The Future of Medicare Supplemental Insurance

By Gail R. Wilensky, PhD
JAMA Internal Medicine, August 19, 2013

Even these highly regulated versions of Medigap have problems. They are expensive and, frequently, are not a very good buy. And Medigap insurance imposes significant costs on the Medicare program. Because Medigap plans pay for the deductibles, coinsurance, and copayments associated with Medicare, they frequently are paying for low-cost, routine care. Such payments are prepayments, rather than “real insurance,” but Medigap plans have to set premiums to cover the costs of this expected use, as well as the administrative costs associated with the insurance.

More than half of the people who buy Medigap insurance buy one of the 2 most expensive plans—“C” or “F.” These plans pay almost all of the beneficiaries’ costs, thus providing first-dollar coverage, which has been the cause for congressional concern.

Currently, the Obama administration and Congress are focused on the costs that Medigap insurance imposes on the Medicare program. Because the plans typically cover all or most cost sharing, seniors with supplemental insurance use more medical services than seniors without supplemental insurance.

The Patient Protection and Affordable Care Act (Pub L No. 111-148) requires the National Association of Insurance Commissioners to review the benefit designs of plans C and F and introduce cost sharing for physician services for plans purchased as of 2015.

President Obama’s fiscal year 2014 budget proposal introduces a $100 home health copayment and a 30% surcharge on Part B premiums for new Medicare beneficiaries who purchase Medigap policies with low cost-sharing requirements.

The National Commission on Fiscal Responsibility and Reform (known as the Fiscal Commission) recommended that Medigap plans not be allowed to cover the first $550 per year in cost sharing and cover no more than half of the cost sharing up to $5500 per year.

The health care cost containment initiative of the Bipartisan Policy Center recommended a prohibition on first dollar supplemental insurance and a more coherent and rational cost-sharing benefit structure for traditional Medicare, as part of broader changes to the US health care system.

Medicaid would protect low-income beneficiaries, but other high users of Medicare services would be more likely to incur higher costs.

Not surprisingly, many of these proposals raise concerns about inappropriate reductions in the use of health care and increased costs for some Medicare beneficiaries. According to a Kaiser Family Foundation study, the majority of elderly persons would have reduced costs, but 20% would have higher costs.

Neither the outdated structure of Medicare nor the costs imposed on the program by Medigap insurance are new issues. Medicare needs to be a viable program, while providing insurance coverage appropriate for the 21st century. Congress and the Obama administration know that reforms to supplemental insurance are needed, and the specific types of changes that make most sense.

Health Care Spending and the Medicare Program

MedPAC, June 2013

Chart 5-6.  Out-of-pocket spending for premiums and health services per beneficiary, by insurance and health status, 2009

Beneficiaries who report they are in good, very good, or excellent health:

Medicare only

$1,079  Premium
$1,643  Out-of-pocket

Medicare plus Medigap

$3,264  Premium
$1,900  Out-of-pocket

Beneficiaries who report they are in fair or poor health:

Medicare only

$1,128  Premium
$3,446  Out-of-pocket

Medicare plus Medigap

$3,191  Premium
$3,382  Out-of-pocket

Former HCFA Administrator Gail Wilensky has long been a supporter of patient cost sharing as a means of discouraging use of health care services, hopefully reducing spending in government health programs such as Medicare. She has particularly targeted Medigap plans because they remove cost sensitivity by providing first-dollar coverage. So do we need to prohibit Medigap plans from providing full coverage of deductibles and other cost sharing, as she recommends?

MedPAC has provided us with the numbers that indicate how patients respond to Medigap incentives. When Medicare beneficiaries elect to purchase Medigap plans, their premiums triple, no matter the status of their health. But look at their out-of-pocket expenses, excluding the premiums. If they are healthy, the out-of-pocket expenses are not much different, whether or not they are enrolled in a Medigap plan. If they are not healthy, the out-of-pocket expenses are quite a bit higher, but still with not much difference between those with and those without a Medigap plan.

According to the MedPAC report, “Insurance that supplements Medicare does not shield beneficiaries from all out-of-pocket costs. Beneficiaries who report being in fair or poor health spend more out of pocket for health services than those reporting good, very good, or excellent health regardless of the type of coverage they have to supplement Medicare.”

The report also speculates that “this result likely reflects the fact that beneficiaries who have Medigap have higher incomes and are likely to have stronger preferences for health care.” Rich people want more health care? It is much more likely that these numbers represent two other factors: 1) the actual dollar benefit of Medigap plans is truly paltry (except for a cap on the costs of catastrophic events), and 2) Medicare benefits are quite spartan, covering on average only about half of seniors’ health care costs.

Considering their high premiums, administrative excesses, and relatively paltry benefits, Medigap plans don’t need revision; they need to be eliminated, with the benefits being rolled into the traditional Medicare program.

Perhaps the most telling comment in Wilensky’s article is her statement that Medicare plus Medigap payments are “prepayments, rather than ‘real insurance.'” The consumer-driven advocates have created the meme that “real insurance” is catastrophic insurance only; it should not pay for routine medical care. That arbitrary definition is nonsense. Insurance is pooling risk, and you can include all health care costs in that pool, including routine and preventive care. Perhaps a better term is “prepaid health care.”

Regardless, when routine care exposes too many individuals to financial hardship, the system needs to be changed, and certainly not by increasing that exposure, as Wilensky recommends. Her diversionary strategy is to prevent us from considering a program that really would work for all of us – a government-run (OMG!) single payer, improved Medicare for all.

Why is she and her ilk so opposed? Is adhering to their ideology really more important to them than preventing physical suffering and financial hardship for the rest of us? I’ve tried to understand them, but I’ll never get it.