Medigap Insurance: Alternatives for Medicare Beneficiaries to Avoid
Medical Underwriting (Letter Report, 09/10/96, GAO/HEHS-96-180).

Pursuant to a legislative requirement, GAO reviewed Medigap policies,
focusing on: (1) the extent to which Medicare beneficiaries are subject
to medical underwriting when they change Medigap policies; and (2)
options for modifying federal Medigap requirements to ensure that
medical underwriting is not a problem in such cases.

GAO found that: (1) 11 of the 25 largest Medigap insurers use medical
underwriting to determine whom they will insure, 5 sell some policies
without medical underwriting, and 9 sell all of their policies without
medical underwriting; (2) the American Association of Retired Persons'
(AARP) insurer accepts all Medicare beneficiaries who are AARP members
without medical underwriting for certain Medigap policies; (3) some
Medicare beneficiaries can obtain supplemental insurance from local Blue
Cross/Blue Shield plans depending on where they reside; (4) federal law
requires Medicare SELECT program insurers to offer participants who want
to drop their SELECT policy the option of purchasing a traditional
Medigap policy without medical underwriting; (5) some beneficiaries have
the option of enrolling in health maintenance organizations (HMO) with
Medicare risk contracts; (6) about 99 percent of Medicare beneficiaries
do not change their private health insurance, but about 25 percent
supplement their existing coverage; (7) few beneficiaries have made
formal complaints to their state insurance departments about Medigap
underwriting practices; and (8) insurers may discontinue the few
policies that do not require medical underwriting in the future, since
federal law does not require these insurers to offer such policies.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-96-180
     TITLE:  Medigap Insurance: Alternatives for Medicare Beneficiaries 
             to Avoid Medical Underwriting
      DATE:  09/10/96
   SUBJECT:  Health insurance
             Health care programs
             Elderly persons
             Eligibility determinations
             Health maintenance organizations
             Insurance companies
             Health care cost control
             Managed health care
             Employee medical benefits
             Actuarial tables
IDENTIFIER:  Medicare Program
             Medigap
             Medicare Current Beneficiary Survey
             Medicare Select Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

September 1996

MEDIGAP INSURANCE - ALTERNATIVES
FOR MEDICARE BENEFICIARIES TO
AVOID MEDICAL UNDERWRITING

GAO/HEHS-96-180

Medigap Insurance

(106429)


Abbreviations
=============================================================== ABBREV

  AARP - American Association of Retired Persons
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HMO - health maintenance organization
  NAIC - National Association of Insurance Commissioners
  OBRA - Omnibus Budget Reconciliation Act

Letter
=============================================================== LETTER


B-271938

September 10, 1996

The Honorable William V.  Roth, Jr.
Chairman
The Honorable Daniel P.  Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Bill Archer
Chairman
The Honorable Sam M.  Gibbons
Ranking Minority Member
Committee on Ways and Means
House of Representatives

The Honorable Thomas J.  Bliley, Jr.
Chairman
The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

Although the Medicare program covers a substantial portion of its
beneficiaries' health costs, it does require deductibles and
coinsurance that can amount to thousands of dollars a year.  As a
result, over 75 percent of elderly beneficiaries--about 22 million
people--obtain private insurance to help cover out-of-pocket costs. 
The most common type of Medicare supplemental coverage is
individually purchased Medigap policies.  Some Medigap policies also
cover some items not covered by Medicare, such as prescription drugs
and services received while out of the country.  On occasion,
beneficiaries decide to change Medigap policies and at that time may
become subject to medical underwriting; that is, the insurer can take
into account a person's health status or health history in deciding
whether to sell a policy. 

A provision in Public Law 104-18 (July 7, 1995) required us to study
the extent to which individuals who have been continuously covered
under Medigap are subject to having their health status and history
affect whether they can obtain a new policy if they want to change
policies.  The statute also called for us to identify options for
modifying the Social Security Act's federal Medigap requirements to
ensure that medical underwriting is not a problem in such cases. 

To do this work, we reviewed the underwriting policies of the 25
largest Medigap insurers who, in total, write about 65 percent of the
Medigap business.  We also analyzed data from the Department of
Health and Human Services' (HHS) Health Care Financing
Administration's (HCFA) surveys of Medicare beneficiaries to estimate
how many changed health plans over the 1991-94 period.  In addition,
we reviewed data maintained by the National Association of Insurance
Commissioners (NAIC) on complaints about Medigap policies and
discussed complaints and issues about medical underwriting with
selected state insurance departments, consumer groups, and NAIC.  We
performed our work from October 1995 through July 1996 in accordance
with generally accepted government auditing standards.  (See app.  I
for details on our methodology.)


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

During the 6 months after a person turns age 65 and enrolls in
Medicare part B, federal law guarantees the opportunity to purchase a
Medigap policy.  After that, Medigap insurers are permitted to refuse
to sell policies because of an applicant's health history or status,
and insurers do exercise this option.  Of the 25 largest Medigap
insurers, 11 use medical underwriting to decide to whom to sell their
policies, 5 sell some policies without checking health histories, and
the remaining 9 offer their policies without checking applicants'
health history or status. 

Currently, all Medicare beneficiaries, regardless of their health
history or status, have at least one alternative available to them to
supplement their Medicare coverage after the 6-month guarantee
period.  Seven of the 10 policies offered through the American
Association of Retired Persons (AARP) and issued by the Prudential
Insurance Company of America are available without medical
underwriting to AARP members, and AARP membership is open to all
elderly Medicare beneficiaries.  Depending on where beneficiaries
reside, the local Blue Cross/Blue Shield plan may also offer Medigap
policies without medical underwriting.  While these alternatives are
available today to people wishing to change Medigap policies without
medical underwriting, there is no federal requirement that such
alternatives be available in the future. 

In lieu of purchasing a Medigap policy, another alternative available
to some beneficiaries is enrollment in a health maintenance
organization (HMO) that has a Medicare risk contract.\1

HMOs often offer reduced, or no, cost-sharing for Medicare services
and cover some additional services.  Some HMOs charge a premium for
the expanded coverage, while others do not.  Medicare requires HMOs
to have annual open enrollment periods and to accept beneficiaries on
a first-come, first-served basis.  However, when beneficiaries enroll
in an HMO, they normally have to use the physicians, hospitals, and
other providers on the HMO's panel.  If a beneficiary chooses to
leave an HMO and switch to fee-for-service care, the same
alternatives to medical underwriting would be available as mentioned
above for Medigap policyholders who choose to switch policies. 

As a rule, Medicare beneficiaries do not switch private health plans,
such as Medigap policies and employer-sponsored plans.  HCFA's
ongoing Medicare surveys show that 99 percent of beneficiaries who
had private plans in 1991 and were still alive in 1994 had the same
plan in 1994.  About 1 percent of beneficiaries either switched
plans, dropped plans, or made other changes during the 1991-94
period.  Nevertheless, beneficiaries are affected by medical
underwriting.  For example, in 1995, one insurer received 83,000
applications after the 6-month open enrollment window had closed. 
These applications were subject to medical underwriting, and almost
1,100 beneficiaries were rejected for medical reasons. 

Medicare beneficiaries have made few formal complaints to their state
insurance departments about Medigap underwriting practices.  The
complaint data system maintained by NAIC included only 316 complaints
for 1995 related to underwriting.  It is not surprising that formal
complaints are few because medical underwriting is permissible, and
policyholders are usually informed of this at the informal telephone
contact stage of the complaint process. 

Because current alternatives for beneficiaries who want to change
Medigap policies without being subject to medical underwriting are
not required by federal law to be available, they might be
discontinued in the future.  If the Congress is concerned by this,
the federal Medigap provisions could be amended to require that
beneficiaries continuously enrolled in Medigap be given the
opportunity to switch policies without being subject to medical
underwriting. 


--------------------
\1 Risk-contract HMOs agree with HCFA to provide all Medicare-
covered services in exchange for a fixed monthly payment for each
beneficiary who enrolls in the HMO.  The HMO retains as profit any
Medicare payment in excess of its costs of treating beneficiaries
while it suffers a loss if costs exceed payments. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Medicare is a federal health insurance program that helps its
beneficiaries pay for health services.  The program does not cover
every type of health service, and beneficiaries are responsible for
deductibles and coinsurance.  Medigap insurance, which is designed to
supplement Medicare's benefits, is regulated by federal and state
law.  Insurers must meet federal and state requirements to market
policies as Medigap insurance. 

Section 1882 of the Social Security Act established federal
requirements for the marketing, benefits, and performance of Medigap
policies.  Starting in 1992, Medigap policies were required to
conform to 1 of 10 standardized sets of benefits, referred to as
plans A through J.  For example, standard policy A covers Medicare
coinsurance; policy C covers Medicare coinsurance and inpatient
deductibles; and policy J covers these cost-sharing components as
well as several services not covered by Medicare, such as
prescription drugs.  These are the only Medigap plans that can be
sold in most states.\2 Companies are not required to offer all 10
plans, and many do not.  (See app.  II for a description of the items
covered under each of the 10 plans.)

The Omnibus Budget Reconciliation Act (OBRA) of 1990\3 authorized the
Medicare SELECT program, a 3-year demonstration project in 15 states. 
Medicare SELECT policies combine certain managed care concepts with
the 10 standard Medigap policies.  SELECT policies require the
insured to use the doctors and hospitals on the plan's provider panel
or pay higher cost-sharing amounts.  The SELECT program was extended
to June 30, 1998, and expanded to all states by Public Law 104-18. 

Federal law guarantees that, for a period of 6 months from the date a
Medicare beneficiary both enrolls in Medicare part B and is age 65 or
older, the beneficiary has a right to buy the Medigap policy of his
or her choice regardless of any health problems the beneficiary may
have.  The Medigap open enrollment period at age 65 is also available
to all disabled and kidney failure beneficiaries who have previously
enrolled in Medicare part B.  Thus, Medigap policies are required to
be "guaranteed issue" during the 6-month period.  Once the 6-month
Medigap open enrollment period starts, it cannot be extended or
repeated.  Beneficiaries are informed of the 6-month open enrollment
period when they enroll in Medicare. 

Insurers who sell Medigap policies outside the open enrollment period
are allowed to use medical underwriting.  Prospective policyholders
usually must complete an application form that includes several
questions about their health and habits.  A "yes" response to any
question can trigger a rejection of the application. 

Enrollment in an HMO with a Medicare risk contract can be viewed as a
substitute for a Medigap policy.  Like Medigap policies, HMOs often
fill some of the gaps in Medicare coverage.  In return for a fixed
monthly payment from Medicare for each beneficiary enrolled, the HMO
must provide or arrange for all services covered by Medicare.  HMO
enrollees generally must use the HMO's doctors and hospitals for all
their care, except in emergencies.  Services obtained outside the HMO
network generally will not be paid for by either the HMO or Medicare. 
The HMO cannot reject an application because of bad health, except
for permanent kidney failure.  Some HMOs charge the beneficiary a
premium for the benefits not otherwise covered by Medicare, while
other HMOs do not. 

Employer-sponsored retiree health insurance also acts as a Medigap
policy for some Medicare beneficiaries.  Although these plans
generally provide benefits similar to those of Medigap policies, they
are not regulated as Medigap insurance.  Nor is limited- benefit
insurance, such as hospital indemnity plans, long-term care policies,
and cancer insurance, regulated as Medigap insurance. 


--------------------
\2 Minnesota, Massachusetts, and Wisconsin have waivers to the
10-plan requirement and operate their own programs that limit the
number of policy types that can be sold.  In each case, the state
allows fewer than the federal limit. 

\3 P.L.  101-508, Nov.  5, 1990. 


   APPLICANTS FOR MEDIGAP
   INSURANCE ARE OFTEN SUBJECT TO
   MEDICAL UNDERWRITING, BUT
   ALTERNATIVES ARE AVAILABLE
------------------------------------------------------------ Letter :3

Medigap insurers are permitted to use medical underwriting after an
individual's 6-month open enrollment period has closed, and many of
them do.  However, Medicare beneficiaries who wish to change Medigap
policies have at least one alternative that does not involve medical
underwriting and, depending on where they live, may have several
alternatives.  Although currently there are alternatives for Medigap
policyholders to switch policies, federal law does not guarantee that
those alternatives will continue in the future. 

Under the Medicare SELECT program, NAIC's model regulation guarantees
policyholders the ability to switch to at least the lowest-benefit
Medigap plan if they decide to go back to a regular Medigap policy
and if the SELECT insurer offers Medigap policies.  Also, federal law
requires risk-contract HMOs to offer an annual open enrollment during
which all must be accepted in the order they apply up to the HMO's
beneficiary enrollment limit. 


      ALTERNATIVES AVAILABLE TO
      MEDIGAP POLICYHOLDERS
---------------------------------------------------------- Letter :3.1

Of the largest 25 Medigap insurers, 11 companies used medical
underwriting for applicants who wished to purchase a Medigap policy
after their 6-month open enrollment period expired.  Five companies
used medical underwriting for applicants for some policies,
especially policies with prescription drug coverage, while offering
other policies as guaranteed issue.  The remaining nine companies
offered all their policies as guaranteed issue.  (See app.  III for a
list and selected characteristics of the 25 companies we reviewed.)

All 16 companies that used medical underwriting gathered information
on applicants' medical history and health status on the Medigap
application form.  For example, applicants could be asked if they had
had cancer.  For 11 of the 16 companies, a "yes" response to any
health question would lead to rejection of the Medigap application. 
The other five companies told us they would consider additional
factors.  For example, if an applicant indicated having had an
illness during the last 5 years, one company would compare the
illness with a list of deniable medical conditions before a
determination was made. 

Twelve of the 14 insurers that offered at least one policy as
guaranteed issue were Blue Cross/Blue Shield companies, which had
market areas generally limited to one state.  Prudential, which sold
its Medigap insurance through an arrangement with the AARP, offered 7
of the 10 Medigap standard plans as guaranteed-issue policies to AARP
members, and membership was open to all elderly.  Eleven of the 14
companies that sold at least one guaranteed-issue policy offered only
the less comprehensive Medigap plans--those without prescription drug
coverage--on a guaranteed-issue basis.  The other three companies
offered plans with prescription drug coverage.  The various medical
underwriting practices of the 25 companies are summarized in table 1. 



                          Table 1
          
            Medical Underwriting Practices of 25
            Largest Medigap Insurance Companies

                           Medical     Medical
                        underwriti  underwriti
                                ng          ng         All
                        applicable  applicable  guaranteed
                            to all     to some      -issue
Insurer          Total    policies    policies    policies
------------  --------  ----------  ----------  ----------
Blue Cross/         16         4\a           4           8
 Blue Shield
Commercial           9           7           1         1\b
==========================================================
Total               25          11           5           9
----------------------------------------------------------
\a One company offered some guaranteed-issue policies but at a higher
premium rate. 

\b This company only sells Medigap policies in one state. 

Six of the 16 companies that used medical underwriting were able to
provide us with information on the number of applications they
rejected.  In 1995, the rejection rates for these companies ranged
from 1 percent to 54 percent.  The two highest rejection rates were
from companies that required medical underwriting on policies with
drug coverage but offered all other policies as guaranteed issue. 
One of the lower rejection rates, 2 percent, was reported by a
company that requires underwriting for all policies.  In 1995, this
company received 83,000 applications from individuals whose 6-month
open window had closed and rejected 1,096 applications for medical
reasons.  The reason most frequently cited by companies for rejecting
an application was medical problems. 

The majority of Medicare beneficiaries have policies issued before
Medigap policies were standardized into 10 policy forms in 1992. 
These prestandardized policies can no longer be sold to new
customers.  Twelve of the 16 companies that submitted some or all of
their applications to medical underwriting allowed their
policyholders to switch from a prestandardized Medigap policy to a
standardized Medigap policy without medical underwriting, if the
benefits were comparable with or less comprehensive than those of the
prestandardized policy.  Two other companies allowed their
prestandardized policyholders to switch into any standardized policy
without medical underwriting.  All 16 companies allowed a
policyholder to switch from one standardized policy to a lesser-
benefit standardized policy without medical underwriting.  A switch
to a policy that provided more benefits, in most cases, was subject
to medical underwriting. 


      MEDICARE SELECT
      POLICYHOLDERS HAVE CHOICES
---------------------------------------------------------- Letter :3.2

Federal law requires insurers to offer Medicare beneficiaries who
want to leave the Medicare SELECT program the option of purchasing a
traditional Medigap policy.  States have interpreted this requirement
differently.  However, the NAIC model regulations require SELECT
insurers to offer a standard Medigap policy, if the insurer sells
them, to those individuals who wish to drop their SELECT policy.  The
policy offered must have comparable or lesser benefits and must be
available regardless of the individual's health.  A recent report\4
on the Medicare SELECT program found that most of the original 15
demonstration states determined that offering the basic Medigap plan
"A" meets this requirement. 


--------------------
\4 Research Triangle Institute, Evaluation of Medicare SELECT
Amendments:  Case Study Report (Baltimore, Md.:  HCFA, HHS, Feb.  10,
1994). 


      RISK-CONTRACT HMOS OFFER
      ANOTHER ALTERNATIVE
---------------------------------------------------------- Letter :3.3

HMOs with Medicare risk contracts often have lower cost-sharing than
the fee-for-service program--or no cost-sharing at all--and also
often cover additional services.  Thus, HMOs with Medicare risk
contracts can be viewed as an alternative to Medigap insurance. 
However, by enrolling in an HMO, a beneficiary agrees to relinquish
the right to choose providers of care.  Also, if the beneficiary
decides to return to the fee-for-service program, Medigap insurers
can use medical underwriting to determine whether to sell the person
a policy. 

Under their agreements with Medicare, risk-contract HMOs must accept
all eligible Medicare applicants in order of application, during an
annual open enrollment period, except those enrolled in a hospice
plan and those who have been diagnosed with permanent kidney failure. 
Medicare HMOs serve areas in 37 states and the District of Columbia,
although they currently are concentrated in relatively few states. 
Over 45 percent of the 223 risk-contract HMOs are located in five
states and enrolled over 65 percent of the 3.7 million Medicare HMO
enrollees as of July 1996.  Most other states had few risk-contract
HMOs, and 13 states had no risk-contract HMO.  While the availability
to beneficiaries of HMOs across the country is far from uniform,
risk-contract HMOs are available in states where a large number of
Medicare beneficiaries reside. 


   MEDICARE BENEFICIARIES SELDOM
   CHANGE HEALTH PLANS
------------------------------------------------------------ Letter :4

Most elderly Medicare beneficiaries do not replace their private
health insurance coverage but many do add to existing coverage. 
HCFA's Medicare Current Beneficiary Survey data show that about 99
percent of the 19.5 million beneficiaries who had private insurance
in 1991 and were alive in 1994 had the same plans in 1994.  The
remaining 1 percent of these beneficiaries either switched plans,
dropped plans, or made other changes during the 1991-94 period. 
About 25 percent of the 19.5 million added plans to supplement those
they had in 1991 (see table 2).  In addition, over 1 million
beneficiaries who did not have a private supplemental policy in 1991
had obtained one or more by the end of 1994.  The data allowed us to
compare only coverage by plan name, and we could not identify those
instances in which the beneficiary switched coverage within the same
plan.  For example, we could not identify a case where a beneficiary
switched from Medigap plan C to Medigap plan F if the plan name was
Blue Cross/Blue Shield in both 1991 and 1994. 

For purposes of HCFA's survey, private insurance included
individually purchased plans (primarily Medigap policies); health
plans from former employers; and other plans that might cover
hospital, physician, or drug charges.  HCFA's survey excluded
long-term care, hospital indemnity, and specified disease insurance
from the private insurance category, but it is possible that
beneficiaries reported these types of limited-benefit plans as
individually purchased plans. 



                          Table 2
          
           Type of Private Health Insurance Plan
           Changes Made Between 1991 and 1994 by
           Medicare Beneficiaries Who Had Private
                       Plans in 1991

                 (Numbers are percentages)

                                                     Total
Type of                                            private
private plan        No       Added       Other  plans held
held in 1991    change    policies    change\a     in 1994
------------  --------  ----------  ----------  ----------
One Medigap       32.2         8.2          .6        41.1
 policy\b
One               28.9        11.8          .3        41.0
 employer-
 sponsored
 plan
One unknown        2.2          .3          .1         2.5
 plan
Multiple          10.8         4.4          .3        15.5
 plans
==========================================================
Total             74.0        24.7         1.3       100.0
----------------------------------------------------------
Note:  Numbers may not add to totals because of rounding. 

\a Medicare beneficiaries either switched policies, dropped policies,
or made multiple changes. 

\b Also includes other insurance that covers hospital and physician
charges or prescription drugs. 

Source:  Derived by GAO from the computerized results of HCFA's 1991
and 1994 Medicare Current Beneficiary Survey. 

Between 1991 and 1994, about 4.8 million beneficiaries added private
health insurance plans to their existing coverage.  Of these
beneficiaries, about 4 million had only one policy in 1991; added
coverage resulted in their owning multiple policies in 1994.  Table 3
shows that in 1994 over 1.3 million beneficiaries had multiple
Medigap policies and 1.4 million had multiple employer-sponsored
plans.  One reason why beneficiaries can be covered by multiple
employer-sponsored plans is that both spouses can have plans that
also cover the other spouse. 



                          Table 3
          
            Number of Medicare Beneficiaries Who
          Added Private Health Insurance Plans in
          1992, 1993, or 1994 to the Plan They Had
                          in 1991

                   (Numbers in thousands)


                                                     Total
Type of                             Combinatio    multiple
private        Medigap   Employer-  n of plans     private
plan held       policy   sponsored    or other  plans held
in 1991           only   plan only        plan     in 1994
----------  ----------  ----------  ----------  ----------
One              1,348         146         114       1,609
 Medigap
 policy
One                639       1,401         254       2,294
 employer-
 sponsored
 plan
One                 23          29           8          60
 unknown
 plan
==========================================================
Total            2,009       1,577         376       3,962
----------------------------------------------------------
Note:  Numbers may not add to totals because of rounding. 

Source:  Derived by GAO from the computerized results of HCFA's 1991
and 1994 Medicare Current Beneficiary Survey. 

Federal law prohibits an insurer from selling a beneficiary a second
Medigap policy unless the beneficiary states in writing that he or
she intends to cancel the first policy after the replacement policy
goes into effect.  Because so many beneficiaries reported purchasing
Medigap policies when they already owned one, it appears that the law
may not actually be preventing beneficiaries from owning multiple
policies. 


   FEW MEDIGAP UNDERWRITING
   COMPLAINTS HAVE BEEN MADE
------------------------------------------------------------ Letter :5

Since 1993, NAIC has maintained a central database of formal
complaints made to state insurance departments.  This system has a
category for underwriting complaints but it does not break the
category into components such as medical underwriting.  According to
NAIC's data, underwriting was the basis for 18 percent of the formal
Medigap complaints to state insurance departments in 1994 and 1995. 

In 1994, 3 out of a total of 391 Medigap complaints relating to
underwriting cited "refusal to insure after open enrollment period"
as the reason for the complaint; in 1995, 1 out of 316 gave this
reason.  According to NAIC data, over 50 percent of the underwriting
complaints in both 1994 and 1995 cited premium and rating method
concerns. 

Insurance department officials from the 10 states with the largest
Medicare populations said their departments received few Medigap
complaints, and even fewer complaints relating to medical
underwriting, in the last few years.  Officials in five states
attributed the current low volume of Medigap complaints to the
changes made under OBRA 1990, which increased consumer protections
and required that Medigap policies be standardized.  Several
officials also commented that it is not surprising that few formal
complaints about medical underwriting are made because that practice
is permissible and people are told as much at the informal telephone
contact stage. 

The six consumer groups we contacted believed that Medigap medical
underwriting practices resulted in some individuals' being unable to
obtain or change coverage, but the groups did not have statistical
data describing the magnitude of the problem.  These groups noted
that although Medigap medical underwriting after the 6-month open
enrollment period was a matter of concern, Prudential offered a
continuous open market for Medigap policies through its arrangement
with AARP. 


   LEGISLATIVE OPTION TO PREVENT
   MEDICAL UNDERWRITING
------------------------------------------------------------ Letter :6

Because the current alternatives for avoiding medical underwriting
are not required by law to be available, the situation could change
in the future.  One way to ensure that medical underwriting does not
become a problem in the future would be to require Medigap insurers
to offer policies with comparable benefit packages on a
guaranteed-issue basis to individuals who have been continuously
covered under Medigap.  In this case, however, concerns might arise
that because individuals can always buy a guaranteed-issue policy
they might be encouraged to postpone purchase until they know they
are likely to use the policy.  However, if a condition for access to
guaranteed-issue policies is continuous coverage under a similar
policy, this concern is no longer an issue.  Another potential
problem is that individuals could seek to upgrade to more
benefit-rich policies if they expected to use one of the new
benefits.  Again, this would not be a problem if insurers had to
offer only policies with benefits comparable with the individual's
current policy. 

Employer-sponsored retiree health plans and HMOs with Medicare
contracts can be viewed as substitutes for Medigap policies. 
Problems with maintaining Medicare supplement coverage can also occur
if beneficiaries choose or are forced to change from these Medigap
substitutes.  We previously reported on potential problems in
obtaining Medigap policies for those beneficiaries covered by
employer-sponsored plans if their plan is terminated or benefits are
downgraded.\5 Beneficiaries can be forced to discontinue HMO
enrollment for such reasons as relocating to an area where no HMO
participates in Medicare.  Also, some beneficiaries want to
discontinue HMO coverage but feel that they cannot do so.  The HHS
Office of Inspector General reported that, in 1994, 10 percent of
beneficiaries who were enrolled in HMOs (almost 94,000 people) wanted
to end their enrollment but felt that they could not because of
financial reasons, which could include concern about the availability
of a Medigap policy.\6 Beneficiaries with substitutes for Medigap who
seek Medigap policies could be protected from medical underwriting
under the legislative option discussed above if continuous coverage
under a Medigap policy is defined to include enrollment in
employer-sponsored health plans and in HMOs with Medicare contracts. 


--------------------
\5 Health Insurance for the Elderly:  Owning Duplicate Policies Is
Costly and Unnecessary (GAO/HEHS-94-185, Aug.  3, 1994). 

\6 Office of Inspector General, HHS, Beneficiary Perspectives of
Medicare Risk HMOs, OEI-06-91-00730 (Washington, D.C.:  HHS, Mar. 
1995). 


   CONCLUSION
------------------------------------------------------------ Letter :7

Most beneficiaries obtain private insurance to supplement Medicare
when they become eligible for the program at age 65.  Few
beneficiaries subsequently decide to change their policies, and those
that do have at least one alternative for changing without being
subject to medical underwriting.  However, these alternatives are not
guaranteed by federal law, and it is possible that circumstances
could change in the future.  Federal Medigap law (section 1882 of the
Social Security Act) could be amended to furnish such a guarantee to
beneficiaries who have been continuously covered by Medigap.  Such a
change should not have any major effect because it would not alter
beneficiary incentives for Medigap coverage. 


   MATTERS FOR CONSIDERATION BY
   THE CONGRESS
------------------------------------------------------------ Letter :8

If the Congress is concerned that the current alternatives available
to Medicare beneficiaries who wish to change Medigap policies might
not exist in the future, the Congress could amend federal Medigap
law.  Such an amendment could require insurers to offer Medicare
beneficiaries who have been continuously covered by Medigap insurance
guaranteed-issue policies with benefit packages comparable with those
of the policy they currently hold.  The Congress may also wish to
consider extending this protection to beneficiaries whose
employer-sponsored retiree health plans are terminated or curtailed
and who must or choose to leave their HMOs. 


---------------------------------------------------------- Letter :8.1

In commenting on a draft of this report, NAIC representatives agreed
with our factual presentation and our conclusions.  NAIC did offer
some technical suggestions, which we incorporated where appropriate. 

We are sending copies of this report to NAIC, the Secretary of Health
and Human Services, and other interested congressional committees and
individuals.  We will make copies available to others on request. 

If you have any questions, please call me on (202) 512-6806 or Tom
Dowdal, Assistant Director, on (202) 512-6588.  Other contributors to
this report are listed in appendix IV. 

Janet L.  Shikles
Assistant Comptroller General
Health, Education, and
 Human Services Division


SCOPE AND METHODOLOGY
=========================================================== Appendix I


   SCOPE
--------------------------------------------------------- Appendix I:1

We obtained from the National Association of Insurance Commissioners
(NAIC) their computerized database of insurance companies' Medigap
annual experience exhibits for 1994.  The database identified 354
insurance companies and reported total earned premiums of $12.6
billion.  We limited our review of medical underwriting to the 25
largest sellers of Medigap insurance.  These companies had earned
premiums of about $8.3 billion, or over 65 percent of the total.  We
did not test the accuracy of the database but our prior work has
shown these databases to be highly accurate. 


   METHODOLOGY
--------------------------------------------------------- Appendix I:2

To identify the extent to which medical underwriting is used in the
Medigap market, we interviewed knowledgeable officials from the 25
largest sellers of Medigap insurance on their underwriting practices. 

To determine how frequently Medicare beneficiaries change private
health plans, we obtained access to the computerized results of round
1 and round 10 of the Health Care Financing Administration's (HCFA)
Medicare Current Beneficiary Survey, a continuous, multipurpose
survey of a representative sample of the Medicare population.  Round
1 and round 10 interviews were conducted in the last 4 months of
calendar years 1991 and 1994, respectively.  These interviews
captured baseline information on a sample of Medicare beneficiaries
(12,677 in 1991), including information on supplemental coverage from
private insurance and Medicaid.  For purposes of HCFA's survey,
private insurance included an individually purchased plan (that is, a
Medigap policy); health plans from former employers; and other plans
that might cover hospital, physician, or drug charges.  HCFA's survey
excluded long-term care, hospital indemnity, and specified disease
insurance from this insurance category.  We compared, by plan name,
the private insurance that Medicare beneficiaries aged 65 and older
had in 1991 with the plans these same beneficiaries had in 1994 and
identified and analyzed differences.  We did not verify the accuracy
of the information in the computerized file. 

To assess whether elderly Medicare beneficiaries are complaining
about Medigap medical underwriting practices, we obtained from NAIC's
complaint data system a computerized file of Medigap complaints in
1994 and 1995.  The NAIC data system is developed from information
provided by state insurance departments on closed complaints.  We
analyzed the data on the 2,110 Medigap complaints identified in 1994
and the 1,732 identified in 1995.  We supplemented these data by
interviewing officials from the insurance departments of the 10
states with the largest elderly populations and by interviewing
officials from 6 consumer/advocacy groups.  We did not verify the
accuracy of the information in the computerized file. 


   SAMPLING ERRORS
--------------------------------------------------------- Appendix I:3

Data reported in tables 2 and 3 are derived from the computerized
results of the Medicare Current Beneficiary Survey.  Because these
data are derived from a sample, each estimate has a sampling error
associated with it.  The size of the sampling error reflects the
precision of the estimate:  The smaller the sampling error, the more
precise the estimate.  We computed sampling errors for tables 2 and 3
at the 95-percent confidence level.  This means that the chances are
about 95 out of 100 that the actual number or percentage being
estimated falls within the range defined by our estimate, plus or
minus the sampling error.  Tables I.1 and I.2 show the sampling
errors for tables 2 and 3, respectively. 



                         Table I.1
          
          Point Estimates and Sampling Errors for
           Type of Private Health Insurance Plan
           Changes Made Between 1991 and 1994 by
           Medicare Beneficiaries Who Had Private
                       Plans in 1991

                 (Numbers are percentages)

                                                     Total
Type of                                            private
private plan        No       Added       Other  plans held
held in 1991    change    policies      change     in 1994
------------  --------  ----------  ----------  ----------
One Medigap   32 ï¿½ 1.9     8 ï¿½ 1.0   0.6 ï¿½ 0.2    41 ï¿½ 2.2
 policy
One           29 ï¿½ 1.9    12 ï¿½ 1.2   0.3 ï¿½ 0.1    41 ï¿½ 2.1
 employer-
 sponsored
 plan
One unknown    2 ï¿½ 0.4   0.3 ï¿½ 0.2   0.1 ï¿½ 0.0     3 ï¿½ 0.5
 plan
Multiple      11 ï¿½ 1.0     4 ï¿½ 0.6   0.3 ï¿½ 0.1    15 ï¿½ 1.1
 plans
==========================================================
Total         74 ï¿½ 1.6    25 ï¿½ 1.6     1 ï¿½ 0.3       100.0
----------------------------------------------------------
Note:  Numbers may not add to totals because of rounding.  Sampling
errors are computed at the 95-percent confidence level. 



                         Table I.2
          
          Point Estimates and Sampling Errors for
            Number of Medicare Beneficiaries Who
          Added Private Health Insurance Plans in
          1992, 1993, or 1994 to the Plan They Had
                          in 1991

                   (Numbers in thousands)


                                                     Total
Type of                             Combinatio    multiple
private        Medigap   Employer-  n of plans     private
plan held       policy   sponsored    or other  plans held
in 1991           only   plan only        plan     in 1994
----------  ----------  ----------  ----------  ----------
One            1,348 ï¿½    146 ï¿½ 54    114 ï¿½ 47     1,609 ï¿½
 Medigap           175                                 195
 policy
One          639 ï¿½ 122     1,401 ï¿½    254 ï¿½ 74     2,294 ï¿½
 employer-                     180                     245
 sponsored
 plan
One            23 ï¿½ 19     29 ï¿½ 23      8 ï¿½ 11     60 ï¿½ 32
 unknown
 plan
==========================================================
Total          2,009 ï¿½     1,577 ï¿½    376 ï¿½ 89     3,962 ï¿½
                   199         199                     295
----------------------------------------------------------
Note:  Numbers may not add to totals because of rounding.  Sampling
errors are computed at the 95-percent confidence level. 

In addition, other beneficiary estimates presented in the report have
the following sampling errors: 

  -- for the 19.5 million beneficiaries who had private insurance,
     the sampling error was ï¿½ .4 million;

  -- for the more than 1 million beneficiaries who did not have a
     private supplemental policy in 1991 but had at least one in
     1994, the sampling error was ï¿½ .1 million; and

  -- for the 4.8 million beneficiaries who added private health
     insurance plans, the sampling error was ï¿½ .3 million. 


FEATURES OF STANDARDIZED MEDICARE
SUPPLEMENT PLANS
========================================================== Appendix II

In 1991, the NAIC approved the following 10 standardized benefit
combinations (plans A through J) for Medicare supplement policies. 
Forty-four states, the District of Columbia, Puerto Rico, and the
Virgin Islands approved all 10 plans.  Pennsylvania and Vermont
approved seven; Delaware approved six; and Massachusetts, Minnesota,
and Wisconsin had alternative simplification programs in effect and
have waivers that exempt them from these standard plans.  Benefits
included in a plan are marked by "X."



                                          Table II.1
                           
                           Benefit Combinations of the Standardized
                                  Medicare Supplement Plans

Benefits       Plan A  Plan B  Plan C  Plan D  Plan E  Plan F  Plan G  Plan H  Plan I  Plan J
-------------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------
Basic          X       X       X       X       X       X       X       X       X       X
benefits\a

Skilled                        X       X       X       X       X       X       X       X
nursing
facility
coinsurance

Part A                 X       X       X       X       X       X       X       X       X
deductible

Part B                         X                       X                               X
deductible

Part B excess                                          X       X\c             X       X
charges\b

Foreign                        X       X       X       X       X       X       X       X
travel
emergency

At-home                                X                       X               X       X
recovery

Prescription                                                           X\d     X\d     X\e
drugs

Preventive                                     X                                       X
medical care
---------------------------------------------------------------------------------------------
\a Basic benefits pay the beneficiary's Medicare part B coinsurance
(generally 20 percent of Medicare-approved charges after the $100
annual deductible), part A coinsurance for the 61st-90th day of a
Medicare-covered hospital stay, part A coinsurance during the use of
a beneficiary's 60 lifetime reserve days, eligible expenses after a
beneficiary's hospital benefits are exhausted up to a lifetime
maximum of 365 days, and parts A and B blood deductible (3 pints). 

\b Part B excess charges are the difference between the actual charge
for a service or item and the Medicare-allowed charge for that
service or item.  Medicare prohibits charging more than 115 percent
of the Medicare-allowed charge. 

\c This plan pays 80 percent of part B excess charges. 

\d Prescription drug coverage under plans H and I requires an annual
deductible of $250; then the plan pays 50 percent of covered charges,
up to a maximum plan payment of $1,250 per year. 

\e Prescription drug coverage under plan J requires an annual
deductible of $250; then the plan pays 50 percent of covered charges,
up to a maximum plan payment of $3,000 per year. 


25 LARGEST SELLERS OF MEDIGAP
INSURANCE
========================================================= Appendix III


                                                                                 Primary
                                                                                 method
                                                                                 for
                                                                                 calculat
                          Standardiz  States                         Medical     ing
              Total 1994  ed plans    markete            Nonstandar  underwriti  premiums
Company         premiums  offered\a   d        Standard           d  ng          \b
----------  ------------  ----------  -------  --------  ----------  ----------  --------
Prudential  $2,525,855,4  A through   Multipl  1,150,21   1,969,743  Yes\c       Communit
Insurance             58  J           e               4                          y
Company of
America

Bankers      567,733,657  A through   Multipl   237,668     202,526  Yes         Attained
Life and                  I           e                                          age
Casualty
Company

Empire       555,536,690  A, B, and   Single    284,639         119  No          Communit
Blue Cross                H                                                      y
and Blue
Shield

United       519,636,376  A, B, C,    Multipl   198,984     180,318  Yes         Issue
American                  D, F, and   e                                          age
Insurance                 G
Company

Blue Cross   464,472,437  Waiver\d    Single    208,559       7,677  No          Communit
and Blue                                                                         y
Shield of
Massachuse
tts

Medical      365,244,297  A, B, C,    Single    513,314           0  No          Issue
Service                   and H                                                  age
Associatio
n of
Pennsylvan
ia-
Pennsylvan
ia Blue
Shield

Blue Cross   305,529,121  A, B, C,    Single     94,762     137,565  No          Issue
and Blue                  D,                                                     age
Shield of                 and F
Florida,
Inc.

Blue Cross   254,696,911  A, B, D,    Single    122,797     167,471  No          Attained
and Blue                  E,                                                     age
Shield of                 and F
Illinois
Health
Care
Service
Corporatio
n

Blue Cross   203,832,750  A, B, C,    Single     32,217      93,711  Yes\e       Issue
and Blue                  F, I, and                                              age
Shield of                 J
Virginia

Blue Cross   184,107,328  All except  Single     55,308      85,267  Yes         Issue
and Blue                  G                                                      age
Shield of
North
Carolina,
Inc.

Mutual of    183,430,118  A, C, F,    Multipl   100,000     150,000  Yes         Attained
Omaha                     and I       e                                          age
Insurance
Company

Pioneer      180,965,855  A, B, C,    Multipl    84,146      71,821  Yes         Attained
Life                      D, E,       e                                          age
Insurance                 F, G, and
Company of                I
Illinois

Blue Cross   180,200,050  A, B, C,    Single     43,000     107,000  Yes\c       Attained
and Blue                  D, F,                                                  age
Shield of                 G, and H
Indiana
Associated
Insurance
Companies,
Inc.

Blue Cross   179,058,000  A, C, F,    Single     33,167     158,485  Yes\c       Communit
and Blue                  and I                                                  y
Shield of
New
Jersey,
Inc.

Physicians   176,543,759  A through   Multipl   105,372      58,690  Yes         Issue
Mutual                    J           e                                          age
Insurance
Company

Blue Cross   165,647,335  A and B     Single    178,000           0  No          Issue
and Blue                                                                         age
Shield of
Alabama

Blue Cross   157,659,892  A, C, E,    Single     60,443      40,235  Yes\c       Attained
and Blue                  F,                                                     age
Shield of                 and J
Iowa-IASD
Health
Services
Corporatio
n

Blue Cross   155,410,958  A, C, and   Single     39,201     148,158  No          Communit
and Blue                  H                                                      y
Shield of
Michigan

Blue Cross   154,283,955  A, B, C,    Single     20,193     128,979  Yes\c       Communit
and Blue                  D, F, and                                              y
Shield of                 H
Connecticu
t, Inc.

Standard     151,782,693  A, B, C,    Multipl    45,000      60,000  Yes         Issue
Life and                  and F       e                                          age
Accident
Insurance
Company

Blue Cross   142,747,238  A through   Single     33,250     124,150  Yes         Attained
and Blue                  J                                                      age
Shield of
Tennessee

Blue Cross   134,673,000  A, C, and   Single    105,570      33,486  Yes         Attained
and Blue                  F                                                      age
Shield of
Kansas,
Inc.

Blue Cross   130,848,816  A,B,C, and  Single    187,569           0  No          Issue
of Western                H                                                      age
Pennsylvan
ia

State Farm   126,533,729  A and C     Single        441      84,768  No          Attained
Mutual                                                                           age
Insurance
Company

American     124,216,026  A, B, C,    Multipl    55,075      46,500  Yes         Issue
Family                    F,          e                                          age
Life                      and G
Assurance
Company of
Columbus,
Georgia
-----------------------------------------------------------------------------------------
\a Plan types may vary by state for companies marketing in multiple
states. 

\b Insurance companies use three different methods to calculate
premiums:  issue age, attained age, and community (no age) rating. 
Under the issue age method, premium rates vary by the age at which
the beneficiary first purchases a policy.  Premiums will not rise as
the beneficiary gets older.  Under the attained age method, the
premium is based on the beneficiary's current age and will increase
as the beneficiary grows older.  Under the community (no age) method,
all beneficiaries pay the same premiums regardless of age. 

\c Company has some guaranteed issue plans. 

\d Massachusetts, Minnesota, and Wisconsin had alternative
simplification programs in effect when OBRA 1990 was enacted and have
a waiver that exempts them from the standardized policy requirement. 

\e Plans A and C can be purchased with or without medical
underwriting, but without medical underwriting, they have higher
premium rates. 

Source:  Derived by GAO from interviews held with officials of the 25
companies listed above and from NAIC's database of 1994 Medigap loss
ratios as reported to NAIC by insurance companies. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

Thomas Dowdal, Assistant Director, (202) 512-6588
William Hamilton, Evaluator-in-Charge
Michael Piskai
Robert DeRoy


*** End of document. ***