
52 26 89 41 19 24 18 Median number of insurers estimated to offer Medigap
plans in each state 30 20 27 16 8 28 12 5 7 5

Source: GAO review of state consumer guides. For certain states, including
those that did not have a consumer guide or whose consumer guides identified
three or fewer Medigap insurers, we obtained additional information from
HCFA, state insurance departments, and insurers.

While beneficiaries in most states have access to multiple insurers for most
Medigap plans, a few insurers represent most Medigap enrollment. In all but
one state, United HealthCare Insurance Company or a Blue Cross/ Blue Shield
plan represents the largest Medigap insurer. Nationally, about 64 percent of
Medigap policies in 1999 were sold by either United HealthCare or a Blue
Cross/ Blue Shield plan. United HealthCare offers all 10 Medigap policies to
AARP 18 members during their initial 6- month openenrollment period in
nearly all states and charges applicants in a geographic area the same
premium regardless of their health status (a rating practice known as
community rating). Outside of beneficiaries? 6- month open- enrollment
period, United HealthCare also offers applicants without end- stage renal
disease (i. e., permanent kidney failure) plans A through G without
medically underwriting- that is, screening beneficiaries for health status-
in states where it sells these policies. In an effort to minimize adverse
selection and to remain competitive, United HealthCare medically underwrites
applicants for the three plans with prescription drug coverage who are
outside their initial open- enrollment period.

Medicare beneficiaries who are not in their open- enrollment period or do
not otherwise qualify for one of the special enrollment periods, such as
when an employer eliminates supplemental coverage or a Medicare+ Choice plan
stops serving an area, are not guaranteed access under federal law to any
Medigap plans. Depending on their health, these individuals may find
coverage alternatives to be reduced or more

18 Formerly known as the American Association of Retired Persons, the
association has changed its name to AARP. While access to the AARP Medigap
plans through United HealthCare requires the beneficiary to be a member of
AARP, this membership is widely available to nearly all Medicare
beneficiaries (except disabled beneficiaries younger than AARP?s membership
age of 50) for a nominal annual fee.

Page 12 GAO- 01- 941 Medigap Insurance

expensive. Outside of the initial or special open- enrollment periods,
access to any Medigap plan could depend on the individual?s health, the
insurer?s willingness to offer coverage, and states? laws. 19 Further,
beneficiaries whose employer terminates their health coverage or whose
Medicare+ Choice plan withdraws from the program are only guaranteed access
to Medigap plans A, B, C, and F, which do not offer prescription drug
coverage.

Medicare beneficiaries can change Medigap policies, but may be subject to
insurers? screening them for health conditions prior to allowing a change to
a Medigap policy with more generous benefits outside openenrollment/
guaranteed- issue periods. If a person has a Medigap policy for at least 6
months and decides to switch plans, the new policy generally must cover all
preexisting conditions. However, if the new policy has benefits not included
in the first policy, the company may make a beneficiary wait 6 months before
covering that benefit or, depending on the health condition of the
applicant, may charge a higher premium or deny the requested change.
According to an insurer representative, virtually all Medigap insurers will
screen the health condition of applicants who want to switch to plans H, I,
or J to avoid the potential for receiving a disproportionate share of
applicants in poor health.

Beneficiaries purchasing Medigap plans may still incur significant out-
ofpocket costs for health care expenses in addition to their premiums. In
1999, the average annual Medigap premium was more than $1,300, although a
number of factors, such as where a beneficiary lives and insurer rating
practices, may contribute to significant variation in the premiums charged
by insurers. Despite their supplemental coverage, Medicare beneficiaries
with Medigap coverage paid more out- of- pocket for health care services
(excluding long- term care facility care) than any other group of
beneficiaries even though their self- reported health status was generally
similar to other beneficiaries.

19 In addition to federal protections, HCFA?s 2000 Guide to Health Insurance
for People with Medicare reports that 21 states also provide other
safeguards for beneficiaries purchasing Medigap policies. For example,
Arkansas and Florida do not allow insurers to set premiums for standardized
plans using an ?attained- age? methodology, whereby insurers increase
premium prices as individuals age. New York requires community rating of
premiums and provides all Medicare beneficiaries with open enrollment at all
times for all 10 standardized Medigap plans. Beneficiaries With

Medigap Policies May Still Incur Significant Out- of- Pocket Costs

Page 13 GAO- 01- 941 Medigap Insurance

Medigap plans can be relatively expensive, with an average annual premium of
more than $1,300 in 1999. Premiums varied widely based on the level of
coverage purchased. Among the 10 standardized plans, 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. (See table 4.) The plans with prescription drug
coverage- H, I, and J- had average premiums paid more than $450 higher than
those plans without such coverage ($ 1,602 compared to $1,144).

Table 4: Annual Premiums Per Covered Life, 1999 Medigap plan Average annual
premium per covered life

A $877 B 1,093 C 1,158 D 1,032 E 1,067 F 1,217 G 981 H 1,379 I 1,698 J 1,672
Standardized plans A through J 1, 185 Plans in states in which insurers are
exempt from plan standards a 1,368 Pre- standard (policies originally sold
before July 1992) 1,525 Average 1,311 a Massachusetts, Minnesota, and
Wisconsin have alternative standardized plans in effect and insurers in
these states are exempt from offering the federal standardized Medigap
plans. Note: Data reported by insurers to the NAIC do not include plan type
for policies representing less than 8 percent of Medigap policy covered
lives, with an average paid premium of $1, 275. These plans are excluded
from the data reported in the table.

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

In addition, Medigap policies are becoming more expensive. One recent study
reports that premiums for the three Medigap plans offering prescription drug
coverage have increased the most rapidly- by 17 to 34 Medigap Policies Can
Have

High Cost

Page 14 GAO- 01- 941 Medigap Insurance

percent from 1999 to 2000. Medigap plans without prescription drug coverage
rose by 4 to 10 percent from 1999 to 2000. 20

Additional factors, such as where Medicare beneficiaries live or specific
demographic or behavioral characteristics, also may influence variation in
Medigap premiums. For example, premiums often vary widely across states,
which may in large part reflect geographic differences in use and costs of
health care services as well as state policies that affect how insurers can
set premium rates. Additionally, premiums for the same policy can vary
significantly within the same state. The method used by insurers to
determine premium rates can dramatically impact the price a beneficiary pays
for coverage over the life of the policy. Finally, depending on the state or
insurer, other factors such as smoking status and gender may also affect the
premiums consumers are charged.

Premiums vary widely among states. For example, based on data reported by
the insurers to NAIC, average premiums per covered life for standardized
Medigap plans in California were $1,600 in 1999- more than one- third higher
than the national average of $1,185 and more than twice as high as Utah?s
average of $706. (See app. III for average premiums per covered life for
standardized plans by state.) This variation is also evident for specific
plan types. For example, average annual premiums per covered life for plan J
were $646 in New Hampshire and $2,802 in New York, and for plan C were $751
in New Jersey and $1,656 in California. In six states (i. e., Alabama,
California, Florida, Illinois, Louisiana, and Texas), the average premium
per covered life exceeded the national average for all 10 standard plan
types while in six states (i. e., Hawaii, Montana, New Hampshire, New
Jersey, Utah, and Vermont), the average premium per covered life always fell
below the national average.

Beneficiaries in the same state may also face widely varying premiums for a
given plan type offered by different insurers. For example, our review of
state consumer guides showed that in Texas, a 65- year- old consumer could
pay an annual premium from $300 to as much as $1,683 for plan A, depending
on the insurer. Similarly, in Ohio, plan F annual premiums for a 65- year-
old ranged from $996 to $1,944 and in Illinois, plan J premiums ranged from
$2,247 to $3, 502. Table 5 provides premium ranges for a 65year- old in five
states with large Medicare populations.

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

Page 15 GAO- 01- 941 Medigap Insurance

Table 5: Range of Annual Premium Prices for Selected Plans for a 65- Year-
Old in Five States with Large Medicare Populations Plan A Plan C Plan F Plan
J

Illinois $467 to $1, 202 $802 to $1, 633 $854 to $1, 861 $2,247 to $3,502
New York $864 to $1, 560 $1,408 to $2,385 $1,617 to $2,800 n/ a a Ohio $612
to $1, 284 $924 to $2, 064 $996 to $1, 944 $2,028 to $3,156 Pennsylvania
$500 to $1, 373 $761 to $1, 964 $802 to $1, 649 $2,312 to $2,976 Texas $300
to $1, 683 $664 to $2, 125 $880 to $2, 171 $2,059 to $5,658

a Only one insurer reported offering plan J in New York?s consumer guide,
with a premium of $3,552. Source: State consumer guides prepared by state
insurance departments for premiums typically offered in 2000 or 2001.

Some of the variation seen in table 5 is attributable to differences in the
premium rating methodology used by different insurers. Insurers who

?community rate? policies charge all applicants the same premium, regardless
of their age. Those who use an ?issue- age- rated? methodology base premiums
on an applicant?s age when first purchasing the policy, and although the
premium can increase for inflation, any such increase should not be
attributable to the aging of the individual. In addition to increases for
inflation, an ?attained- age- rated? policy?s premium also increases as a
beneficiary ages. Although attained- age policies are generally cheaper when
initially purchased, they may become more expensive than issue- age rated
policies at older ages. For example, a Pennsylvania insurer that sells both
attained- age and issue- age policies for plan C charges a 65- year- old
male $869 for an attained- age policy or $1,347 for an issue- age policy.
But over time, under the attained- age rated policy, this individual would
have premium increases both due to inflation and the higher cost the insurer
anticipates as the policyholder ages. However, under the issue- age- rated
policy, rate increases would only reflect inflation because the higher
anticipated costs resulting from aging have already been included in the
premium rate. By age 80, excluding increases attributable to inflation, the
attained- age policy would cost $1,580 but the issue- age policy would
remain at $1,347. Individuals who did not anticipate premium increases over
time for attained- age policies may find it increasingly difficult to afford
continued coverage and consequently may let their Medigap coverage lapse.
Or, as their premiums increase and if an individual is still in good health,
individuals may switch to plans sold by insurers that charge the same
premium regardless of age, thus creating the potential for these insurers to
have a disproportionate share of older beneficiaries. For individuals not in
their open- enrollment period or otherwise eligible for a guaranteed- issue
product, insurers may also adjust premium prices based on the health status
of individuals.

Page 16 GAO- 01- 941 Medigap Insurance

Because the consumer guides show that insurers offer the same Medigap plan
type for a wide range in premiums, some plans with higher premiums are
unlikely to have high enrollment. Nonetheless, insurers may have an
incentive to continue offering higher cost plans despite low enrollment
because states prohibit insurers that stop marketing a plan type from
reentering the market and selling that particular plan for a 5- year period.
Insurers that may not want to completely exit a market may continue to offer
a plan type with a premium higher than the market rate, thereby discouraging
enrollment but ensuring their continued presence in the market. However,
federal law requiring Medigap plans to pay at least 65 percent of premiums
earned for beneficiaries? medical expenses for individually purchased
policies limits insurers? ability to charge rates excessively higher than
the market rates. 21

Despite purchasing Medigap policies to help cover Medicare cost- sharing
requirements and other costs for health care services that the beneficiary
would have to pay directly out of pocket, Medigap purchasers still pay
higher out- of- pocket costs than do other Medicare beneficiaries. Our
analysis of the 1998 MCBS showed that out- of- pocket costs for health care
services, excluding long- term facility care costs, 22 averaged $1,392 for
those purchasing individual Medigap policies with prescription drug coverage
and $1,369 for those purchasing individual Medigap policies without
prescription drug coverage- significantly higher than the $1,056 average for
all Medicare beneficiaries. (See fig. 2.) Furthermore, Medigap purchasers
had higher total expenditures for health care services ($ 7,631, not
including the cost of the insurance) than Medicare beneficiaries without
supplemental coverage from any source ($ 4, 716) in 1998. These higher
expenditures for individuals with Medigap may be due in large part to higher
utilization rates for individuals with supplemental coverage. In addition,
Medigap?s supplemental coverage of prescription drugs is less

21 On average, nearly 80 percent of the Medigap premiums are spent for
medical expenses. In 1999, the 15 largest Medigap insurers spent between 64
and 88 percent of premiums on medical expenses.

22 We excluded long- term care facility costs because these costs represent
a major cost for some Medicare beneficiaries, but are not typically covered
by Medicare or Medigap. Since Medicaid or beneficiaries pay most of these
costs, including these costs would disproportionately increase out- of-
pocket expenditures for some categories of Medicare beneficiaries. Long-
term care facilities include licensed nursing homes, retirement homes,
domiciliary or personal care facilities, mental health or mental retardation
facilities, continuing care facilities, assisted living facilities, and
rehabilitation facilities. Gaps in Coverage Leave

Medigap Purchasers With Significant Out- of- Pocket Costs

Page 17 GAO- 01- 941 Medigap Insurance

comprehensive than typically provided through employer- sponsored
supplemental coverage and therefore may leave beneficiaries with higher out-
of- pocket costs. Differences in health status do not appear to account for
higher out- of- pocket costs and expenditures for those with Medigap. We
found that Medicare beneficiaries with Medigap coverage reported a health
status similar to those without supplemental coverage.

Figure 2: Out- of- Pocket Costs (Excluding Long- Term Facility Care Costs)
for Medicare Beneficiaries, 1998

a In addition to the subcategories of Medicare beneficiaries included in the
figure, about 6 percent of beneficiaries receive supplemental health care
services through other public plans or private HMOs. b Medicare HMOs
contract with the Medicare program to provide services to beneficiaries as
an

alternative to the traditional fee- for- service Medicare program. Source:
GAO analysis of 1998 Medicare Current Beneficiary Survey.

Supplemental coverage can offset the effects of cost- sharing requirements
intended to encourage prudent use of services and thus control costs.
Providing ?first- dollar coverage? by eliminating beneficiaries? major cost

0 200

400 600

800 1,000

1,200 1,400

1,600 All beneficiariesa

Medigap with prescription drug coverage

Medigap without

prescription drug coverage Medicare fee- for- service only

Employer sponsored

supplemental coverage

Medicare HMOb Medicaid

Type of coverage Out- of- pocket costs in dollars

689 1,056

1,392 1,369 1,255

1,103 755

Page 18 GAO- 01- 941 Medigap Insurance

requirements for health care services, including deductibles and coinsurance
for physicians and hospitals, in the absence of other utilization control
methods can result in increased utilization of discretionary services and
higher total expenditures. One study found that Medicare beneficiaries with
Medigap insurance had 28 percent more outpatient visits and inpatient
hospital days relative to beneficiaries who did not have supplemental
insurance, but were otherwise similar in terms of age, gender, income,
education, and health status. 23 Service use among beneficiaries with
employer- sponsored supplemental insurance (which often reduces, but does
not eliminate, cost sharing and is typically managed through other
utilization control methods) was approximately 17 percent higher than the
service use of beneficiaries with Medicare fee- forservice coverage only.

Medigap covers some health care expenses for policyholders but also leaves
substantial out- of- pocket costs in some areas, particularly for
prescription drugs. Our analysis of the 1998 MCBS shows that Medigap paid
about 13 percent of the $7,631 in average total health care expenditures
(including Medicare payments) for beneficiaries with Medigap. Even with
Medigap, beneficiaries still paid about 18 percent of their total costs
directly out of pocket, with prescription drugs being the largest out- of-
pocket cost. (See table 6.)

23 Sandra Christensen and Judy Shinogle, ?Effects of Supplemental Coverage
on Use of Services by Medicare Enrollees,? Health Care Financing Review,
Fall 1997. Other studies have also found higher out- of- pocket costs or
utilization by Medicare beneficiaries with Medigap. See John A. Poisal and
Lauren Murray, ?Growing Differences Between Medicare Beneficiaries With and
Without Drug Coverage,? Health Affairs, March/ April 2001 (Vol. 20, No. 2,
pp. 74- 85) and David Gross and Normandy Brangan, ?Out- of- Pocket Spending
on Health Care By Medicare Beneficiaries Age 65 and Older: 1999
Projections,? AARP Public Policy Institute, December 1999.

Page 19 GAO- 01- 941 Medigap Insurance

Table 6: Expenditures by Payer for Beneficiaries With an Individually
Purchased Medigap Policy, 1998 a

Type of service Medicare Medigap Out- ofpocket Other

payers b Total costs

Inpatient hospital care $2,447

(89%) $194

(7%) $60

(2%) $46

(2%) $2,747

Physicians, laboratories, and other medical providers

$1,396 (61%)

$422 (18%)

$353 (15%)

$129 (6%)

$2,300 Outpatient hospital care $443

(51%) $261

(30%) $109

(13%) $58

(7%) $871

Prescription drugs

Medigap policyholders with prescription drug coverage

Medigap policyholders without prescription drug coverage

- c

- c $239

27%)

- c $548

(61%) $618 (82%)

$105 (12%)

$129 (17%)

$893 $757 Other services d $589

(65%) $37

(4%) $259

(28%) $27

(3%) $912

Total $4,876

(64%) $996

(13%) $1,376

(18%) $383

(5%) $7,631

a Percentages may not add to 100 due to rounding. b Other payers may include
uncollected liabilities or health care received through the Department of
Veterans Affairs, other public health plans, or private HMOs. c Expenditures
were negligible (less than $10).

d Other services include dental, home health, hospice, and short- term
skilled nursing facility care, but exclude long- term facility care
services. Source: GAO analysis of 1998 Medicare Current Beneficiary Survey.

Among Medigap policyholders with prescription drug coverage, Medigap covered
27 percent ($ 239) of prescription drug costs, leaving the beneficiary to
incur 61 percent ($ 548) of the costs out of pocket. 24 For Medigap
policyholders without drug coverage, beneficiaries incurred 82

24 Moreover, Medigap policyholders with prescription drug coverage had on
average about $136 higher total prescription drug costs, but spent 11
percent (or $70) less out of pocket on prescription drugs, than those
without prescription drug coverage. In addition, they paid 22 percent ($
285) more in premiums for their Medigap policy than policyholders without
prescription drug coverage.

Page 20 GAO- 01- 941 Medigap Insurance

percent ($ 618) of prescription drug costs. 25 Out- of- pocket costs for
prescription drugs were higher for Medigap policyholders than any other
group of Medicare beneficiaries, including those with employer- sponsored
supplemental coverage ($ 301). Higher out- of- pockets costs for
prescription drugs may be attributable to differences in supplemental
coverage. Medigap policyholders with prescription drug coverage have high
cost- sharing requirements (a $250 deductible and 50- percent coinsurance
with a maximum annual benefit of $1,250 or $3,000 depending on the plan
selected) in contrast to most employer- sponsored supplemental plans that
provide relatively comprehensive prescription drug coverage. Employer-
sponsored supplemental plans typically require small copayments of $8 to $20
or coinsurance of 20 to 25 percent, and provide incentives for enrollees to
use selected, less costly drugs, such as generic brands or those for which
the plan has negotiated a discount. Further, few employer- sponsored health
plans have separate deductibles or maximum annual benefits for prescription
drugs.

As Congress continues to examine potential changes to the Medicare program,
it is important to consider the role that Medigap supplemental coverage has
on beneficiaries? use of services and expenditures. Medicare beneficiaries
who purchase Medigap plans have coverage for essentially all major Medicare
cost- sharing requirements, including coinsurance and deductibles. But
offering this ?first- dollar? coverage may undermine incentives for prudent
use of Medicare services, especially with regard to discretionary services,
which could ultimately increase costs for beneficiaries and the entire
Medicare program. While the lack of coverage for outpatient prescription
drugs through Medicare has led to various proposals to expand Medicare
benefits, relatively few beneficiaries purchase standardized Medigap plans
offering these benefits. Low enrollment in these plans may be due to fewer
plans being marketed with these benefits, their relatively high cost, and
the limited nature of their prescription drug benefit, which still requires
beneficiaries to pay more than half of their prescription drug costs while
receiving a maximum of $3,000 in benefits. As a result, Medigap
beneficiaries with prescription drug coverage continue to incur substantial
out- of- pocket costs for prescription drugs and other health care services.

25 The remainder represents uncollected liabilities and payments from other
sources, such as private HMOs, state prescription drug programs, or public
programs, such as coverage through the Department of Veterans Affairs.
Concluding

Observations

Page 21 GAO- 01- 941 Medigap Insurance

We did not seek agency comments on this report because it does not focus on
agency activities. However, we shared a draft of this report with experts in
Medigap insurance at CMS and NAIC for their technical review. We
incorporated their technical comments as appropriate.

We will send copies of this report to the Administrator of CMS and other
interested congressional committees and members and agency officials. We
will also make copies available to others on request.

Please call me at (202) 512- 7118 or John Dicken, Assistant Director, at
(202) 512- 7043 if you have any questions. Rashmi Agarwal, Susan Anthony,
and Carmen- Rivera Lowitt also made major contributions to this report.

Kathryn G. Allen Director, Health Care-- Medicaid

and Private Health Insurance Issues

Page 22 GAO- 01- 941 Medigap Insurance

List of Congressional Committees The Honorable Max Baucus Chairman The
Honorable Charles E. Grassley Ranking Minority Member Committee on Finance
United States Senate

The Honorable Edward M. Kennedy Chairman The Honorable Judd Gregg Ranking
Minority Member Committee on Health, Education, Labor and Pensions United
States Senate

The Honorable W. J. ?Billy? Tauzin Chairman The Honorable John D. Dingell
Ranking Minority Member Committee on Energy and Commerce House of
Representatives

The Honorable William M. Thomas Chairman The Honorable Charles B. Rangel
Ranking Minority Member Committee on Ways and Means House of Representatives

Appendix I: Methodology Page 23 GAO- 01- 941 Medigap Insurance

To assess issues related to Medigap plan enrollment and premiums incurred by
beneficiaries who purchase Medigap plans, we analyzed data collected on the
National Association of Insurance Commisioners? (NAIC) 1999 Medicare
Supplement Insurance Experience exhibit. We also analyzed the 1998 Medicare
Current Beneficiary Survey (MCBS) to examine out- of- pocket costs paid by
Medicare beneficiaries with Medigap policies. To assess the availability of
Medigap plans across states and to individuals who are not in their open-
enrollment periods we examined consumer guides for Medicare beneficiaries
published by many states and by the Health Care Financing Administration
(HCFA). (Appendix II further discusses our review of these consumer guides
and the number of insurers offering standardized Medigap plans.)
Additionally, we interviewed researchers and representatives from insurers,
HCFA, NAIC, and several state insurance regulators. We conducted our work
from March 2001 through July 2001 in accordance with generally accepted
government auditing standards.

We relied on data collected on the NAIC?s 1999 Medicare Supplement Insurance
Experience Exhibit for information on Medigap enrollment by plan type and
premiums per covered life by plan type and across states. Under federal and
state statutes, insurers selling Medigap plans annually file reports, known
as the Medicare Supplement Insurance Experience Exhibit, with the NAIC. NAIC
then distributes the exhibit information to the states. These exhibits are
used as preliminary indicators, in conjunction with other information, as to
whether insurers meet federal requirements that at least a minimum
percentage of premiums earned are spent on beneficiaries? medical expenses,
referred to as loss ratios. Additionally, insurers report information on
various aspects of Medigap plans including plan type, premiums earned, the
number of covered lives, as well as other plan characteristic information
and a contact for the insurer. We relied on NAIC data containing filings as
of December 31, 1999, for the 50 states and the District of Columbia. These
data represent policies in force as of 1999, including pre- standardized
policies, standardized policies, and policies for individuals living in
three states in which insurers are exempt from the federal standardized
policies (i. e., Massachusetts, Minnesota, and Wisconsin).

An initial analysis of the 1999 data set revealed that several insurers
failed to include or did not designate a valid plan type on their filings.
As part of our data cleaning, we reclassified some of these filings to
include or correct the plan type based on information reported in other
sections of the insurance exhibit. We also called 37 insurers that covered
more than Appendix I: Methodology

Medicare Supplement Insurance Experience Exhibit

Appendix I: Methodology Page 24 GAO- 01- 941 Medigap Insurance

5,000 lives and had not included a valid plan type on their filing. 1 During
these calls, we asked for plan type information as well as verified whether
the insurer sold a Medicare Select plan that included incentives for
beneficiaries to use a network of health care providers, and corrected the
data in the database. After the data- cleaning process, approximately 8
percent of the 10.7 million 2 covered lives still had an unknown plan type 3
and less than 1 percent had missing information about whether the plan was
sold as a Medicare Select policy.

NAIC does not formally audit the data that insurers report, but it does
conduct quality checks before making the data publicly available. We did not
test the accuracy of the data beyond the data- cleaning steps mentioned
above. During our phone calls to insurers, we found that some insurers
failed to report separate filings for the various Medigap plan types they
sell and instead reported aggregate information across multiple plan types.
Since plan type information was unavailable for these plans, information for
these insurers was excluded from our estimates of enrollment and premium
estimates for standardized plans.

We relied on HCFA?s 1998 MCBS for information on expenditures for health
care services by payer for Medicare beneficiaries. Specifically, we examined
(1) the out- of- pocket costs incurred by beneficiaries with a Medigap plan
in comparison to other beneficiaries 4 and (2) the out- ofpocket costs for
beneficiaries with a Medigap plan as a share of total

1 We were unable to call two insurers because the NAIC data did not provide
sufficient contact information for the insurer. 2 The 10.7 million covered
lives that we calculated exclude the following: (1) information not
available to us from 2 insurers representing 5, 744 covered lives and (2)
all filings that reported information on covered lives but not premiums, or
reported premiums but not covered lives. These filings lacking either
covered lives or premium information represent 10,847 lives (including a
single insurer with 10, 651 lives enrolled in plan A in Kentucky) and $61
million in premiums earned. We excluded these filings to prevent them from
distorting estimated premiums per covered life by plan type across states.

3 We also found that a plan type only applicable in states exempt from the
federal standards was being reported in states other than the three exempt
states. Some of these filings may have reflected beneficiaries moving from
exempt states to other states. The insurer may have misreported the plan
type or reported the state of residence instead of the state of issue. We
placed these policies into the unknown plan type category since the insurer
may have misreported for that filing.

4 The MCBS does not contain information on expenditures for beneficiaries by
Medigap plan type. Medicare Current

Beneficiary Survey (MCBS)

Appendix I: Methodology Page 25 GAO- 01- 941 Medigap Insurance

expenditures for health care services, including payments by Medicare and
other payers. The MCBS is a multipurpose survey of a representative sample
of the Medicare population. The 1998 MCBS collected information on a sample
of 13,024 beneficiaries, representing about a 72- percent response rate.
Because the MCBS is based on a sample, any estimates derived from the survey
are subject to sampling errors. A sampling error indicates how closely the
results from a particular sample would be reproduced if a complete count of
the population were taken with the same measurement methods. To minimize the
chances of citing differences that could be attributable to sampling errors,
we highlight only those differences that are statistically significant at
the 95- percent confidence level.

We analyzed the MCBS? cost- and- use file representing persons enrolled in
Medicare as of January 1, 1997, and 1998. The cost- and- use file contains a
combination of survey- reported data from the MCBS and Medicare claims and
other data from HCFA administrative files. The survey also collects
information on services not covered by Medicare, including prescription
drugs and long- term facility care. HCFA notes that there may be some
underreporting of services and costs by beneficiaries. 5 To compensate in
part for survey respondents who may not know how much an event of care costs
or how the event was paid for, HCFA used Medicare administrative data to
adjust or supplement survey responses for some information, including cost
information. We did not verify the accuracy of the information in the
computerized file.

Because some Medicare beneficiaries may have supplemental coverage from
several sources, we prioritized the source of insurance individuals reported
to avoid double counting. That is, if individuals reported having coverage
during 1998 from two or more kinds of supplemental coverage, we assigned
them to one type to estimate enrollment and costs without including the same
individuals in multiple categories. We initially separated beneficiaries
enrolled in a health maintenance organization (HMO) contracting with the
Medicare program (a Medicare HMO) from beneficiaries in the traditional fee-
for- service Medicare program. Then, we used the following hierarchy of
supplemental insurance categories: (1) employer- sponsored, (2) individually
purchased (that is, a Medigap policy) with prescription drug coverage, (3)
individually purchased without

5 In particular, HCFA notes that prescription drug and ancillary service
cost information for persons in long- term care facilities may not be
complete.

Appendix I: Methodology Page 26 GAO- 01- 941 Medigap Insurance

prescription drug coverage, (4) private HMO, (5) Medicaid, and (6) other
public health plans (including coverage through the Department of Veterans
Affairs and state- sponsored drug plans). Finally, those without any
supplemental coverage were categorized as having Medicare fee- forservice
only. For example, a beneficiary with Medicare HMO coverage sponsored by an
employer would be included within the Medicare HMO category. Table 7 shows
the number and percent of beneficiaries in each insurance category.

Table 7: Number and Percent of Beneficiaries by Insurance Category, 1998
Insurance category Number of beneficiaries

(in millions) Percent of beneficiaries

Medicare HMO 7.1 18 Employer- sponsored 12.8 32 Medigap with prescription
drug coverage 2.9 7 Medigap without prescription drug coverage 6.2 15
Private HMO 1.7 4 Medicaid 5.5 14 Other public 0.6 1 Fee- for- service
Medicare only 3.3 8

Total 40.0

Note: Percents may not add to 100 due to rounding. Source: GAO analysis of
1998 MCBS.

Appendix II: Insurers Offering Standardized Medigap Plans During Open-
Enrollment Periods

Page 27 GAO- 01- 941 Medigap Insurance

Table 8 shows the extent to which health insurers offer the 10 standardized
Medigap policies to 65- year- olds during the initial openenrollment period.
The table lists information for 47 states and the District of Columbia where
insurers sell these plans. Three states- Massachusetts, Minnesota, and
Wisconsin- are not included in the table because insurers in these states
are exempt from federal Medigap standardized requirements.

To determine the extent to which Medigap standardized plans are available in
each state, we primarily relied on state consumer guides and information
available from the Health Care Financing Administration?s (HCFA) web site.
For states that did not have available information in consumer guides or
Internet sites, we obtained information from their state insurance
departments and insurers. We also contacted state insurance departments and
insurers to verify state consumer guide information for states reporting
three or fewer insurers offering any plan type to ensure that we did not
understate the availability of Medigap plans in these states. Information
from consumer guides and HCFA data may not contain comprehensive data on
insurers operating in a state at a given point in time because (1) in some
states, insurers voluntarily submit data to insurance departments and do not
always report on the Medigap policies they offer and (2) data may not
reflect recent changes such as companies that stop selling a product or new
insurers that the states certify to sell Medigap plans. Also, in some
states, such as Michigan, some insurers may be licensed to sell Medigap in
the state but are not actively marketing the plan to new enrollees. We did
not independently confirm information reported by state insurance
departments and insurers. Appendix II: Insurers Offering Standardized

Medigap Plans During Open- Enrollment Periods

Appendix II: Insurers Offering Standardized Medigap Plans During Open-
Enrollment Periods

Page 28 GAO- 01- 941 Medigap Insurance

Table 8: Number of Insurers Offering Standardized Medigap Policies by Plan
Type and by State to 65- Year- Olds in Their Initial Open- Enrollment Period

Plan type A BC DEFGHIJ

Alabama 19 15 18 9 5 17 8 4 5 5 Alaska 15 8 12 9 4 15 8 3 5 5 Arizona 31 16
29 17 6 29 12 6 6 5 Arkansas 47 35 45 24 13 46 22 7 12 6 California 18 13 17
10 4 18 8 5 6 4 Colorado 41 27 35 17 10 39 19 6 8 7 Connecticut 15 10 12 11
4 15 6 5 5 4 Delaware 17 17 17 13 5 16 5 0 4 2 District of Columbia 9 68 63
94232 Florida 38 2730 1713 34197135 Georgia 28 21 26 16 5 28 9 3 6 4 Hawaii
25 14 20 12 9 21 14 8 8 9 Idaho a 15 8 10 6 6 11 7 7 9 10 Illinois 41 25 35
21 9 40 14 4 8 7 Indiana 44 2841 2510 4420887 Iowa 37 24 33 21 10 37 16 5 8
7 Kansas 45 29 40 17 8 40 15 6 10 7 Kentucky 38 32 36 24 12 37 15 9 8 9
Louisiana 21 16 20 14 6 21 13 3 3 4 Maine 13 101196 137453 Maryland 23 15 16
10 8 21 12 4 5 5 Michigan 98 30 98 25 11 38 15 9 11 8 Mississippi 10 7 10 7
4 9 7 2 2 2 Missouri 43 28 39 23 9 42 20 9 10 6 Montana 24 13 24 11 7 24 13
5 6 6 Nebraska 35 26 34 20 7 35 15 7 7 6 New Hampshire 17 10 16 9 6 17 10 4
5 4 New J ersey 7 57 53 74232 New Mexico 62 48 59 32 18 56 27 10 20 10
Nevada 26 20 24 15 7 24 11 5 7 5 New York 16 16 13 7 4 10 7 8 4 1 North
Carolina 27 20 25 15 6 25 12 2 6 4 North Dakota 36 23 35 23 8 36 16 6 7 6
Ohio 35 25 33 20 11 33 16 7 11 5 Oklahoma 42 28 39 23 11 41 18 9 11 9 Oregon
27 16 25 13 6 26 12 5 10 7 Pennsylvania 46 46 44 24 14 11 7 17 6 7 Rhode
Island 10 7 9 5 2 9 6 1 1 1 South Carolina 29 20 27 16 5 29 12 3 3 3

Appendix II: Insurers Offering Standardized Medigap Plans During Open-
Enrollment Periods

Page 29 GAO- 01- 941 Medigap Insurance

Plan type A BC DEFGHIJ

South Dakota 26 16 25 11 6 25 11 4 5 5 Tennessee 50 35 48 25 12 50 23 11 12
11 Texas 46 3242 2810 4619998 Utah 30 24 30 20 10 31 17 6 8 7 Vermont 16 11
15 10 8 0 0 7 0 4 Virginia 34 26 31 19 8 33 11 5 8 7 Washington 30 15 26 11
10 27 9 4 11 5 West Virginia 34 21 32 15 9 34 14 3 8 5 Wyoming 36 22 36 18 8
35 15 7 11 7

Median 30 20 27 16 8 28 12 5 7 5

a For Idaho, the state insurance department confirmed the number of insurers
offering plans H, I, and J. Other carriers may also offer plans A through G,
but this information was not readily available. Note: This table does not
include Massachusetts, Minnesota, and Wisconsin because insurers in these
states are exempt from the standardized plans. Our review of information
from these states? insurance departments indicates that multiple insurers
also offer Medigap policies in these states.

Source: GAO review of most recently available state consumer guides,
generally representing policies offered in 2000 or 2001. For certain states,
including those that did not have a consumer guide or whose consumer guides
identified three or fewer Medigap insurers, we obtained additional
information from HCFA, state insurance departments, and insurers.

Appendix III: Average Annual Premiums by State

Page 30 GAO- 01- 941 Medigap Insurance

Table 9 presents information from the National Association of Insurance
Commissioners? (NAIC) 1999 Medicare Supplement Insurance Experience Exhibit
on premiums per covered life for standardized Medigap plans among the states
and the District of Columbia offering the federally standardized Medigap
plans. Nationally, the average premium per covered life in 1999 for the
standardized plans was $1,185, and ranged from $706 in Utah to $1, 600 in
California.

Table 9: Average Annual Premiums Per Covered Life by State, 1999 State

Premiums per covered life for standardized plans A- J

(dollars) Percent difference from

national average for standardized plans A- J

California 1, 600 35.0 New York 1,509 27.3 Florida 1, 507 27.2 Texas 1, 404
18.5 Rhode Island 1,376 16.1 Louisiana 1, 369 15.5 Connecticut 1,351 14.0
Ohio 1,351 13.9 Nevada 1,334 12.6 District of Columbia 1,329 12.1 Arizona 1,
301 9.7 Mississippi 1,295 9.2 Michigan 1,291 8.9 Illinois 1, 289 8.7
Colorado 1,269 7.0 Georgia 1, 265 6.7 West Virginia 1,260 6.3 Missouri 1,
258 6.1 Oklahoma 1, 248 5.3 Tennessee 1,243 4.9 Washington 1,243 4.8 Kansas
1,241 4.7 Idaho 1,234 4.1 Indiana 1, 233 4.0 Virginia 1,212 2.2 North
Carolina 1, 201 1.3 Alaska 1,201 1.3 South Carolina 1,185 0.0

U. S. average 1, 185 0.0

Maine 1, 166 -1.6 Oregon 1,163 -1.9 Alabama 1, 162 -2.0

Appendix III: Average Annual Premiums by State

Appendix III: Average Annual Premiums by State

Page 31 GAO- 01- 941 Medigap Insurance

State Premiums per covered life for

standardized plans A- J (dollars)

Percent difference from national average for standardized plans A- J

Nebraska 1,161 -2.1 Kentucky 1,149 -3.1 New Mexico 1,145 -3.4 Wyoming 1, 136
-4.2 Maryland 1,129 -4.7 Iowa 1,125 -5.1 South Dakota 1,121 -5.5 Arkansas
1,104 -6.9 North Dakota 1,090 -8.1 Hawaii 1,079 -9.0 Delaware 1,060 -10.6
Vermont 960 -19.0 Pennsylvania 891 -24.8 New Hampshire 762 -35. 7 New Jersey
729 -38.5 Utah 706 -40.4

Notes: Percent difference may be different for the same premium amount in
different states due to rounding. Excludes data for Montana because of
problems with data reported by a large insurer in the state. Insurers in
Massachusetts, Minnesota, and Wisconsin are exempt from offering the
standardized plans because these states standardized their plans prior to
the establishment of the federal standardized plans. The average premium per
covered life was $1,922 in Massachusetts, $1,377 in Minnesota, and $1,264 in
Wisconsin.

Source: GAO analysis of data collected on NAIC?s 1999 Medicare Supplement
Insurance Experience Exhibit.

Related GAO Products Page 32 GAO- 01- 941 Medigap Insurance

Medicare: Cost- Sharing Policies Problematic for Beneficiaries and Program
(GAO- 01- 713T, May 9, 2001)

Retiree Health Benefits: Employer- Sponsored Benefits May Be Vulnerable to
Further Erosion (GAO- 01- 374, May 1, 2001)

Medicare+ Choice: Plan Withdrawals Indicate Difficulty of Providing Choice
While Achieving Savings (GAO/ HEHS- 00- 183, Sept. 7, 2000)

Medigap: Premiums for Standardized Plans That Cover Prescription Drugs (GAO/
HEHS- 00- 70R, Mar. 1, 2000)

Prescription Drugs: Increasing Medicare Beneficiary Access and Related
Implications (GAO/ T- HEHS/ AIMD- 00- 100, Feb. 16, 2000)

Medigap Insurance: Compliance With Federal Standards Has Increased (GAO/
HEHS- 98- 66, Mar. 6, 1998)

Medigap Insurance: Alternatives for Medicare Beneficiaries to Avoid Medical
Underwriting (GAO/ HEHS- 96- 180, Sept. 10, 1996) Related GAO Products

(290040)

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