Medigap: Current Polices Contain Coverage Gaps, Undermine Cost	 
Control Incentives (14-MAR-02, GAO-02-533T).			 
								 
Medicare provides valuable and extensive coverage for the health 
care needs of 40 million elderly and disable beneficiaries.	 
Nevertheless, significant gaps leave some beneficiaries 	 
vulnerable to sizeable financial burdens from out-of-pocket	 
costs. Most beneficiaries have additional supplemental coverage  
that helps to fill Medicare coverage gaps and pay some		 
out-of-pocket expenses. Privately purchased Medigap policies are 
an important source of this supplemental coverage because they	 
are widely available to beneficiaries. The other		 
sources--employer-sponsored policies, Medicare + Choice plans,	 
and Medicaid programs--are not available to all beneficiaries. 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. Medigap policies	 
help to fill in some of Medicare's gaps but also have		 
shortcomings. In 1999, premiums paid for Medigap policies	 
averaged $1,300, with more than 20 percent going to		 
administrative costs. Medigap plans typically cover Medicare's	 
required deductibles, coinsurance, and copayments, but do not	 
fully protect beneficiaries from potentially significant	 
out-of-pocket costs. Medigap policies offering prescription drug 
coverage can be inadequate because beneficiaries still pay most  
of the cost and the Medigap benefit is capped.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-533T					        
    ACCNO:   A02898						        
  TITLE:     Medigap: Current Polices Contain Coverage Gaps, Undermine
Cost Control Incentives 					 
     DATE:   03/14/2002 
  SUBJECT:   Cost analysis					 
	     Cost sharing (finance)				 
	     Drugs						 
	     Health care cost control				 
	     Health insurance					 
	     Health insurance cost control			 
	     Managed health care				 
	     Medicaid Program					 
	     Medicare Choice Program				 
	     Medicare Program					 
	     Medigap						 

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GAO-02-533T
     
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: 15 p. m. Thursday, March 14, 2002 MEDIGAP

Current Policies Contain Coverage Gaps, Undermine Cost Control Incentives

Statement of William J. Scanlon Director, Health Care Issues GAO- 02- 533T

Page 1 GAO- 02- 533T Madam Chairwoman and Members of the Subcommittee: I am
pleased to be here today as you consider the role of ?Medigap? policies in
supplementing the Medicare benefit. Medicare provides

valuable and extensive coverage for the health care needs of 40 million
elderly and disabled beneficiaries. 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
policies are an important source of this supplemental coverage

because they are widely available to beneficiaries. The other sources-
employer- sponsored policies, Medicare+ Choice plans, and Medicaid programs-
are not available to all beneficiaries. However, concerns exist that Medigap
policies can be expensive and may undermine the legitimate role of cost-
sharing in a health insurance plan- that is, to encourage the

cost- effective use of services. Moreover, due to statutory restrictions,
these policies provide only limited prescription drug coverage, leaving an
important gap in beneficiary protection against high health care expenses.

In this context, the president has proposed adding 2 new types of Medigap
plans to the existing 10 standard plan types. 1 The new plans would provide
protection against catastrophic expenses for Medicare- covered services and
would include different levels of prescription drug coverage. To help keep
premiums affordable, the new plans would also require beneficiary cost-
sharing. At this point, detailed specifications for these plans are not
available.

To assist the subcommittee as it considers ways to improve protections for
beneficiaries, my remarks today focus on the design of Medicare?s benefit
package and the role that Medigap plays in providing 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 socalled ?first
dollar? coverage- its coverage of Medicare?s required deductibles and
coinsurance- undermines the cost control incentives of Medicare?s cost-
sharing requirements. My comments are based on our

1 Budget of the United States Government, Fiscal Year 2003 (Washington, D.
C.: Government Printing Office, Feb. 4, 2002).

Page 2 GAO- 02- 533T prior and ongoing work on Medicare and Medigap as well
as other published research. 2 In summary, Medicare?s benefit 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.
Recent estimates suggest that about 45 percent of Medicare beneficiaries?
health care costs are not covered.

Medigap policies help to fill in some of Medicare?s gaps but also have
shortcomings. They are often expensive. In 1999, premiums paid for Medigap
policies averaged $1,300, with more than 20 percent going to administrative
costs. Medigap plans typically cover Medicare?s required deductibles,
coinsurance, and copayments but do not fully protect beneficiaries from
potentially significant out- of- pocket costs. Medigap

policies offering prescription drug coverage can be inadequate because
beneficiaries still pay most of the cost and the Medigap benefit is capped.
In addition, Medigap?s 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
deductible, coinsurance, and copayment amounts. (See table 1.)
Medicareeligible 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 $54 per month. 3 Beneficiaries are
also responsible for part B deductibles and coinsurance.

2 U. S. General Accounting Office, Medigap Insurance: Plans Are Widely
Available but Have Limited Benefits and May Have High Costs, GAO- 01- 941
(Washington, D. C.: July 31, 2001).

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

Page 3 GAO- 02- 533T Table 1: Medicare Coverage and Beneficiary Cost-
Sharing, 2002 Part A Coverage Copayments and deductibles

Inpatient hospital For each benefit period: $812 deductible for up to 60
days a $203/ day for days 61 through 90

$406/ day for days 91 through 150 b All costs beyond 150 days Skilled
nursing facility For each benefit period: Nothing for up to 20 days $101.50/
day or less for days 21 through 100 All costs beyond 100 days Home health
Nothing

20 percent of approved amount for durable medical equipment Hospice $5 or
less for outpatient drugs 5 percent of approved amount for inpatient respite
care

Blood Cost of first 3 pints

Part B Coverage c Physician and Medical $100 deductible each year 20 percent
of approved amount 50 percent of approved amount for mental health Clinical
laboratory Nothing

Home health Nothing 20 percent of approved amount for durable medical
equipment Outpatient hospital Coinsurance or copayment varies according to
service (after part B deductible)

Blood Cost of first 3 pints 20 percent of approved amount (after part B
deductible) 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 through 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: Centers for Medicare and Medicaid
Services, Medicare & You 2002, CMS- 10050 (Baltimore: Sept. 2001). Most
Medicare beneficiaries have some type of supplemental coverage to help pay
for Medicare cost- sharing requirements as well as for some services not
covered by Medicare. They obtain this coverage either through employers,
Medicare+ Choice plans, state Medicaid programs, or Medigap policies sold by
private insurers.

Page 4 GAO- 02- 533T About one- third of Medicare?s 40 million beneficiaries
have employersponsored supplemental coverage. These plans, which typically
include

cost- sharing requirements, pay for some costs not covered by Medicare, such
as shares of coinsurance and deductibles and the cost of prescription drugs.
However, many beneficiaries do not have access to employersponsored
coverage. A recent survey found that more than 70 percent of large employers
with at least 500 employees did not offer these health

benefits to Medicare- eligible retirees. 4 Small employers are even less
likely to offer retiree health benefits. Approximately 14 percent of
Medicare beneficiaries are enrolled in Medicare+ Choice plans, which include
health maintenance organizations (HMO) and other private insurers who are
paid a set amount each month to provide nearly all Medicare- covered
services. Compared to Medicare?s traditional fee- for- service program, HMOs
typically offer lower costsharing requirements and additional benefits,
including prescription drugs, in exchange for a restricted choice of
providers. However, Medicare+ Choice HMOs are not available in all parts of
the country. In 2002, about 40 percent of all beneficiaries live in counties
where there are

no Medicare+ Choice HMOs. In 1997, about 17 percent of Medicare
beneficiaries received assistance from Medicaid, the federal- state health
financing program for low- income aged and disabled individuals. Depending
upon state- defined eligibility policies, some of these low- income
individuals are entitled to full Medicaid benefits (so called ?dual
eligibles?), which include coverage for certain services not available
through Medicare, such as most outpatient prescription drugs. Under federal
law, all Medicare beneficiaries with incomes below the federal poverty level
are entitled to have their Medicare premiums and cost- sharing paid for by
Medicaid. Similarly, Medicare

beneficiaries with incomes slightly above the poverty level are eligible to
have all or part of their Medicare premiums paid for by Medicaid. 5 4
William M. Mercer, Incorporated, Mercer/ Foster Higgins National Survey of
Employersponsored

Health Plans 2000 (New York, N. Y.: 2001). 5 Many low- income Medicare
beneficiaries who are eligible for Medicaid and other federalstate programs
that 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 U. S. General
Accounting Office, Low- Income Medicare Beneficiaries: Further Outreach and
Administrative Simplification Could Increase Enrollment, GAO/ HEHS- 99- 61
(Washington, D. C.: Apr. 9, 1999).

Page 5 GAO- 02- 533T 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

than 10 million individuals- about one- fourth of all beneficiaries- were
covered by Medigap policies. 6 The Omnibus Budget Reconciliation Act of 1990
(OBRA) required that Medigap policies be standardized and allowed

a maximum of 10 different benefit packages offering varying levels of
supplemental coverage. 7 Policies sold in most states since July 31, 1992,
are modeled on 1 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. The Balanced Budget
Act of 1997 permitted insurers to offer high- deductible versions of the
existing F and J plans. 8 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 X X X X X X X X X 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 X X Foreign
travel emergency X X X X X X X X Home health care X X X X Outpatient
prescription drugs X c X c X d Preventive medical care X X

Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin,
where alternative standards for supplemental health policies exist. a Plans
F and J also have a high- deductible option ($ 1,620 in 2002) 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). 6 The National Association of
Insurance Commissioners reports that Medigap enrollment

has declined from about 14 million in 1994. 7 Pub. L. 101- 508, sect. 4351, 104
Stat. 1388- 30, 1388- 127 (1990). 8 Pub. L. No. 105- 33, sect. 4032, 111 Stat.
251, 359 (1997).

Page 6 GAO- 02- 533T 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 $250 annual deductibles. d Plan J pays 50 percent of drug charges up to
$3,000 per year and has a $250 annual deductible. Source: Health care
Financing Administration, 2001 Guide to Health Insurance for People with
Medicare, HCFA- 02110 (Baltimore: 2001). Currently, Medicare beneficiaries
aged 65 and older are guaranteed access to Medigap policies within 6 months
of enrolling in part B, regardless of their health status. 9 Subsequent laws
have added guarantees for certain other beneficiaries. Beneficiaries who
enroll in a Medicare+ Choice plan

when first becoming eligible for Medicare at age 65 and then leave the plan
within 1 year are also guaranteed access to any Medigap policy. Those who
terminate their Medigap policies to join a Medicare+ Choice plan can return
to their previous policies or, if the original policies are not available,
be guaranteed access to plans A, B, C, and F, none of which covers
prescription drugs. 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 four standardized

Medigap policies. 10 Beneficiaries who do not meet any of these conditions
may be denied coverage or be charged higher premiums.

9 42 USC sect. 1395ss( s)( 2)( A). 10 These protections, which applied to
beneficiaries aged 65 and older, were added by the Balanced Budget Act, Pub.
L. 105- 33, sect. 403,111 Stat. 251, 330. In addition to these federal
protections, 21 states provided for additional Medigap protections in 2000.

Page 7 GAO- 02- 533T In Medicare, the lack of dollar limits on
beneficiaries? cost- sharing obligations- deductibles, coinsurance, and
copayments- puts

beneficiaries with extensive health care needs at risk for very large
expenses for Medicare- covered services. Similarly, Medicare?s lack of
coverage for certain services, especially most outpatient prescription
drugs, can expose beneficiaries to substantial financial risk. The
increasingly important role of pharmaceuticals in medical care and the
continuing rapid increases in drug prices accentuate this risk.

Unlike most employer- sponsored plans for active workers, Medicare does not
limit beneficiaries? cost- sharing liabilities, which can represent a
significant share of their personal resources. In 2000, premiums,
deductibles, coinsurance, and copayments that beneficiaries were required to
pay for services that Medicare covers equaled an estimated 23 percent of
total Medicare expenditures. For Medicare- covered services alone,
beneficiaries who obtained services in 1998 had an average liability of
$1,458, consisting of $932 in Medicare cost- sharing in addition to the $526

in annual part B premiums for that year. However, the burden of Medicare
cost- sharing can be much higher for beneficiaries with extensive health
care needs. In 1998, the most current year of available data on the
distribution of these costs, about 3.4 million beneficiaries (11.5 percent
of beneficiaries who obtained services) were

liable for at least $2,000 for Medicare cost- sharing and part B premiums.
Approximately 736,000 of these beneficiaries (2.5 percent) were liable for
at least $5,000, and about 167,000 beneficiaries (0.6 percent) were liable
for at least $10,000. In contrast, private employer- sponsored health plans
for active workers in 2000 typically limited maximum annual out- of- pocket
costs for covered services to less than $2, 000 per year for single
coverage. 11 Furthermore, Medicare provides no coverage for certain health
care

services, such as most outpatient prescription drugs. These limitations put
beneficiaries at additional risk of incurring potentially catastrophic
expenses. 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. In 2000, the average beneficiary

is estimated to have incurred about $3,100 in total out- of- pocket expenses
11 The Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits: 2000 Annual Survey (Menlo Park, Calif. and
Chicago: 2000). Medicare?s CostSharing Requirements

and Gaps in Prescription Drug Coverage Put Beneficiaries at Considerable
Financial Risk

Page 8 GAO- 02- 533T for health care- an amount equal to about 22 percent of
beneficiary income. 12 The combination of Medicare cost- sharing and costs
of uncovered services represents a much greater financial burden for some
beneficiaries. For

example, in 2000, 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. Low- income single women over

age 85 who are 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. 13 These percentages are expected to increase over time as
Medicare premiums and costs for prescription drugs and other health care

goods and services rise faster than incomes. The shortcomings in Medicare?s
benefit package underscore the importance of supplemental health insurance
for program beneficiaries. More than one- fourth of beneficiaries have
Medigap policies to fill Medicare coverage gaps, but these policies can be
expensive and do not fully protect beneficiaries from catastrophic out- of-
pocket expenses. Medigap policies that provide drug coverage offer only
limited protection from prescription drug expenses because of high cost-
sharing and low coverage caps. The extent to which the president?s proposed
plan types-

which include catastrophic coverage protection, a prescription drug benefit,
and beneficiary cost- sharing requirements- would address these shortcomings
will depend on the details of the new policies.

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 selecting from among a group of 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

12 Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in Medicare and
Out- OfPocket Spending: Impact on Vulnerable Beneficiaries (Washington, D.
C.: Urban Institute, 2000).

13 Maxwell, Moon, and Segal. Current Medigap

Policies Address Some Medicare Shortcomings But Are Expensive

Medigap Fills Some Needs

Page 9 GAO- 02- 533T Medicaid or employer- sponsored retiree benefits. In
fact, most Medicare beneficiaries who do not otherwise have employer-
sponsored

supplemental coverage, Medicaid, or Medicare+ Choice plans purchase Medigap
policies, demonstrating the value of this coverage to the Medicare
population.

Medigap policies can be expensive. In 1999, the average annual Medigap
premium was more than $1,300. Premiums varied based on the level of coverage
purchased. Plan A, which provides the fewest benefits, was the

least expensive, with average premiums of nearly $900 per year. (See table
3.) The most popular plans- C and F- had average premiums of about $1,200.
The most comprehensive plans that provide some drug coverage- I and J- were
the most expensive, with average annual premiums around $1,700.

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

Medigap plan Covered lives (percentage) Average annual premium

A 2.7 $877 B 7.8 1,093 C 15.7 1,158 D 3.7 1,032 E 1.5 1,067 F 22.9 1,217 G
1.5 981 H 1.4 1,379 I 1.5 1,698 J 2.6 1,672 Prestandard (policies sold
before July 1992) 34.9 1,525 Plans in states in which insurers are exempt
from offering standardized plan a 4.0 1,368

Total b 100.0 c 1,311

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 the National Association of Insurance
Commissioners (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 not included in the table. c Percentages do not
add to 100 due to rounding. Medigap Policies Can Have High Premiums

Page 10 GAO- 02- 533T Source: GAO analysis of data collected by the NAIC
from the 1999 Medicare Supplement Insurance Experience Exhibit. Medigap
premiums also varied across geographic areas and insurers. For example, in
1999, average annual premiums in California were 35 percent

higher than the national average for policies conforming to the standard
plans. While premiums may reflect geographic differences in 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. 14 For example, in Illinois, plan A premiums for a 65-
yearold ranged from $467 to $1,202, depending on the insurer. Similarly, in
New York, plan F premiums for a 65- year- old ranged from $1,617 to $2,800,

and in Texas, plan J premiums ranged from $2,059 to $5,658. Medigap policies
are becoming more expensive. One recent study reported that, from 1999 to
2000, premiums for the three Medigap plan types offering prescription drug
coverage (H, I, and J) increased the most rapidly- by 17 to 34 percent.
Medigap plans without prescription drug

coverage rose by 4 to 10 percent. 15 A major reason premiums are high is
that a significant share of premium dollars is used for administrative costs
rather than benefits. On average, 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. 16
The share of premiums spent on benefits varies significantly among carriers.
The 15 largest sellers of Medigap policies spent from 64 to 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. In comparison, 98 percent of Medicare fee- for- service funds are
used for benefits.

14 Premium quotes are from 2000 and 2001 state consumers guides on Medigap
policies. 15 Weiss Ratings Inc, ?Prescription Drug Costs Boost Medigap
Premiums Dramatically,? (Palm Beach Gardens, Fla.: Mar. 26, 2001). http://
www. weissratings. com/ NewsReleases/ Ins_ Medigap/ 20010326Medigap. htm
(downloaded May 3, 2001). 16 Federal law requires Medigap plans to spend at
least 65 percent of premiums over time on benefits for policies sold to
individuals and 75 percent for policies sold to groups. See 42 USC sect. 1395ss(
r)( 1)( A).

Page 11 GAO- 02- 533T Medigap policies can leave beneficiaries exposed to
significant out- ofpocket costs for prescription drugs. Medigap policies
with a drug benefit are expensive, yet the drug benefit offered can be of
limited value to many

beneficiaries. The Medigap annual prescription drug benefit has a $250
deductible, requires 50 percent coinsurance, and limits coverage to $1,250
or $3,000, depending on the plan purchased. These dollar amounts have

not been increased since they were established in 1992. As a result of the
deductible and coinsurance provisions, a beneficiary with Medigap plan type
J would have to incur $6,250 in prescription drug costs to get the full
$3,000 benefit. Moreover, Medigap policies offering drug coverage typically
cost much more than policies without drug coverage. For example, plan type
J- the most popular plan with prescription drug coverage- costs, on average,
$450 a year more than the most popular plan

without drug coverage (plan F). Having a Medigap policy with drug coverage
versus one without has little effect on beneficiaries? out- of- pocket
spending on drugs. In 1998, Medigap policyholders with prescription coverage
spent, on average, $548 out of pocket on prescription drugs. Medigap paid
only 27 percent of policy

holders drug costs. Medigap policyholders without prescription drug coverage
spent, on average, $618 out of pocket on drugs- about 13 percent more than
beneficiaries with drug coverage.

The high cost and limited benefit of existing Medigap plans may explain why
more than 90 percent of beneficiaries with Medigap coverage purchased
standard plans that do not include drug benefits. 17 Another reason is that,
in most states, 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. For those beneficiaries, insurers may either deny coverage or
charge higher premiums. 17 While less is known about the benefits offered by
prestandardized plans that were sold prior to 1992- representing about one-
third 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. Medigap Provides Limited

Coverage for Prescription Drugs

Page 12 GAO- 02- 533T The most popular Medigap plans are fundamentally
different from other health insurance policies, which typically include
cost- sharing provisions in the form of deductibles, coinsurance, and
copayments. Cost- sharing requirements are intended to make beneficiaries
aware of the costs

associated with the use of services and encourage them to use these services
prudently. In contrast, Medigap?s first- dollar coverage- the elimination of
any deductibles or coinsurance associated with the use of

covered services- undermines this objective. All standard Medigap plans
cover hospital and physician coinsurance, with some of them also covering
the full hospital deductible, skilled nursing facility coinsurance, or the
part B deductible. Nearly all beneficiaries purchasing a standard Medigap
plan choose one that covers the full hospital deductible, and most select
plans that cover the full skilled nursing home coinsurance and part B
deductible. The president?s proposed plan types would be different from the
existing popular Medigap plans in that they would not include firstdollar

coverage. Medigap?s first- dollar coverage reduces financial barriers to
health care, but it also diminishes beneficiaries? sensitivity to costs and
likely increases beneficiaries? use of services, adding to total Medicare
spending. Having

first- dollar coverage may also add to Medigap premiums. The extra spending
induced by first- dollar coverage causes insurers? outlays to rise and
likely increases Medigap premiums. The premiums may increase not only to
cover the additional expected health care expenses but also insurers?
administrative costs.

Our analysis and other research indicate that Medicare spends more on
beneficiaries with supplemental insurance than on beneficiaries who have
Medicare coverage only. For example, our analysis of the 1998 Medicare
Current Beneficiary Survey data found that annual Medicare expenditures for
beneficiaries with Medigap insurance were about $2,000 higher than for
beneficiaries with Medicare only. 18 Medicare annual spending for
beneficiaries with employer- sponsored plans was about $1,700 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) compared

18 GAO- 01- 941. First- Dollar Coverage

Increases Medigap Premiums and Weakens Medicare?s Cost Control Features

Page 13 GAO- 02- 533T to beneficiaries who did not have supplemental
insurance but were otherwise similar in terms of age, sex, income,
education, and health

status. 19 Service use among beneficiaries with employer- sponsored
supplemental insurance 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.

Under the president?s Medigap proposal, the two new plan types would require
beneficiary cost- sharing and, in this way, would be similar to the features
of employer- sponsored insurance plans. In eliminating first- dollar
coverage, the proposal seeks to keep the new policies more affordable for
beneficiaries and create incentives to restrain overall program spending.

Interest remains high in improving supplemental coverage available to
Medicare beneficiaries while fostering the prudent use of health care
services. The president?s proposal to create two new plan types that require
cost- sharing and provide coverage for prescription drugs seeks to

balance access and affordability with incentives for beneficiaries to be
cost- conscious. The exclusion of first- dollar coverage from the new
Medigap policies would make them more like employer- sponsored supplemental
insurance policies that include incentives to minimize unnecessary use.
These reforms could serve the interests both of beneficiaries and the
program, making drug coverage more affordable

while helping to moderate program expenditures. Details of the president?s
proposal will reveal the extent to which the new plan types offer better
value for beneficiaries? premium dollars than the existing Medigap plan
types. In our view, an effective health insurance plan would

discourage the inappropriate use of services and protect beneficiaries from
catastrophic health expenses, including prescription drug costs. We

19 Sandra Christensen, Ph. D. and Judy Shinogle, M. S., ?Effects of
Supplemental Coverage on Use of Services by Medicare Enrollees,? Health Care
Financing Review 19 (1997). Concluding Observations

Page 14 GAO- 02- 533T look forward to working with this subcommittee as it
considers various options to reform Medigap and improve health care coverage
for

individuals. 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 James
Cosgrove at (202) 512- 7118. Other contributors to this product were

Rashmi Agarwal, John Dicken, Hannah Fein, Jennifer Podulka, and Lisa Rogers.

(290178) Contacts and Acknowledgments
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