3.  Rationalizing Cost Sharing and Medigap

a.  New 20 percent coinsurance on clinical laboratory services

Policy: For most other Part B services, beneficiaries are subject to both a deductible and the 20 percent coinsurance rate. However, Medicare currently pays 100 percent of the approved fee for clinical laboratory services provided to beneficiaries. This policy would apply 20 percent coinsurance requirements to all clinical laboratory services beginning in 2002. This coinsurance requirement would not apply to lab services which are also preventive services (e.g., pap smears and fecal occult blood lab tests for colorectal cancer screening).

Background/rationale: Clinical laboratory services represents a fast-growing Medicare service. About 24 million beneficiaries used diagnostic lab service in 1997, at a rate of about 14 services per user and an annual cost of $200 per user. Having beneficiaries contribute towards their lab services would make cost-sharing requirements under Part B more uniform and easier to understand. It also could cut down on fraud and help reduce over-use.

b.  Indexing the Part B deductible to inflation

Policy: Medicare’s Part B deductible of $100 would be indexed annually to inflation beginning in 2002. Given current inflation projections, this policy would increase the deductible by $2-$3 per year.

Background/rationale: The Part B deductible (i.e., the amount that enrollees must pay for services each year before the government shares financial liability) is set at $100 a year. In relation to average annual per capita charges under the SMI program, the deductible has fallen from 28 percent in 1967 to about 3 percent (projected) for 2000. The deductible has been increased only three times since Medicare began in 1966, when it was set at $50. Rather than follow past practice of instituting a one-time increase of 20-33 percent, this policy would make small, annual adjustments to guard against the program assuming a growing amount of Part B costs.

c.  Updating and expanding Medigap plan options

Policy: This policy would request that the National Association of Insurance Commissioners (NAIC) create a new Medigap plan option that has more rational cost sharing than the current standardized plans. The plan option would protect beneficiaries against catastrophic costs while maintaining nominal cost sharing to discourage unnecessary use of health care services. This new Medigap plan would simply provide another option for beneficiaries; those who wish to continue their current Medigap coverage would not be affected. All Medigap carriers would be required to offer this policy, which would likely be less expensive than other plan options because of its nominal cost sharing.

It would also authorize the Secretary, in consultation with the NAIC, to review the standard Medigap packages on a periodic basis to determine whether any changes should be made to the content or number of the packages. The proposal would also conform Medigap benefits to the changes in this reform plan.

Background/rationale: Medigap plans typically eliminate all cost sharing for most Medicare services. As a consequence, beneficiaries face no immediate cost for using health care services. One study found that Medicare spending for beneficiaries with Medigap coverage was 29 percent higher than that of beneficiaries with no coverage, and 11 percent higher than that of beneficiaries with retiree health coverage (which typically has some cost sharing). Additionally, the premiums for Medigap have been rising rapidly – over 10 percent per year according to some sources. A policy with limited cost sharing could be less expensive and thus more affordable than the current plan options while still protecting beneficiaries from high out-of-pocket costs.

The ten standard Medigap packages were created as a result of OBRA ‘90. This proposal would authorize a review of the packages, most notably the drug benefit provisions. In particular, the Secretary and NAIC would examine the feasibility of providing additional drug coverage through a Medigap plan that provides both additional protection above the limit and reduces the coinsurance rates for coverage below the limit. The establishment of a Preferred Provider Option (PPO) within traditional Medicare also has implications for Medigap. The Secretary and the NAIC would also continue their current efforts to improve the information available to beneficiaries about their Medigap options, similar to the current HHS efforts to provide beneficiaries with easy-to-compare information on their options for basic Medicare benefits.

d.  Report to Congress on policy options for supplemental coverage

Policy: The Secretary of Health and Human Services would be directed to produce a detailed report to Congress on policy options for improving supplemental coverage for Medicare beneficiaries, with a special focus on limiting out-of-pocket spending for Medicare-covered services. This report would examine issues associated with having multiple sources of insurance (e.g., duplication of coverage, incentives to overuse care) and compare Medicare’s cost sharing to that of a typical private-sector health insurance plan. It would also present options and recommendations on ways to improve beneficiary information on the cost and quality of Medigap; the feasibility and advisability of Medicare offering an unsubsidized option to limit out-of-pocket spending; and whether and how to structure the supplemental benefits that private plans could offer (without subsidies) in the new competitive defined benefits system.

Background/rationale: Because Medicare does not protect against high out-of-pocket health spending, about 90 percent of Medicare beneficiaries have some second (or third) source of health insurance. Some of these beneficiaries get supplemental coverage through Medicaid or Medicare managed care, while about 30 percent purchase private Medigap plans. Medigap premiums vary tremendously and can be quite costly. Individual insurance typically has a mark-up for administrative expenses and profit of 30 percent. In contrast, private group plans, the mark-up is about 10 percent and Medicare administrative expenses are less than 2 percent. Additionally, Medigap totally eliminates cost sharing, which could encourage overutilization. Studies have documented that people with Medigap tend to have higher use and costs relative to people with retiree coverage, which has some cost sharing. The accessibility and affordability of supplemental insurance also appears to be declining. A study of trends between 1992 and 1996 found that the premiums of the most popular Medigap plans experienced nearly double-digit inflation. In recent years, Medigap coverage has declined, although this has been somewhat offset by increased Medicare managed care enrollment. Similarly, retiree health coverage is declining. Between 1993 and 1997, the percent of large firms offering retiree health benefits dropped by about 20 percent. As such, private supplemental coverage as it is currently offered may become more inaccessible in the future.

Possible approaches to reducing costs and improving coverage include a mechanism for Medicare to provide standardized, understandable information on Medigap plans to beneficiaries, much as Medicare is doing to improve competition and reduce costs of private plans, and having Medicare offer unsubsidized Medigap coverage. This study would be conducted in conjunction with the proposals for updating private Medigap options discussed above.

e.  Access to Medigap

Policy: The President’s budget includes several policies that would improve access to Medigap for beneficiaries whose private plans have withdrawn from Medicare. They include:

• Initial Open Enrollment for Medigap for Disabled and end-stage renal disease (ESRD). Under current Federal law, only aged beneficiaries have an initial open enrollment period for Medigap. Eighteen States mandate an initial open enrollment period for beneficiaries under 65 (although one of these states does not include individuals with ESRD). This proposal would expand the initial 6-month open enrollment period to new disabled and ESRD beneficiaries. It would mandate that insurers who write policies for new aged beneficiaries offer these same policies to new disabled and ESRD beneficiaries. Enactment of this proposal would assure Medigap access in all states for disabled and ESRD beneficiaries both upon initial eligibility for Medicare and also in the case of Medicare+Choice plan termination. This proposal would be effective upon enactment.
• Special Medigap Open Enrollment Period for Certain Beneficiaries. The BBA provided that beneficiaries in plans that terminated their Medicare contract or reduced their service area have a 63 day open enrollment period for Medigap. The provision was triggered for the first time by plan terminations and service area reductions effective January 1, 1999. Unfortunately, given the newness of this provision, some insurance carriers were not properly prepared to answer inquiries regarding this new right. This proposal would provide a one-time additional special Medigap open enrollment period for individuals who were enrolled in a plan and who had no Medicare+Choice option after the plan terminated its contract or reduced its service area effective January 1, 1999. The special enrollment period would begin upon enactment and would last for 90 days.
• Expand Choice of Medigap Plans During Special Enrollment Periods. The BBA provided special enrollment opportunities for Medigap under certain situations (e.g., for an enrollee of a Medicare+Choice plan whose plan terminates its contract or reduces its service area). Under current law, however, beneficiaries in these situations only have access to plans "A","B","C" and "F", none of which include coverage of prescription drugs. This proposal would expand the BBA special open enrollment opportunities to include access to all Medigap options, including those that offer prescription drugs, offered to new enrollees. This proposal would be effective upon enactment.
• Increase Civil Monetary Penalties for Violation of Medigap Open Enrollment Requirement. Issuers who violate the open enrollment requirement are subject to a civil monetary penalty (CMP) of $5,000 for each violation. This proposal would increase the CMP for failure to $50,000 for each violation plus $5,000 per day per violation and would be effective upon enactment.

Background/rationale: Medicare HMOs decide each year whether to continue serving beneficiaries in selected counties or entire service areas. Plan decisions in 1998 led to just over 50,000 beneficiaries in 79 counties who were left with no other managed care option available. Preliminary reports suggest that more plans will drop out of Medicare this year. Beneficiaries who return to original fee-for-service Medicare may seek individual Medigap policies. Current law offers some protections, but these protections are not complete. The President’s proposals would improve access to Medigap for beneficiaries whose plans withdraw from Medicare. The President’s proposal for a prescription drug benefit available to all beneficiaries in both the traditional program and private plans will also help protect beneficiaries whose plans withdraw from Medicare.