Under traditional Medicare, beneficiaries have cost-sharing responsibilities that can be substantial if they have a serious health problem. Traditional Medicare does not limit beneficiary out-of-pocket costs. To help mitigate the risk of high out-of-pocket costs, many beneficiaries supplement their benefits with private insurance, often under an employer’s health benefit plan or a Medicare Supplement Insurance policy, known as a Medigap plan.
In 1990, Congress standardized the Medigap policies that insurance companies may offer. Congress also created a variety of major consumer protections, including a uniform outline of coverage, guaranteed issue of coverage at age 65 or older (regardless of health status) for the first six months of Medicare Part B enrollment, a six-month limit on coverage restrictions for preexisting conditions, guaranteed renewal, and a prohibition on the sale of duplicative policies. In 1997 Congress expanded guaranteed access to Medigap plans, allowing special enrollment periods under certain circumstances and improving portability protections by requiring that prior, continuous insurance coverage be credited against the allowed six-month restriction on benefits related to preexisting conditions.
With the advent of the Medicare drug benefit (Medicare Part D), Congress prohibited the sale of prescription drug coverage in Medigap plans. Congress also created two new standard Medigap plans with additional cost-sharing and called for the review and updating of the standard plans established in 1990. The updated standards took effect in 2010.
Some recent Medicare reform proposals include measures either to restrict Medigap plans’ ability to cover all or most Medicare cost-sharing, or to place a surcharge on such Medigap plans. These proposals stem from a concern that Medigap plans that fully cover Medicare cost-sharing insulate beneficiaries from the costs associated with seeking care, leading them to use more Medicare services and drive up spending. The goal of these proposals is to reduce Medicare’s costs by relying on cost-sharing to make people more cost-conscious when seeking care or by capturing a portion of the cost of additional service use by those who choose first-dollar coverage.
An opposing view is that cost-sharing is a crude tool that discourages people from initiating necessary, as well as unnecessary, care. This view maintains that once care is initiated a provider’s treatment recommendations have more to do with treatment selection than cost-sharing considerations. Further, Medigap plans, as secondary payers, do not make coverage decisions and only pay based on Medicare’s coverage rules. The reasons for observed differences in Medicare costs and service use among Medigap participants is a topic of ongoing debate.
In 2015, the Medicare Access and CHIP Reauthorization Act prohibited certain Medigap policies from covering beneficiaries’ payment of Medicare Part B deductibles. This change was intended to limit first-dollar coverage and only applies for people who become eligible for Medicare beginning January 1, 2020.
Beyond the existing Medigap consumer protections, concerns remain about access and cost. For example, federal law does not require insurers to issue Medigap policies to this population. This also affects beneficiaries who are eligible for Medicare because of end-stage renal disease (ESRD), whose out-of-pocket liabilities under Medicare are often large. Whether a Medicare beneficiary younger than age 65 has access to Medigap depends on whether his or her state has added any protection.
Medicare Supplement rules ordinarily do not protect beneficiary access to Medigap coverage outside the initial open enrollment period or designated special enrollment periods. As a result, under current law, if beneficiaries disenroll from an MA plan and change to traditional Medicare during Medicare’s annual open enrollment period, they may not be able to buy Medigap coverage.
Rate increases on the basis of age can contribute to the cost of Medigap coverage over time and may push Medicare Supplement plans beyond the reach of many people on fixed incomes. While Medigap policies have standards for the share of premiums that must be spent on claims (called the “medical-loss ratio”), their share is lower than those required of other health insurance products under the ACA.
Medicare Supplement Insurance (Medigap): Policy
Affordability and availability
Congress and state legislatures should keep Medicare Supplement Insurance (Medigap) affordable and available to those who need it by:
- requiring pure community rating and prohibiting insurers from varying premium levels and premium rate increases for different individuals on the basis of age;
- applying similar regulatory rules on medical underwriting to all Medigap insurers;
- requiring Medicare Supplement insurers to provide Medicare beneficiaries with disabilities under age 65 who are not in Medicare’s ESRD program with the same guaranteed access to supplemental coverage given to beneficiaries age 65 and older; and
- protecting ESRD beneficiaries against high out-of-pocket costs. Potential solutions include creating a managed care option; developing a federally supported Medicare Supplement Insurance policy, Medigap risk-pool program, or reinsurance program for guaranteed access to private supplement coverage; or some variation or combination of these options.
Reviewing standards and trends
Federal and state policymakers, together with the National Association of Insurance Commissioners, should review Medicare Supplement Insurance standards to ensure that plans continue to offer meaningful benefits and affordable choices for beneficiaries to supplement their coverage in fee-for-service Medicare and protect them from high out-of-pocket costs.
Congress should ensure that people with preexisting conditions have access to Medigap coverage and should make the Medigap medical-loss ratio standards similar to the standards for other private insurance plans, including MA plans.
Congress should put Medicare fee-for-service and MA plans on a level playing field by making all Medigap products available, without regard to health status, to Medicare beneficiaries who are switching from an MA plan into Medicare fee-for-service:
- during Medicare’s annual open enrollment period,
- during the 45-day period at the start of each year when MA enrollees may disenroll and switch to fee-for-service Medicare, or
- when an MA beneficiary has a special enrollment period allowing a change to fee-for-service.
When reviewing and approving Medigap premiums, states should be particularly attentive to ensuring that rates appropriately reflect claims exposure and that premium increases are justified and reasonable.