By Mark Merlis
Kaiser Family Foundation, July 2011

Among the many proposals under consideration to control the growth in Medicare spending is one that attempts to achieve savings by restricting coverage under Medigap plans to require enrollees to pay a larger share of the costs of Medicare-covered services.

Medicare by itself has relatively high deductibles, and imposes coinsurance for most covered services. Moreover, Medicare does not have any limit on total cost sharing, exposing some beneficiaries to large out-of-pocket (OOP) costs. Medigap policies help cover some or all of Medicare’s cost-sharing requirements. Some analysts contend that comprehensive “first dollar” coverage from Medigap leads enrollees to obtain unnecessary services, which results in excess Medicare spending.

This brief examines the potential effects of three different Medigap reform proposals on Medicare program spending and on beneficiaries’ out-of-pocket costs.

Medigap reforms would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization. Under all three options, a greater share of beneficiaries reporting fair or poor health than those in better health would experience an increase in total out-of-pocket costs, because their premium savings would not be enough to offset their new spending for direct cost-sharing. Under Options 1 and 2, more than one-third of all Medigap enrollees in fair or poor health would experience a net increase in premiums and other out-of-pocket costs for Medicare covered services, as compared to less than one-fifth of those in relatively good health. Because those in relatively poor health use more services than healthier enrollees, the increase in their direct cost-sharing expenses for Medicare-covered services would more than offset any premium reduction.

Enrollees facing higher net costs are disproportionately those in fair or poor health, those requiring inpatient hospital care, and those with modest incomes. Even enrollees who do not actually see an increase in their total costs could be thought of as suffering a “welfare loss.” Beneficiaries buy comprehensive insurance in part for the peace of mind of knowing that they are fully protected against unpredictable events. They may see the loss of this protection as outweighing any potential premium savings.

http://www.kff.org/medicare/upload/8208.pdf

Comment: 

By Don McCanne, MD

Two days ago we discussed the negative impact of requiring deductibles for Medigap plans – a proposal designed to reduce the moral hazard of insurance (the propensity to obtain more care if it is free at the time of access). This KFF study is timely because it confirms that requiring Medigap cost sharing “would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization.” Further, even if eliminating cost sharing does not have a net financial benefit, it does provide a “welfare gain” by providing beneficiaries with “the peace of mind of knowing that they are fully protected against unpredictable events.”

Medigap Reforms: Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs

By Mark Merlis
Kaiser Family Foundation, July 2011

Among the many proposals under consideration to control the growth in Medicare spending is one that attempts to achieve savings by restricting coverage under Medigap plans to require enrollees to pay a larger share of the costs of Medicare-covered services.

Medicare by itself has relatively high deductibles, and imposes coinsurance for most covered services. Moreover, Medicare does not have any limit on total cost sharing, exposing some beneficiaries to large out-of-pocket (OOP) costs. Medigap policies help cover some or all of Medicare’s cost-sharing requirements. Some analysts contend that comprehensive “first dollar” coverage from Medigap leads enrollees to obtain unnecessary services, which results in excess Medicare spending.

This brief examines the potential effects of three different Medigap reform proposals on Medicare program spending and on beneficiaries’ out-of-pocket costs.

Medigap reforms would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization. Under all three options, a greater share of beneficiaries reporting fair or poor health than those in better health would experience an increase in total out-of-pocket costs, because their premium savings would not be enough to offset their new spending for direct cost-sharing. Under Options 1 and 2, more than one-third of all Medigap enrollees in fair or poor health would experience a net increase in premiums and other out-of-pocket costs for Medicare covered services, as compared to less than one-fifth of those in relatively good health. Because those in relatively poor health use more services than healthier enrollees, the increase in their direct cost-sharing expenses for Medicare-covered services would more than offset any premium reduction.

Enrollees facing higher net costs are disproportionately those in fair or poor health, those requiring inpatient hospital care, and those with modest incomes. Even enrollees who do not actually see an increase in their total costs could be thought of as suffering a “welfare loss.” Beneficiaries buy comprehensive insurance in part for the peace of mind of knowing that they are fully protected against unpredictable events. They may see the loss of this protection as outweighing any potential premium savings.

http://www.kff.org/medicare/upload/8208.pdf

Two days ago we discussed the negative impact of requiring deductibles for Medigap plans – a proposal designed to reduce the moral hazard of insurance (the propensity to obtain more care if it is free at the time of access). This KFF study is timely because it confirms that requiring Medigap cost sharing “would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization.” Further, even if eliminating cost sharing does not have a net financial benefit, it does provide a “welfare gain” by providing beneficiaries with “the peace of mind of knowing that they are fully protected against unpredictable events.”