GO TO: Medicare HOME | Meeting Agenda for Jan. 5-6, 1999

Section I: Overview

While Medicare is estimated to cover approximately 50 percent of beneficiaries’ health care costs, coverage for their remaining costs is fragmented, inaccessible to some, and often inefficient. While some beneficiaries have no supplemental coverage, others have multiple sources of supplemental coverage. For example, more than 27 percent of beneficiaries enrolled in managed care plans also have Medigap or employer-sponsored coverage. Some of this overlapping coverage may not be necessary since many managed care plans offer a broad range of benefits (e.g., 68 percent of plans offer a prescription drug benefit) usually covered by supplemental insurance.

The majority of beneficiaries have either Medigap or employer-sponsored retiree coverage, but many beneficiaries are eligible for supplemental coverage through other programs, such as Medicaid, the Veterans Administration or state drug assistance programs for low-income beneficiaries. Beneficiaries with Medicaid coverage have different levels of coverage according to their income, assets and state policy. "Dual eligibles" are eligible for the full range of Medicaid benefits, while others are eligible for assistance in paying their deductibles and coinsurance and/or premiums.

As a first step toward addressing some of the policy issues raised by current supplemental coverage, this paper focuses on describing and contrasting Medigap and employer-sponsored retiree coverage.

Percent of beneficiaries have private supplemental coverage (See Chart 1)

As noted above, more than a quarter of beneficiaries enrolled in managed care plans also have supplemental coverage through a Medigap plan or employer-sponsored retiree coverage.  It is also important to note that a 1998 report by the Office of the Inspector General found that 88 percent of beneficiaries who either medigap or employer-sponsored coverage are satisfied with their coverage.

Comparison of Medigap to Employer-Sponsored Coverage

There are many contrasts between the coverage offered to retirees by employers and Medigap coverage purchased individually.

• While employers are increasingly structuring their retiree coverage so that retirees have out-of-pocket liabilities similar to those prior to retirement, Medigap coverage usually means that beneficiaries have no cost-sharing liability. Employers seek to have their retirees be cost-conscious in their utilization of services, while for Medigap covered beneficiaries, medical care is virtually "free." (See attached Chart 2).

• While employers often offer a comprehensive prescription drug benefit, only some Medigap plans offer drug coverage and they have a limited drug benefit with a $250 deductible, 50 percent coinsurance, and a $1,500 or $3,000 maximum benefit. Once the Medigap plan has spent the maximum benefit, all further drug costs must be paid out-of-pocket. Only about 14 percent of beneficiaries select a Medigap plan with drug coverage and evidence suggests that these plans are adversely selected against.

• While employers are increasingly encouraging their retirees to select managed care plans, only recently has Medicare SELECT been more widely available to beneficiaries. Under SELECT, insurers can establish managed care plans with restricted networks and cover only those services obtained through the SELECT network and emergency out-of-area care. The policies must conform to one of the 10 federally standardized Medigap policies. Medicare SELECT was created in OBRA90 on a demonstration basis and was expanded to all 50 states in 1995.

• Prior to 1980, there was no Federal regulation of Medigap policies. However, the Baucus amendments to the Social Security Act passed in1980 addressed concerns about duplication of coverage, marketing abuses and loss ratios.

• OBRA 90 limited Medigap policies to 10 standard plans, referred to by letters A through J. Policies issued after July 30, 1992, must be one of the 10 standard plans, but beneficiaries were given the option to renew their pre-OBRA90 plans.

• OBRA 90 increased the minimum loss ratio for individual plans and prohibited insures from denying a policy to individuals within six months of enrollment in Part B of Medicare.

• The Balanced Budget Act of 1997 made additional changes to Medigap regulation. Among other changes, BBA 1997 required the guaranteed issuance of certain Medigap policies for certain continuously enrolled individuals, including beneficiaries who seek to enroll in Medigap if their managed care plans leave the Medicare+Choice program.

• More than 11 million people were enrolled in individual Medigap plans in 1996, which was 28 percent of all Medicare beneficiaries. Medigap insurance generally provides almost total coverage of all Medicare deductible and coinsurance requirements. In 1997, 6.1 million beneficiaries were in standardized plans and 5.8 million beneficiaries were in pre-standardized plans (i.e., plans that were "grandfathered in" when standardization of plan began) In 1997, there were approximately 2,500 non-standardized plans and 2,500 standardized plans.

• The two most popular standard Medigap policies (F and C, respectively) contain 54.7% of enrollees and have nearly identical covered benefits (see attached Chart 4):

• Core benefits (Parts A and B coinsurance, additional hospital days, and blood products)
   
• Part A deductible
   
• Skilled Nursing Facility Coinsurance
   
• Foreign Travel Emergency
   
• Part B deductible
  

The only difference between the plans is that Plan F also covers physician (Part B) excess charges.

• 14% of beneficiaries with standardized plans have Medigap insurance that covers prescription drugs (H, I and J). With these plans, the purchase of prescription drugs requires a $250 deductible, after which the policy covers 50% of the costs to a maximum of $1,250 or $3,000, depending on the plan.

• Enrollees in Medigap tend to have higher incomes and better health status than those who do not have supplemental coverage.

• The percentage of beneficiaries with Medigap coverage has declined from approximately 40 percent in 1984-87 to 30 percent in 1996. This decline is attributable to increased enrollment in integrated Medicare+Choice plans, which include benefits previously purchased through Medigap plans, as well as higher Medigap premiums. (See attached Chart 5. Charts 6 and 7 have data on employer-sponsored coverage and beneficiaries with Medicare only.)

• Because supplemental coverage often pays for much or all of beneficiaries’ cost-sharing, Medicare services may seem "free" to the beneficiary. Accordingly, there may be little incentive for beneficiaries with supplemental coverage to consider the value of the service they purchase.  

• Studies show that beneficiaries with supplemental insurance have higher service utilization and higher Medicare costs. According to the Physcian Payment Review Commission, Medicare expenditures for beneficiaries with Medigap coverage were 29.2 percent higher than expenditures for beneficiaries without supplemental insurance and spending for beneficiaries with employer-sponsored insurance was 11.1 percent higher. CBO researchers have documented similar findings. (See attached Chart 8) 

• These findings mean that beneficiaries with Medigap cost Medicare $5,400. Beneficiaries with employer-sponsored retiree coverage cost Medicare $4,900 and beneficiaries with no supplemental coverage cost Medicare $4,000.

• Medigap coverage increases utilization more than employer-sponsored retiree coverage since the latter is more likely to:

1. Require beneficiaries to face some cost-sharing - though employer-sponsored coverage reduces the deductibles and cost sharing faced by beneficiaries, often to levels comparable to those faced by active employees, Medigap plans are more likely to offer first dollar coverage. Thus, beneficiaries in employer-sponsored coverage tend to face incentives to control utilization.
2. Incorporate elements of managed care - though Medicare HMOs reduce or eliminate cost-sharing faced by beneficiaries, their provider incentives and other management techniques tend to counteract any resulting increase in overall utilization. Employer-sponsored coverage is more likely to adopt some of these same techniques to lower utilization.
3. Cover prescription drugs - most employer-sponsored plans cover prescription drugs, while relatively few beneficiaries with Medigap coverage receive this benefit. This coverage may reduce the need for other services for beneficiaries with employer-sponsored coverage.

• According to the Physician Payment Review Commission, lack of supplemental coverage is associated with reduced access to care, as indicated by measures such as whether a beneficiary has a physician as a regular source of care or is likely to delay care because of cost. Similarly those without coverage are less likely to have mammograms, pap smears, flu shots, and annual office visits than beneficiaries with Medigap coverage. Some portion of the increased utilization associated with supplemental coverage appears to be due to appropriate utilization.

• Estimates of average Medigap premiums vary depending upon the source. A HCFA analysis of 1995 MCBS data found that those with Medigap pay an average premium of $1,047. PPRC had previously cited the average premium for community rated plans to be $1,300 based on Prudential information.

• While it is difficult to summarize premium changes over time, since the data is not regularly collected in any one place, there have been several recent studies that provide useful information. According to a study by The Lewin Group, the average increases in premiums for the two most popular plans (C and F) between 1992 and 1996 were 8.5 percent and 3.7 percent, respectively, with increases of 20.6% and 12.4% between 1995 and 1996 (See Chart 9). Families USA found a 23 percent increase in Prudential’s Medigap premiums between 1995 and 1996 and Consumers Union found a 35 percent increase in Medigap premiums since 1994.

• According to a survey conducted by The Lewin Group in 1997, all representatives of large insurers who responded in an interview projected rate increases, with 70% of the representatives predicting double-digit annual increases for the near future.  

• Some insurers and regulators speculated that 1996 increases by AARP Prudential, the largest Medigap provider at the time, gave other companies the latitude to increase their rates. After holding their rates level for three years, AARP Prudential substantially increased their 1996 rates. According to AARP and Prudential, their rates had been subsidized by using a surplus that it had built up. When the surplus was exhausted, the company was forced to raise rates substantially.

• Premiums vary tremendously, depending on the state and policy type. The Lewin Group found a range in price nationwide from $402 to $7,196, annually. A study by Weiss Ratings, Inc., a rater of insurance company solvency, found that a 65 year old male living in Springfield Illinois, for example, would be charged $3,171 per year by a company in Missouri for its Plan J. But he could get the same exact coverage from another plan for only $1,699.

• The growth of the Medicare HMO market may have implications for the Medigap market. Many Medigap providers believe HMO enrollment hurts their sales. Since HMOs appeal to younger, healthier individuals, Medigap premiums may rise as less healthy individuals are left with the policies, which could encourage greater HMO enrollment among healthier Medicare beneficiaries.

A similar dynamic already occurs in the pre-standardized Medigap plans. As a result of the prohibition of new entrants into the pre-standardized risk pools, beneficiaries in pre-standardized plans have more health conditions as they age, which in turn, increases premiums.

• Part of the problem in calculating an average premium is that plans set their premiums differently. There are three types of rating methodologies: issue age, attained age and community rating. Under issue age rating, the premium is determined by the age of the beneficiary upon purchase of the policy. Under attained age rating, the premium increases with the age of the beneficiary. Under community rating, all beneficiaries in a particular plan pay the same premium.

• Medigap insurers can differentiate their policies by limiting to whom they will sell a policy after the first 6 months of a beneficiary’s eligibility for Medicare. Some plans require that applicants meet certain health criteria, while others are available to anyone who applies (guarantee-issue). However, plans may not deny a policy to aged beneficiaries within six months of enrollment in Part B of Medicare.

• A GAO study found that other than AARP and some Blue Cross/Blue Shield policies very few guarantee-issue plans are available.

• Medigap loss ratios must be at least 65 percent for individual-purchase Medigap and at least 75 percent for group-purchase Medigap. The average loss ratio was 84.2 percent in 1997. If a plan does not reach proscribed loss ratios, they must provide refunds or credits to policyholders.

Prevalence of Medical Coverage for Post-65 Retirees

Source: The ECS Survey Report on Employee Benefits 1998/99 (Wyatt Data Services)

What is covered in Employer-sponsored Post-65 plans?

Employer-sponsored plans typically cover all the traditional Medicare services, plus prescription drugs. Large employers with plans that supplement fee-for-service Medicare typically have a $300 deductible, 80 percent coinsurance, and an out-of-pocket limit of $1,750. Drug coverage typically involves a $5 copay for generic and a $10-$15 copay for brand name drugs, (Hewitt Assoc., 1998) and have an actuarial value of between $500 and $750 per beneficiary per year (Watson Wyatt, 1998). Most employers, 90 percent, who offer retiree health insurance coverage also offer prescription drugs (Watson Wyatt, 1998).

Cost of Employer-sponsored Retiree Coverage

The average cost for an employer-sponsored plan for Medicare Eligible Retirees in 1997 was $1,910 ( $159 per month). Source: Mercer/Foster Higgins "National Survey of Employer-Sponsored Health Plans 1997.

Medicare Eligible Retiree Contributions to Premium, 1997

How Employers Coordinate Benefits with Medicare?

There are three common ways employers coordinate their retirees’ coverage with Medicare:

1) Carve out - Carve out is a coordination method which first calculates the normal plan benefits that would be paid for a worker, then reduces this amount by the amount paid by Medicare. For example, if an employer’s coverage for employees and pre-Medicare retirees has a $300 overall deductible, the employer would pay the Medicare retirees’ deductible charges above $300. The Medicare retiree is effectively held harmless when he or she retires and acquires Medicare as primary coverage. It is the most common way employers coordinate with Medicare. As many as 75 percent of beneficiaries with employer-sponsored coverage are in carve out plans (Christiansen and Shinogle, p. 12, 1997).

2) Traditional - Traditional Coordination of Benefits (COB) allows the beneficiary to receive up to 100 percent of expenses from a combination of Medicare and employer plans. The employer plan pays the portion not paid by Medicare, but no more than it would have paid in the absence of Medicare. Of the three approaches, traditional COB is the most generous. It generally removes all price sensitivity for the beneficiary.

3) Maintenance of Benefits -Maintenance of Benefits (MOB) reduces covered charges by the amount the primary plan has paid, and then applies the plan deductible and coinsurance criteria. Consequently, the plan pays less than it would under a traditional COB arrangement, and the beneficiary is typically left with some cost sharing.

Recent Developments in Retiree Coverage

Employers typically cover retiree health costs as they are incurred, rather than prefunding them as they might their employee pension programs. In 1990, the Financial Accounting Standards Board announced the introduction of a new rule, referred to as FAS 106, regarding these unfunded obligations. Beginning in 1993, employers were required to include the present value of future costs for retiree health benefits as a liability on their balance sheets. The new standard does not require that employers set aside funds to pay for these future costs, and thus it does not affect their cash flow. Large unfunded liabilities for retiree health coverage can make a company’s stock less attractive to potential investors. In responding to benefit consultant surveys, many companies cited FAS 106 as a reason for modifying retiree health benefits.

In a recent survey of employers (Hay Group, 1998), 5 percent of employers had dropped retiree coverage since FAS 106 took effect and another 3 percent were considering dropping coverage. A more common response among employers was to require higher contributions from their retirees, 25 percent, as a means of offsetting FAS106 liabilities.

Some employers have turned to Medicare risk HMOs as an efficient alternative. One survey, Mercer/Foster Higgins, found that the percentage of medium and large employers offering coordinated risk HMO plans rose from 7 percent in 1993 to 39 percent in 1997. Among employers offering this type of coverage, about one third provided some kind of incentive for retirees to join risk plans, resulting in about 39 percent of beneficiaries choosing this option.

Hewitt Associates found that large employers offering Medicare risk HMOs on a group basis usually subsidize the offering so retirees in different parts of the country will have uniform cost-sharing and benefits. They usually negotiate and pay additional costs for prescription drug coverage without annual limits.

 Appendix A: Data on Retiree Health Coverage from Various Sources:

Employers offering Retiree Health Benefits, 1998

Percent of Retirees offered a Medicare Risk Contract for Coverage of Health Benefits, 1998

Facts from Mercer/Foster Higgins "National Survey of Employer-Sponsored Health Plans 1997"

Note: Data are for Employers > 500 workers

Distribution of Medicare Eligible Retirees by Plan Type, 1997

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