Effect of Changes in Medigap Insurance

As Medicare searches desperately for ways to cut its spending growth one option that has been suggested by MedPAC, some congresspeople and others is to reform Medigap policies so that they no longer provide in essence first dollar coverage.  A Kaiser Family Foundation report examines the likely effect of these proposals both on Medicare and on beneficiaries.  (Kaiser Report) Medicare’s benefits, depending on the type, have a deductible, coinsurance and no out-of-pocket limit.  In 2008, it was estimated that 6% of beneficiaries had cost-sharing of $5000 or more.  So around 90% of beneficiaries have some kind of supplemental coverage.  About 30% get this through retiree health coverage, another 25% by enrolling in Medicare Advantage plans, 15% through Medicaid and 17% from Medigap coverage.

Today the law allows ten standard Medigap policies, some of which cover almost all out-of-pocket costs.  Research indicates that seniors with this richer coverage use more services than those without it.  The report examines three options to address cost-sharing.  The first option requires significant cost-sharing and is similar to proposals from the Bowles-Simpson commission, the Congressional Budget Office and others.  The second also requires fairly substantial cost-sharing, but not as much as the first option.   The third only adds limited cost-sharing on physician services and ER visits.  The first two options also have an out-of-pocket limit, which might help protect relatively unhealthy seniors with high health service use.  The most interesting aspect of the analysis of these options is that there is a trade-off; as seniors have more potential out-of-pocket exposure, they also have lower premiums, since the insurer is picking up less of the tab.

The analysis suggests that the first option would save Medicare about $4.6 billion in 2011; the second, $2.3 billion and the third, $1.5 billion.  Under all three options, on average beneficiaries would see a reduction in total expenses–the combination of their premium payments and their out-of-pocket costs, because premiums would drop more than average out-of-pocket costs increase.  The savings are greatest in the first option, over $400, dropping to $190 in option 2 and only $78 in the third option.  The range of savings is very large; some beneficiaries might see a reduction in overall spending of over $1000, while others could see increases of over $1000, depending on the option being analyzed.   Those with higher cost-sharing would likely be less healthy and poorer.  While the savings aren’t huge; anything is worth considering at this point.