Statement of Donald A. Young, M.D., President,
Health Insurance Association of America

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on Medicare Supplemental Insurance

March 14, 2002

Introduction

Mr. Chairman, distinguished members of the Subcommittee, I am Donald A. Young, MD, President of the Health Insurance Association of America (HIAA).  HIAA is the nation's most prominent trade association representing the private health care system.  Its nearly 300 members provide health, long-term care, dental, disability, and supplemental coverage to more than 100 million Americans.  Many of HIAA’s members provide Medicare supplemental insurance products, including individual Medigap policies, and we, therefore, greatly appreciate the opportunity to join in today’s discussion. 

Current Medigap Market

Because Medicare was designed with deductibles and coinsurance, with limits on covered services, and with certain services not covered at all, there have been gaps in coverage from the very beginning.  In fact, it’s been estimated that Medicare covers only about half of the health care costs incurred by seniors and other beneficiaries, leaving many at significant financial risk for illness. Medicare supplemental insurance was designed to address this financial risk.  Approximately 20 million seniors have Medicare supplemental coverage, either through an employer-sponsored plan for retirees (11.5 million beneficiaries) or through an individually purchased Medigap plan (8.4 million beneficiaries).  Many other seniors have supplemental coverage through Medicare+Choice (5.5 million) or Medicaid (3.8 million).  About 4.3 million beneficiaries have no supplemental coverage.[1]

In 1990 Congress mandated the creation of 10 standardized Medigap plans, Plans A through J.  In addition, two high deductible policies were authorized by the Balanced Budget Act of 1997.  Three of the 10 standardized plans, H, I and J, and the J high deductible plan, provide  limited coverage for prescription drugs. 

Popularity of Medigap Among Seniors

Surveys conducted bi-annually by the Inspector General of the Department of Health and Human Services continue to show a high level of satisfaction among seniors with their Medigap coverage.   A survey conducted last summer by a private company, American Viewpoint, found that 89 percent of respondents were satisfied or very satisfied with their Medigap coverage, while 76 percent of respondents said that, considering the premiums they pay, the policies are a good or excellent value.  What they value most is peace of mind from knowing what their medical costs will be and the lack of paperwork – they don’t have to hassle with medical bills.  The vast majority (81%) would recommend Medigap coverage to a friend or relative when they turn 65 and enroll in Medicare.[2]

Transition Issues

In considering potential changes to Medigap, it is important to understand that essentially any change would raise a variety of transition issues that would need to be very carefully addressed.  I’d like to take a few minutes to discuss the most important of these.

Treatment of old policies.  One very important element of any Medicare and Medigap reform is the treatment of current Medigap policyholders.  Public policy must be carefully crafted to support a stable supplemental insurance market and avoid adverse selection.  When the 10 standardized plans were implemented in the early ‘90s, beneficiaries were granted a 6-month open enrollment period, during which they could purchase any of the new policies available in their state.   They also were allowed to keep their pre-standardized policy instead of buying one of the new policies, if they preferred.  The one-time opportunity to choose the desired level of supplemental coverage protects the market and the plans with richer benefits from rate spirals that result from adverse selection.

We envision a very different transition in the context of comprehensive Medicare and Medigap reform.  Standardized policies A – J were designed to mesh with the current Medicare benefit structure.  Comprehensive reform, which may entail eliminating the Part A and Part B distinction or otherwise changing the structure of beneficiary cost-sharing, will require that new standardized supplemental policies be defined which mesh with the new Medicare covered benefits.  In that case, policyholders with plans A – J would most likely need to transition to new supplemental policies, and policies A – J would be retired.  Having a one-time, limited open enrollment opportunity for the new supplemental policies, in the context of comprehensive reform, should be workable (in terms of the hazards of adverse selection) because all beneficiaries (the more healthy and less healthy) will be moving into the new policies. 

Regulatory implementation.  Another important element of transition from current Medigap offerings to new supplemental policies is regulatory implementation.  In a process created by OBRA 1990, Congress preserved for the States (and the National Association of Insurance Commissioners (NAIC)) the role of defining detailed standards and regulating Medigap carriers.  Thus, after Congress enacts guidelines for reformed supplemental benefits, the NAIC must design new standardized policies and develop model regulations, and the Department of Health and Human Services must adopt the NAIC model as part of the federal requirements.  Subsequently, each state must change its laws and regulations to implement the new requirements, to ensure that state requirements are at least as stringent as federal requirements. 

Since states play a central role in regulating Medigap insurance, Congress must recognize that this process takes time, and the implementation period must be sufficiently long to allow for this.  The timeline set under the BBA for implementing the new standardized high deductible policies was too short, and much confusion resulted.     On the other hand, we also believe that the NAIC would need to consider some form of “speed to market” arrangement for any reformed Medigap plan offerings so that the opportunity for beneficiaries to purchase better coverage is not unduly delayed.

Education.  Yet another very important element of transition is education.  Clearly provisions for adequate regulator, insurer, agent, and beneficiary education are essential in order for beneficiaries to receive the supplemental insurance options intended by Congress.  Because reeducation in the Medigap market is such a massive undertaking, and because the market has experienced much stress in recent years, the frequency with which Congress changes Medigap standards should be kept to a minimum. 

NAIC Consideration of Medigap Reform

In considering Medigap reform, we believe it is useful to review recent efforts by the NAIC.  In 2000 and 2001, the NAIC undertook a reexamination of the 10 standardized Medigap policies, assigning the task to the Medicare Supplement Working Group.  In conducting its examination, the Working Group conferred with consumer representatives, state and federal regulators, Medicare supplement insurance carriers and their trade associations, including HIAA.  Through a seven-month structured fact-finding process, the Working Group elicited statistical data, information and opinions from the various interested parties.  And, at the 2000 NAIC Winter National Meeting, the working group held a public hearing.

The final report of the Working Group,[3] adopted by the NAIC Health Insurance & Managed Care (B) Committee on December 10, 2001, contains a list of possible revisions for further consideration – but only in the context of comprehensive Medicare reform.  Importantly, the report highlights a number of concerns about the prospect of numerous, incremental changes to Medigap. In this regard, relevant excerpts from the report include the following: 

• “In the absence of comprehensive Medicare and Medigap reform, which would need to contain appropriate transitional periods for relevant Medigap blocks of business and implementation of amended state regulations, most interested parties cautioned against incremental changes to the Medigap benefit design.” 
• “It is important to note [that] frequent changes in Medigap benefits are costly and confusing to beneficiaries.” 
• “Any revision to the [Medigap] standardized plans must consider the transition issues that involve regulatory changes, beneficiary education, and adverse selection where existing plans are grandfathered.” 

The Working Group’s report does present a number of suggested modifications to Medigap benefits “if larger Medicare reform is adopted, thus necessitating changes to Medigap.”  Examples include the following:

• Delete coverage for services that are now Medicare covered services (e.g. certain preventive benefits), or that are no longer needed due to Medicare program changes (e.g. coverage for excess charges, coverage for at home recovery).  
• Consider including new benefits (e.g. cost-sharing for Medicare hospice benefit).
• Include deductibles and copayments/coinsurance to create incentives for appropriate service utilization. 
• Have fewer standardized plans.
• Allow use of benefit utilization controls such as tiered drug formularies in those Medigap plans that include prescription drug coverage. 

The Issue of First-Dollar Coverage

The announcement for this hearing expressed concern about the fact that many of the Medigap plans purchased by seniors cover Medicare Part A and Part B deductibles as well as Part A copayment and Part B coinsurance amounts.   This is typically referred to as first-dollar coverage.  The concern is that first-dollar coverage, by lessening beneficiary price sensitivity, may increase Medicare spending, perhaps inappropriately.

This is not a new issue, and things are not as simple as they might first appear.  To begin with, not all Medigap plans provide full first-dollar coverage.  However, it is certainly true that those that do are the most popular plans among the nation’s seniors.  Medigap plans C, F and J are the three that cover both the Part A and Part B deductibles.  These three plans are twice as popular as the other seven plans combined.   This popularity is likely due to the fact that Medicare beneficiaries are risk averse and derive a great deal of financial and personal security from their supplemental insurance policies.

Moreover, under the Balanced Budget Act of 1997, Congress provided for two, new high-deductible Medigap products.  However, few such plans have actually been sold, and there are reports that the biggest hurdle to the sale of these products is overcoming beneficiary expectations that a Medigap plan will provide first-dollar coverage.   Thus, any Congressional plan to restrict Medigap first-dollar coverage of deductibles and other cost-sharing obligations is likely to require considerable Medicare beneficiary education and involvement in order to overcome expected beneficiary resistance to this idea.    

Second, if Medicare spending is higher for beneficiaries who purchase a Medigap plan with first-dollar coverage, it cannot automatically be assumed that such spending is for medically inappropriate or unnecessary services.  Medicare’s existing coverage and utilization review mechanisms are specifically designed to assure that Medicare pays only for items and services that are reasonable and necessary.  Medicare supplemental insurers do not make independent coverage decisions.  Thus, attempts to move away from first-dollar coverage might in fact impose barriers to the receipt of necessary care.  A special study performed a few years ago for HIAA by Gerard Anderson and his colleagues at Johns Hopkins noted that the burden of Medicare cost-sharing is distributed unequally across beneficiaries, increasing as they become older, develop chronic illnesses, or have catastrophic illnesses.[4]  Supplemental insurance spreads this risk, thereby reducing the financial burden on older beneficiaries and those with chronic or catastrophic illnesses. 

Dr. Anderson’s study also noted that the available literature suggested that Medicare beneficiaries’ price sensitivity is greatest for preventive and physician services.  According to Dr. Anderson’s study, Medicare beneficiaries without supplemental insurance were much less likely to have flu shots, mammograms, and pap smears.   For this and other reasons, Dr. Anderson cautioned that comparisons of the Medicare expenditures incurred by beneficiaries with supplemental coverage and those who do not overestimate the effect of supplemental insurance on Medicare spending. 

Even the celebrated RAND Health Insurance Experiment, which investigated the impact of cost-sharing on health care utilization by a non-elderly population, found that when faced with cost-sharing, individuals were just as likely to limit the use of “highly effective” care as “less effective” care.   Thus, as far as we can determine, the Medicare savings predicted from restrictions on first-dollar coverage of Medicare deductible and coinsurance amounts would, at least to some extent, be due to the fact that beneficiaries would be discouraged from seeking medically appropriate care.     In a report last year, the Congressional Budget Office acknowledged that “the decrease in use of services by Medigap policyholders” produced by restrictions on first-dollar coverage “might not be limited to unnecessary care, so the health of some policyholders might be adversely affected.”[5]

Medigap Benefit Design

The committee’s announcement for this hearing also questioned the value of one of the prescribed benefits for most Medigap policies, foreign travel insurance, asserting that most beneficiaries never leave their home country.    This benefit covers 80 percent of the medically necessary emergency care received in a foreign country, after a $250 deductible, up to a lifetime maximum of $50,000. 

Ideally, any redesign of Medigap benefits would take account of the needs and preferences of today’s seniors.  Many seniors do travel outside the United States, and may well value the peace of mind associated with Medigap coverage when they do so.  On the other hand, if a benefit is infrequently used, it does not contribute very much to product pricing, and so dropping the benefit would not, by itself, produce much benefit.   

In this regard, it also needs to be remembered that current law requires that Medigap products be guaranteed renewable.  This means that a Medigap policy may not be cancelled or have its benefits changed.   Thus, any revisions to current Medigap benefits would raise very important transition issues, which are likely to be complex and difficult to resolve.  

In the case of the elderly, many of whom suffer from chronic illnesses, treatment costs for such things as prescription drugs and regular physician office visits can be more or less predictable.  This relative predictability certainly permits each beneficiary to make a reasoned economic judgment about the expected near-term value of an insurance product.   In other words, beneficiaries can be expected to do the math, comparing anticipated benefits with known premium costs.    This raises the potential that healthier Medicare beneficiaries will seek out lower cost Medigap products or even decide to self-insure, thereby further driving up the average costs of coverage for those remaining behind.  As insurers know only too well, benefit redesign, if not very carefully done, can lead to adverse selection and ultimately make the re-designed insurance product simply unaffordable for the average citizen. 

Bush Administration Proposals

As part of his fiscal year 2003 budget plan, President George W. Bush has proposed several mechanisms for providing prescription drug benefits for Medicare beneficiaries.  One of these would involve the creation of two new Medigap plans.  These plans would offer prescription drug coverage, protect beneficiaries against catastrophic illness, and include nominal beneficiary cost-sharing, all presumably for a lower premium cost than the most popular Medigap plans today.

To date, few details have been released about the exact nature of the benefits for the two new Medigap plans or how they would be implemented.  For example, the degree to which the new products would or would not provide coverage for Medicare deductibles and other beneficiary cost-sharing obligations has not been spelled out.  The Administration maintains that the new plans will offer better benefits at a lower premium than the most popular Medigap plans today.  However, it seems more likely that these new policies would require premiums comparable to, or even higher than, the premiums for today’s most popular policies, especially since they promise more generous prescription drug benefits than current Medigap policies, catastrophic expense protection, and only “nominal” beneficiary cost sharing obligations.

Furthermore, there appears to be considerable risk that the new Medigap products would be subject to adverse selection, since they would be more likely to appeal to beneficiaries expecting high health care utilization (e.g., high prescription drug costs).   This risk, would likely discourage Medigap carriers from offering the new products, especially since they would expect to find it difficult to secure from state regulators future rate adjustments needed to cover the level of cost increases induced by adverse selection and rising prescription drug costs.   In this context, it goes without saying that Medigap carriers would strongly oppose any attempt to require them to offer the new Medigap options.  Such a mandate could prompt some carriers to exit the Medigap market entirely. 

HIAA certainly looks forward to getting more information about the President’s Medigap proposal and to helping the Congress assess its various components.  We certainly share everyone’s desire to find ways to better meet the needs of Medicare beneficiaries.

HIAA’s Recommendations to the Congress

What I have tried to do today is to provide a context for the understandable desire to reform not only the basic Medicare program, but Medigap coverage options as well.  I hope it is apparent that even the most tempting Medigap reforms would need to navigate some difficult ground.   The design of any new or revised Medigap plans would, of course, be heavily dependent upon the features of a modernized Medicare program.   Thus, it seems to us that the Congress should first make decisions about the Medicare program itself, and then proceed to address corresponding Medigap issues. 

HIAA also believes that changes to Medigap policies should be done in conjunction with comprehensive changes in Medicare benefits, and not before that time.  Further, changes affecting Medigap should be made at one time and not in an incremental or piecemeal fashion.  Making Medigap changes in two or more “rounds of reform” would add significantly more administrative costs to the system than making such changes at one time, and would likely increase beneficiary confusion.  

We would also suggest that Congress provide as much flexibility as possible for any mandated redesign of Medigap benefits.  As you know, under the Omnibus Budget Reconciliation Act of 1990, the Congress did not specify the contents of the 10 standardized Medigap plans we have today, but instead allowed for a process where consumer representatives, state regulators, and insurers worked together to design Medigap benefit options.  Similarly, we believe that it would be extremely risky for Congress to mandate by statute the contents of insurance products intended for voluntary sale and purchase in the private marketplace.

Finally, to state the obvious, when it comes to Medigap, Medicare beneficiaries are the customers, and they are free to buy — or not buy — available products.  In the end, whatever we do must be viewed as beneficial, not harmful, to the interests of the typical Medicare beneficiary, and result in Medigap products that are affordable.

Conclusion

I hope that my testimony today helps elucidate the many issues that arise in any consideration of changes to Medigap.  HIAA is open to considering Medigap reforms, such as those catalogued in the NAIC Medicare Supplement Working Group report, in the context of broader reform of Medicare covered benefits.   However, without knowing how the core Medicare benefit package is structured, it is difficult, if not impossible to properly evaluate the merit of individual Medigap reform suggestions.  In addition, some suggestions may not be well received by Medicare beneficiaries, could risk subjecting Medigap plans to adverse selection, or might otherwise endanger the important goal of maintaining affordable Medigap products.  In any case, HIAA and its member companies look forward to working with this committee to craft feasible Medicare and Medigap policies that will meet the needs and expectations of Medicare beneficiaries.

[1] Laschober, Mary A., Michelle Kitchman, Patricia Newman, and Allison A. Strabic, “Trends in Medicare Supplemental Insurance and Prescription Drug Coverage, 1996-1999,” Health Affairs, February 27, 2002.  Figures are for fall 1999, except for Medicare+Choice (6.0 million in fall 1999), which has been updated by CMS data to February 2002.

[2] AmericanViewpoint, National Medigap Enrollees Survey, Conducted for the Coalition to Preserve Choice for Seniors, June 22 - July 1, 2001.

[3] “Report on Revisiting Medicare Supplement Insurance Standardized Plans,” Final Report of the  Medicare Supplement Working Group of the NAIC Senior Issues Task Force. December 10,  2001

[4] Anderson, GF; Wiest, A; Shaffer, T; Hussey, P; and Bilenker, J.  Concerns About the Theory of Increased Cost-Sharing for Medicare Beneficiaries and Its Policy Implications for the Medicare Program.  Washington, DC: Health Insurance Association of America, 1999.

[5] Congressional Budget Office, Budget Options, February 2001.

HIAA Traditional Members.