A Special Report from Families USA
October 1996

The Crushing Costs of Medicare Supplemental Policies

No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings they have so carefully put away over a lifetime so that they might enjoy dignity in their later years. No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations. --Lyndon B. Johnson at the signing of the Medicare legislation in July, 1965

INTRODUCTION

In the 1996 Congressional debate over the Medcare "crisis," Americans heard much about the need to cut the growth of Medicare funding. The issue was framed not only in terms of how much to cut, but how to distribute the burden of those cuts. A number of legislative initiatives proposed to shift a portion of program costs to Medicare beneficiaries by increasing their premiums and out-of-pocket costs. Largely lost in the debate was the significant amount of money the elderly already spend out-of-pocket.

Proposals that will require the elderly, especially the low-income elderly, to pay more for their Medicare coverage should be placed in the context of senior out-of-pocket health care costs, a significant component of which is the premiums paid for Medicare supplemental policies. These costs, which have risen considerably faster than Social Security cost-of-living increases, are pricing the elderly out of the Medicare fee-for-service market.

This report examines the costs of Medicare supplemental policies by the largest Medicare supplemental insurers--Prudential Insurance Company of America (sold under the sponsorship of the American Association of Retired Persons or AARP) and state Blue Cross/Blue Shield plans --and the sharp increases in premiums for these policies between 1995 and 1996.

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KEY FINDINGS

• Between 1995 and 1996, large numbers of elderly received major, double-digit increases in their Medicare Supplemental Insurance (Medigap) premiums, far in excess of Social Security cost-of-living increases.
• On average, Prudential Medigap 1995-1996 premium increases were 23 percent nationwide.
  • In 11 states, Prudential Medigap premiums increased an average of 30 percent or more;
  • In California, a state with 10 percent of the nations elderly population, Prudential premiums for some Medigap plans increased by over 40 percent.
• Between 1995 and 1996, in a number of states, Blue Cross/Blue Shild (BC/BS) insurers increased their Medigap premiums above the Medicare rate of inflation and well above the 2.6 percent Social Security cost-of-living increase.
  • Between 1995 and 1996, almost half (151 of 308) of the BC/BS standardized plans analyzed for this report increased premiums by 10 percent or more; and
  • The size of premium increases differed markedly from one state to another, one plan to another, and one age group to another--but overall, the growth of premiums far exceeded changes in seniors incomes.
• The dollar amount of Medigap premiums varies dramatically by state.
  • A female Medicare beneficiary age 65 first purchasing a Medigap Plan A policy from BC/BS plan in 1996 paid $280 in New Mexico and $876 in Ohio and those first purchasing Plan F paid $711 in Iowa and $1,531 in Florida.
  • In 1996, Prudentials Plan C for all ages cost $822 in New Mexico and $1,350 in California and Prudentials Plan J cost $2,205 in California compared to $1,509 in neighboring Oregon.
• Rising Medigap premiums are pricing Medicare beneficiaries out of the Medicare fee-for-service program and leading to increased HMO enrollment.
• Because AARP-sponsored Medigap insurace community rates and does not medically underwrite most of its Medigap plans, it is at a disadvantage in the Medigap market.

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OUT-OF-POCKET HEALTH CARE COSTS FOR THE ELDERLY

Health care costs not covered by Medicare burden the nations elderly. Medicare premiums and cost-sharing expenses (e.g., deductibles, co-insurance and co-payments) are significant (see accompanying chart). Medicare also does not cover the costs of prescription drugs and most long-term care. On average, Americas elderly paid $2,519 in out-of-pocket health costs in 1994 (AARP, 1996). In 1960-61, before the enactment of Medicare, the elderly paid an average of 11 percent of after-tax income on health care expenditures; by 1994, they were paying 18 percent of after-tax income on health care expenditures (Health Care Financing Administration (HCFA), 1996a).

The burden of out-of-pocket health care spending varies by income level. In 1994, the elderly with incomes below poverty paid 34 percent of their incomes on out-of-pocket health care, those with incomes between 100 to 200 percent of poverty paid 26 percent, while those with incomes at 200 percent or more of poverty paid 16 perent (Kaiser Family Foundation, 1995).

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THE ROLE OF MEDICARE SUPPLEMENTAL INSURANCE POLICIES

From the inception of Medicare, program beneficiaries sought protection from Medicare cost-sharing requirements through the purchase of additional private insurance. Slightly over 70 percent of elderly Medicare beneficiaries have either employer retirement or individually purchased insurance to supplement Medicare coverage. Forty percent of beneficiaries purchase Medicare Supplemental Insurance themselves. Medicare Supplemental Insurance (often called Medigap insurance) was originally sold to cover part or all of Medicares deductibles and co-insurance. Beginning in 1992, changes in federal law (part of the Omnibus Budget Reconciliation Act of 1990, or OBRA 1990) required Medigap insurers to standardize the policies offered and included some additional benefits not covered by Medicare.

Today Medigap insurers can offer no more than 10 standardized plans, labeled A-J. Plan A offers a "core package" of benefits. The other nine plans each have a different combination of benefits, but all include the core package. Medigap insurers are only required to offer plan A. They can offer all, some or none of the other nine plans.

All 10 plans are offered in 44 states. Three states (Delaware, Pennsylvania and Vermont) further limit the types of plans offered, while three states (Massachusetts, Minnesota and Wisconsin) have waivers for alternative simplification programs in effect prior to 1990. In the 44 states that have authorized the sale of all 10 plans, only Prudential offers plans A-J. In addition, as discussed below, AARP requires that Medigap policies sold through Prudential be community rated, that is, the premiums are the same regardless of age and health status. (As discussed below, community rating and other AARP mandated policies to share risk among beneficiaries and make its policies available to all elderly Medicare beneficiaries regardless of pre-existing conditions have disadvantaged the insurer in the market.)

In addition to the standardization of Medigap plans, OBRA 1990 requires Medigap insurers to sell policies for a six-month period to any Medicare beneficiary who has turned 65 and who has purchased Part B of Medicare.[3] That is, Medigap insurers may not deny coverage during this six-month period because of a pre-existing condition (although they may impose a pre-existing condition exclusion for up to six months). OBRA 1990 also set limits on Medigap "loss ratios" (i.e., the percentage of premiums actually paid out in claims) at 65 prcent for individual policies and 75 percent for group policies.

The Medigap market has grown steadily. In 1993, Medicare beneficiaries spent $12.1 billion dollars on Medigap insurance (General Accounting Office, 1995). Studies have shown that Medigap insurance increases access to care. The elderly with only Medicare (i.e., have neither additional Medigap insurance nor Medicaid coverage) are far likelier than those with additional coverage to report having no usual source of health care and to describe their health status as fair or poor (Chulis et al., 1993), and less likely to visit a physician or hospital outpatient facility or be admitted to a hospital (Physician Payment Review Commission (ProPAC), 1996). In one recent study, only 14.4 percent of female Medicare beneficiaries lacking supplemental insurance had a mammogram, as compared with 44.7 percent of those with employer-sponsored supplemental insurance, 40.1 percent of those with self-purchased supplemental insurance, and 23.9 percent of those with Medicaid supplemental insurance (Blustein, 1995).

In the last quarter of 1995, AARP announced a significant increase in the 1996 premiums of its Medigap policies, offered through the Prudential Insurance Company of America. On average, 1995-1996 premium increases were 23 percent nationwide. In 11 states, Prudential Medigap premiums increased on average by 30 percent or more (see Table1).

This study examines the Prudential increases and those of Blue Cross/Blue Shield (BC/BS) insurers. According to data collected by the National Association of Insurance Commissioners (1995), in 1994 Prudentials Medigap policies garnered 20 percent of all Medigap premiums, while state BC/BS insurers collected over 30 percent of Medigap premiums. Thus, these plans underwrite over 50 percent of the Medigap market.

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METHODOLOGY

Families USA requested the 1995 and 1996 Medicare Supplemental Insurance Guides produced by state departments of insurance. We were able to obtain guides (which include information on Medigap premiums) for both years for 26 states. We then calculated 1995-1996 premium increases for five of the 10 standardized plans: the basic plan (A), the two most popular plans (plans C and F) and two of the three standardized plans which offer prescription drug benefits (plans H and J). The accompanying chart describes the benefits offered by these five plans.

We analyzed premium increases for the five Medigap plans in the 26 states for which we had 1995 and 1996 state Medigap insurance guides.In a number of states, 1996 guides were published before BC/BS and other Medigap insurers increased their rates. In these states, we called BC/BS plans in September 1996 to obtain updated information. We also called BC/BS and Prudential plans in additional states to obtain 1995 and 1996 premium information directly from these Medigap insurers. We were able to obtain 1995 and 1996 premium data for both plans and calculate rate increases in 35 states. Tables 2 through 4 provide information on the dollar amount of premiums and Tables 5 through 7 provide information on the percentage of premium increases between 1995 and 1996 for Prudential and BC/BS plans in these 35 states. The data are presented for plans A, C, F, H and J for age groups 65, 70 and 80.

The data are limited in two ways. First, as mentioned earlier, we were unable to obtain 1995 and 1996 Department of Insurance Medigap Guides for a number of states. Second, some guides did not include premium information for all age groups or all plans for which the insurers wrote policies. (Appendix 1 provides a detailed description of the study methodology.)

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COSTS OF MEDICARE SUPPLEMENTAL POLICIES INCREASED DRAMATICALLY FROM 1995 TO 1996

Based on available data, a number of key findings are readily apparent. These include:

In almost all states surveyed, prudential medigap premiums increased dramatically between 1995 and 1996

1995-1996 Prudential premium increases were dramatic, topping 40 percent in some states for some plans. In only four states did the average premium increase by less than 10 percent (see Table 1). In California, a state with 10 percent of the nations elderly population, Prudential premiums for plans A and B increased by 40.2 percent; Plan F, by 39 percent; Plan H, by 43.3 percent; and Plan J, 25 percent. Thus, for the elderly in California with plan A, premiums increased from $552 in 1995 to $774 in 1996. For the elderly with Plan H, premiums increased by over $500, from $1,260 to $1,212 a year (tables 2 through 4).

Similarly, in Ohio, Prudential increased premiums for Plan A by 39.7 percent (from $393 in 1995 to $549 in 1996); for Plan C by 37.6 percent (from $783 in 1995 to $1,077 in 1996); for Plan F by 22.6 percent ($918 in 1995 to $1,125 in 1996); for Plan H by 37.7 percent (from $1,020 in 1995 to $1,404 in 1996); and for Plan J by 13.4 percent ($1,500 in 1995 to $1,701 in 1996).

With Few Exceptions, Increases in Prudential Medigap Polices Outstripped Those of BC/BS Policies

In Connecticut, for example, BC/BS increased premiums (depending on the specific plan) by between 10 and 12 percent for age 65 compared to a 25 percent increase for Prudential (for all but plan H, which went up 15 percent). In Ohio BC/BS increased premiums by 12.9 percent for Plan A and 14.4 percent for Plan C for age 65 compared to a Prudential increase of 39.7 percent for Plan A and 37.6 percent for Plan C.

In some states, for some Medigap plans, the difference in price increases between BC/BS and Prudential was quite large. For example, New Hampshire beneficiaries between ages 65 and 69 saw their BC/BS Medigap premiums either decrease or increase by less than 5 percent while beneficiaries in the same age group with Prudential Medigap insurance saw their rates increase by from 20 to 40 percent for plans A, C, F and H. (Premiums for plan J went up by less than one percent.) However, in a number of states, including New Hampshire, Prudential's 1996 premiums are still lower than those of BC/BS, especially for older beneficiaries.

In a Number of States, BC/BS Medigap Premiums Increased Above the Medicare Inflation Rate and Well Above Social Security Cost-of-Living Increases

As discussed above, BC/BS increases were generally less than those of Prudential. Moreover, in a few states, BC/BS either did not increase or actually decreased premiums for some plans (Tables 2-7). However, in a number of states, BC/BS, like Prudential, increased Medigap premiums well above the Medicare inflation rate of between 9 and 10 percent (see discussion below). For example, in Georgia, premiums for Plans A, C and F for beneficiaries ages 70 through 74 increased by 15.3 to 27.4 percent. In Iowa, for this same age group, BC/BS increased Medigap premiums by 12.6 to 30.0 percent, depending on the plan.

Further, over two-thirds of plans showed increases above the percentage increase in Social Security payments between 1995 and 1996 of 2.6 percent. Almost half (151 of 308) of the BC/BS plans analyzed for this report increased premiums by 10% or more.

Premium Increases for Medigap Insurers Other than Prudential and BC/BS Varied Dramatically by Insurer, by Plan Offered (i.e., A-J) by Age and by State

The premium rate changes for all Medigap insurers in the 26 states for which we were able to obtain state 1995 and 1996 Medigap guides varied wildly. No pattern could be discerned by insurer, by plan, by age group or by state. However, in a number of states, all plans for which data were available significantly raised their premium rates. For example, in New Hampshire, the 10 insurers for which we had 1995 and 1996 data increased their rates on average by 23 percent for Plan A, age 65 purchase; in Georgia, the 26 Medigap insurers for which we have Plan C 1995 and 1996 premium information for age 70 increased their rates an average of 11.7 percent; in South Carolina, the seven Medigap insurers for which we had 1995 and 1996 premium data for Plan H at age 80 increased their rates on average by 18 percent (tables available from Families USA).

The Dollar Amount of Medigap Premiums Varies Dramatically By State and Within States

Reflecting the differences in medical practice patterns and Medicare payment rates in different states, the cost of Medigap premiums varies dramatically by state, with premium rates in some states double or more those of other states. For example, Medicare beneficiaries age 65 first purchasing a Medigap Plan A policy from a BC/BS plan in 1996 paid $311 in New Mexico, $325 in Kansas, $350 in South Dakota and $377 in South Carolina. This compares to $817 in Florida, $825 in New Jersey, $855 in New York and $876 in Ohio (Table 2).

Medicare beneficiaries age 65 first purchasing BC/BS Plan F in 1996 would pay $1,531 in Florida, $1,187 in Texas, and $1,104 in Georgia compared to $711 in Iowa, $731 in Kansas, and $778 in South Dakota (Table 2).

Prudential Medigap policies show a similar premium differential by state (Table 2-4). For example, in 1996, Prudentials Plan C for all ages cost $822 in New Mexico and $1,350 in California. Prudentials Plan J costs $700 more in California ($2,205) compared to neighboring Oregon ($1,509).

Medigap premiums also varied dramatically within states. For example, in Virginia, BC/BS premiums for Plan A at age 65 varied by as much as $300 between urban and rural communities. Premiums for Plan F at age 80 varied by $500 from one area of the state to another.

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DISCUSSION

The dramatic 1996 Medigap premium increases for policies sold by the largest insurers, and especially AARPs Prudential policy, likely have many causes. Among these are increasing Medicare costs, especially dramatic increases in beneficiary liability for hospital outpatient charges; AARPs community rating and underwriting policies; and increasing enrollment in Medicare HMOs.

Increasing Medicare Costs, Especially Beneficiary Liability for Uncapped Hospital Outpatient Charges

Because Medigap policies pay Medicare deductibles and co-insurance, increases in Medicare costs likely account for part of the dramatic 1995-1996 increases in Medigap premiums. Although data on Medicare cost increases for 1996 will not be available until the end of 1996 or early 1997, the 1994-1995 Medicare cost increases provide some information about trends in Medicare costs. Further, as discussed below, the federal governments legislative failure to cap skyrocketing increases in what hospitals charge Medicare beneficiaries (and their Medigap insurers) for outpatient services helps explain Medigap premium increases between 1995 and 1996.

Part A Increases

Between 1994 and 1995, growth in total Medicare Part A payments increased by 11.7 percent. This increase includes the cost of new beneficiaries, which raised program costs by two percent. Holding the growth of beneficiaries steady, Part A payments per beneficiary increased by approximately 9.7 percent. Increases in inpatient hospital costs were 8.9 percent compared to 23.8 percent for skilled nursing facility (SNF) care and 19.3 percent for home health care (Prospective Payment Assessment Commission, 1996). Although only four Medigap plans (D, G, I and J) provide a small home health benefit, eight plans (C-J) provide coverage for Medicare copayments for days 21-100 of skilled care in a skilled nursing facility ($89.50 a day in 1995, $92 a day in 1996).

Part B Increases

Between 1994 and 1995, costs for Medicare Part B phyician services increased by 9.1 percent, holding the growth of beneficiaries steady (Physician Payment Review Commission, 1996). No dramatic increases occurred in any one area of physician Part B services. This is not the case for Part B hospital outpatient services, however, where a quirk in Medicare reimbursement policies helps explain increasing Medigap costs.

Except for hospital outpatient services, Medicare pays 80 percent of the Medicare-approved amount for Part B services, leaving beneficiaries to pay the remaining 20 percent. For hospital outpatient services, Medicare pays 80 percent of an approved amount, but beneficiaries, or their Medigap insurer, pay 20 percent of what the hospital charges. Medicare limits what it pays for hospital outpatient services to a prearranged price but does not limit in any way what hospitals can charge Medicare beneficiaries. On average, a Medigap supplemental policy pays 37 percent of the total payment to hospitals for outpatient services, and this percentage is increasing. For some services--such as outpatient surgery, radiology and other diagnostic services -- the beneficiaries share is 49 percent (Pear, 1996). All standardized Medigap plans pay Part B outpatient co-insurance charges.

As more and more procedures are performed on an outpatient basis, Medicare spending on hospital outpatient care has increased by 15.7 percent a year between 1980 and 1995 compared to a 7.8 percent growth increase for inpatient services (Pear, 1996). Between 1994 and 1995, Medicares outpatient costs went up 12.8 percent (Prospective Payment Assessment Commission, 1996). However, because Medicare does not cap what hospitals can charge Medicare beneficiaries for their share of hospital outpatient costs, outpatient costs to beneficiaries or their Medigap insurer went up by far more than 12.8 percent. In 1993, hospitals charged Medicare beneficiaries an amount equal to 217 percent of the hospitals reported outpatient costs (Stephenson v. Shalala, 1995). When AARP announced its double-digit 1996 premium increases, it cited the increased use of outpatient services as a major reason (Pear, 1996).

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MEDICARE PLACES NO CAP ON WHAT HOSPITAL OUTPATIENT DEPARTMENTS CAN CHARGE MEDICARE BENEFICIARIES

In 1994, Marie Lohse of Pasadena, California had hospital outpatient cataract surgery for one eye, for which the hospital charged $6,457. This charge excluded the physicians bill. Medicare paid the hospital only $1,280.37 (80 percent of the Medicare-approved amount), but Ms. Lohses Medigap insurer had to pay 20 percent of the $6,457 hospital bill ($1,291), or 50 ent of the total payment received by the hospital. (Stephenson v Shalala, 1995)

AARPs Community Rating and Underwriting Policies

Medigap insurers use three different methods to calculate premiums: issue age, attained age, and community (no age) rating. When Medigap insurers community rate, they charge the same premiums for all insured (for the same plan), regardless of age. Prudential is the only Medigap insurer that community rates in all states (except Florida). Because AARP-sponsored Prudential polices use community rating, Prudentials premium rates are often less attractive to younger Medicare beneficiaries between the ages of 65 and 74, but more attractive to the elderly over age 74. In New York and Maine, all Medigap insurers are required to community rate. Five of the 15 largest BC/BS plans also community rate (General Accounting Office, 1996). However, many BC/BS non-profit plans are converting to for-profit status and are unlikely to continue this practice.

Other insurers, including many BC/BS plans, use attained age or issue age to calculate premiums. Attained aged policies price premiums based on age. This results in relatively low premiums at age 65, when most elderly first purchase a Medigap policy, but steeply increasing premiums as beneficiaries age. An alternative to attained age policies is issue age policies which base premiums on the age of beneficiaries at the time of purchase. These policies go up with increasing costs and volume of services, but not with age and, thus, are more similar in design to community-rated policies. Currently, 10 states[5] prohibit attained age rating for all Medigap policies sold in the state. In 1990, 31 percent of BC/BS Medigap policies used attained age; in 1993, 55 percent did. One 1994 analysis comparing an attained age Plan F offered by New York Life and an issue age Plan F offered by United American found that, although New York Life priced its policy at age 65 purchase at $114 less than Plan F offered by United American, by age 80 the buyer of the New York Life policy would have spent $5,000 more than the buyer of the United American policy. (Consumers Report, 1994).

Table 8 provides an example of the impact of rating policies on premiums for differing age groups. The table provides pricing information for six Medigap standardized plans (A, C, F, H, I, and J) for BC/BS, Prudential and three other large Medigap insurers (Bankers Life, Mutual of Omaha, and Pioneer Life) in North Carolina for beneficiaries at ages 65, 75 and 80.

With only a few exceptions, for age 65, Medigap insurers in North Carolina priced their premiums for Medicare beneficiaries at or slightly below those of the community-rated Prudential plans, especially for the lower-priced plans, A and C. However, by age 75 and 80, again with a few exceptions, premiums for other insurers were higher than those of Prudential. In some cases, the dollar differences are quite large. For example, Pioneer Life priced its Medigap Plan A for new Medicare enrollees aged 65 at $441, $51 a year less than Prudentials Plan A policy. By age 75, however, Pioneers Plan A policy cost $584--$145 a year more than Prudentials; by age 80, Pioneer Lifes plan A policy cost $692, or $241 a year more than Prudentials policy. For plan F, at age 65, Pioneer Life charged Medicare beneficiaries $13 less a year than Prudential. By age 75, Pioneer Life charged $418 more a year than Prudential. For Plan F, by age 80, Pioneer charged $714 a year more than Prudential.

According to one health insurance consumer advocate, Prudential has been seeing increased purchases of its Medigap policies by individuals 75 and older partially due to switching from other commercial Medigap insurers (Burns, 1996).

In addition to community rating, AARP underwriting policies are socially responsible in other ways. As discussed above, federal law requires all Medigap insurers to sell their policies for a period of six months from the date a Medicare beneficiary both enrolls in Medicare Part B and is age 65 or older (regrdless of any pre-existing condition). However, after this six-month period, Medigap insurers can underwrite or deny coverage because of a pre-existing condition. AARPs Prudential policies do not underwrite for other ages, except for Plans H-J which cover prescription drugs. Prudential will sell policies to Medicare beneficiaries over age 65 who have pre-existing conditions (with only a three-month wait for coverage of some pre-existing conditions). Prudential is the largest single national Medigap insurer and sells its policies in all states. All of the other large national Medigap insurers use medical underwriting (General Accounting Office, 1996b).

Among the 15 largest state BC/BS plans, those in New York, Pennsylvania (Blue Shield plan), Florida, Illinois, Indiana, New Jersey, Alabama, Iowa, and Connecticut also sell all or some of their Medigap plans without underwriting (General Accounting Office, 1996b). Again, these policies may change as BC/BS plans convert to for-profit status. In a number of states, such as California, AARPs Prudential policy is the only Medigap insurer that does not underwrite.

In addition to its community rating and underwriting policies, Prudential is also the only Medigap insurer that markets all 10 Medigap plans. Thus, AARPs underwriting and community rating policies have likely resulted in the enrollment of older and less healthy Medicare beneficiaries, placing it at a disadvantage compared to other Medigap insurers.

Healthier Medicare Beneficiaries enroll in HMOs

Recent studies indicate that healthier Medicare beneficiaries enroll in HMOs. Mathematica Policy Research, for example, found that, because Medicare HMO enrollees were healthier than Medicare beneficiaries who remained in fee-for-service Medicare, Medicare overpaid HMOs by six percent (Brown et al., 1993). According to the 1993 Medicare Current Beneficiary Survey, 30 percent of Medicare fee-for-service enrollees reported their health as only fair or poor compared to 15 percent of HMO enrollees. Similarly, 11.4 percent of enrollees in fee-for-service Medicare reported having problems with three or more activities of daily living compared to 5.7 percent of HMO enrollees (HCFA, 1996).

Although a study by Price Waterhouse (1995) found no difference in health status between Medicare HMO enrollees and those that remained in fee-for-service Medicare, a more recent and definitive HCFA study of the 1994 Medicare Current Beneficiary Survey confirms earlier studies showing that Medicare HMO enrollees are healthier than their fee-for-service counterparts. Medicare HMO enrollees report better general health, better functional status, and less heart disease compared with beneficiaries who remain in traditional fee-for-service Medicare. HCFA researchers estimate that, because of thse differences in health status, Medicare currently overpays HMOs by seven percent (Riley et al., 1996). Thus, in California, where over 36 percent of the Medicare population is enrolled in HMOs, part of the rise in Medigap premiums may be the result of market segmentation where the healthier Medicare population enrolls in HMOs, leaving the least healthy in the fee-for-service and Medigap market.

Moreover, at least one study suggests that Medicare beneficiaries who disenroll from an HMO and rejoin Medicare fee-for-service may do so for reasons of access. A 1995 survey of Medicare HMO enrollees and disenrollees found that disenrollees rated their quality of health lower than did enrollees and report a much greater decline in health status during their HMO enrollment (Office of Inspector General, 1995). A recent study by researchers at the New England Medical Center lends credence to this survey. Researchers found that the chronically ill elderly in HMOs were twice as likely as the chronically ill elderly in fee-for-service to report a decline in health status during the four-year study period (Ware et al., 1996). The market is further segmented if high-cost Medicare beneficiaries disenroll from HMOs to rejoin traditional Medicare.

Impact of Rising Medigap Premium Rates on the Elderly

Increasing Medigap premiums and other out-of-pocket health care costs impose a serious burden on the nations elderly. Although many elderly are more economically secure than ever before, the vast majority live on fixed, limited incomes. In 1992, 59 percent of the elderly relied on Social Security for 50 percent or more of their income and 32 percent for 80 percent or more of their income. Reliance on Social Security income increases dramatically with age. Nearly 70 percent of those 75 years and older rely on Social Security for over 50 percent of their income (HCFA, 1996). Annual Social Security cost-of-living adjustments do not allow seniors to keep up with their increasing health care costs. As discussed above, in January 1996, Social Security recipients received a 2.6 percent increase in payments, which fell far short of the added costs of Medigap premiums in most states as well as other out-of-pocket health care costs.

The Bureau of the Census reports that, in 1995, 10.5 percent of the nationss elderly, or 3.3 million, lived in poverty; 17.7 percent lived on incomes below 125 percent of poverty; and 39.6 percent of the elderly (and 47.8 percent of the elderly aged 75 and older) had incomes below 200 percent of poverty (Bureau of the Census, 1996). Nearly three-quarters of elderly Medicare beneficiaries reported incomes of $25,000 or less (HCFA, 1996a).

Sixteen percent of the Medicare population are largely protected from out-of-pocket health care costs by Medicaid coverage which pays Medicare cost-sharing, prescription drugs and some long-term care (HCFA, 1996a). However, the rest of the lower- and middle-income elderly find it increasingly difficult to pay for the medical care they need.

One consequence of rising health care costs for the elderly is the increasing number of Medicare beneficiaries who are leaving fee-for-service Medicare and joining HMOs. HMOs offer a range of additional benefits, the most important of which is prescription drug coverage. Moreover, if they join an HMO, Medicare beneficiaries can drop their Medigap insurance, often saving $1,000 a year or more. In Arizona and California, for example, 31 percent and 36 percent, respectively, of the Medicare population are enrolled in HMOs. All Arizona Medicare HMOs offer a prescription drug benefit and none require a premium to join, other than continued payment of the Medicare Part B premium. This compares to the average AARP/Prudential premium of $798 a year in Arizona. Seventy-four percent of California HMOs offer a prescription drug benefit (which in Los Angeles County is up to $3,000 in one HMO and unlimited in two other HMOs). Although most Medicare HMOs in California do not require premiums to join, of those that do, the average premium costs are $117 a year in 1995. This compares to the average AARP/Prudential Medigap policy in California of $893 in 1995 (HCFA, 1996a).

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IMPLICATIONS OF RISING MEDIGAP PREMIUMS FOR THE FUTURE OF MEDICARE

The picture is clear. As Medicare out-of-pocket costs and Medigap premiums continue to increase, more and more elderly will join the stampede to HMOs and other managed care plans. In the first nine months of 1996, 690,000 Medicare beneficiaries (almost 80,000 beneficiaries a month) joined HMOs. During these months, Medicare HMO enrollment increased by 22 percent (HCFA, 1996b). Many analysts believe that this trend is positive and that managed care will be Medicares savior.

However, a strong case can be made that "one size does not fit all" and that managed care may not be the right choice for all elderly, especially those with chronic and disabling conditions. In a recent report, the Institute of Medicine recommended that "traditional" Medicare be preserved as a "safe harbor" for the elderly and disabled Medicare population (Institute of Medicine, 1996). In the Office of Inspector Generals survey of Medicare HMO enrollees, two-thirds of disabled and end-stage-renal disease enrollees reported that they wanted to leave their HMO and return to fee-for-service Medicare but felt that they could not do o for financial or other reasons (Office of Inspector General, 1995).

Given projected Medicare costs and the precarious financial position of Medicares Part A trust fund, preserving Medicares fee-for-service system will not be easy. In the short term, a number of options to limit the growth of Medigap premiums and put Medigap insurers on a level playing field with each other and with HMOs should be considered. If implemented, these options, such as a cap on hospital outpatient charges, will result in significant added protections for the Medicare population and a more rational Medicare program.

Medigap Reforms

• Require all Medigap insurers to community rate or, at a minimum, base all premiums on issue age so that premiums do not increase as beneficiaries age and their incomes drop.
• Require the same annual open enrollment period for both HMOs and Medigap insurers, thus allowing Medicare beneficiaries to more easily move from HMO membership back to Medicare fee-for-service (Institute of Medicine, 1996). Medigap insurers should be required to offer all or, at a minimum, the three most popular standardized plans during the open enrollment period to all Medicare beneficiaries regardless of pre-existing conditions.
• Change the current loss ratios for individual Medigap policies from 65 percent to 75 or 80 percent and for group Medigap policies from 75 percent to 80 or 85 percent. This will result in lower premium increases to Medicare beneficiaries as more of the premiums will go to pay for services.
• Offer Medigap insurance through a new Part C Medicare, fully funded by premium payments. A Part C Medicare that covers prescription drugs and which includes a stop-loss protection would largely replace the private Medigap market (Moon, 1996). Medicare beneficiaries purchasing a Medicare Part C Medigap policy would receive far more in benefits for their premium dollars than they currently receive through privately marketed Medigap plans.

Medicare Reforms

• Cap Medicare hospital outpatient charges. Hospitals, faced with reductions in Medicare spending and demands by managed care companies to reduce utilization, are shifting costs to Medicare beneficiaries through uncontrolled increases in outpatient charges. Congress needs to address this issue.
• Risk-adjust payment for Medicare beneficiaries joining HMOs. If this were done, the captitated payments to HMOs would be lower, reflecting the enrollment of healthier enrollees. Moreover, risk-adjustment would result in higher payments for less healthy Medicare HMO enrollees, making this population more attractive to HMOs and reducing HMO incentives to deny necessary care to high-cost enrollees. Unless payments to Medicare HMOs are adjusted to cover the costs of Medicare beneficiaries with chronic and high-costs illnesses, HMO enrollment will continue to result in a net financial loss to the Medicare program. Without risk-adjusted payments, HMOs will continue to recruit younger and healthier seniors and discourage enrollment of older and sicker seniors.
• Provide added protections for Medicare HMO enrollees, including a more responsive appeals process with independent expedited review (Institute of Medicine, 1996; Dallek, 1995). A stronger appeals system might decrease HMO disenrollment by beneficiaries who believe that they do not have, and may not be getting (Ware, 1996), access to the full range of Medicare benefits within the HMO.
• Reject calls for Medicare Medical Savings Accounts (MSAs), which the Physician Payment Review Commission (1996) estimates will cost Medicare $1,400 per MSA enrollee, further segmenting the market and bankrupting the Medicare program.

Unfortunately, none of these suggestions address the fundamental question of how to keep the Medicare program financially viable into the 21st century. Finding a fix for increasing Medicare costs that do not further burden Medicare beneficiaries and result in a two-tiered Medicare program -- one tier for the young and healthy, one for the old and sick -- will require a delicate balancing act between the needs of current and future beneficiaries. If Medicare is to keep the nations promise to the elderly made 31 years ago, we must find a way to strengthen the Medicare bridge to a healthy future for generations of elderly to come.

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ENDNOTES

1. Beginning in 1997, AARP will market its Medigap plans through new insurance contractors.

2. Although in most states Blue Cross and Blue Shield are one plan, in some states they are separate insurers.

3. The six-month window when Medigap insurers must sell their policies is triggered by two events (turning 65 and first paying Medicare Part B premiums). If an individual decides not to purchase Part B when he or she turns 65 (perhaps because of continued workplace coverage), then the six-month period in which insurers must sell their Medigap policies is delayed until the individual first begins paying Part B premiums. Insurers do not have to sell Medigap policies to disabled Medicare beneficiaries younger than 65.

4. According to Prudential, Medigap premium rate increases in 1996 were the result of "rising medical costs and an increased number of claims." (General Accounting Office, 1996a).

5. Arkansas, Connecticut, Florida, Georgia, Idaho, Maine, Massachusetts, Minnesota, New York and Washington. Massachusetts and Maine require full community-rating for all Medigap insurers (Shearer, 1995).

REFERENCES

American Association of Retired Persons. Public Policy Institute, Data Digest, DD Number 20. 1995.

American Association of Retired Persons. The AARP Public Policy Agenda for 1996, 1996.

Blustein J. "Medicare Coverage, Supplemental Insurance, and the Use of Mammography by Older Women," N Engl J Med (332): 1138-43, 1995.

Brown RS, Bergeron JW, Clement DG, Hill JW, Retchin SM. The Medicare Risk Program for HMOs--Final Summary Report on Findings From the Evaluation. Final report under HCFA contract no. 500-88-0006. Mathematica Policy Research. Princeton NJ 1993.

Bureau of the Census, Economics and Statistics Administration. Poverty in the United States: 1995, 1996.

Burns B, Consultant, Senior Health Insurance Issues. Correspondence, September 11, 1996.

Chulis G, et al. "Health Insurance and the Elderly: Data from the MCBS," Health Care Financing Review 4(3):163-81, Spring 1993.

Consumer Reports, "Filling the Gaps in Medicare," August 1994 as cited in Shearer G. Written Statement before the Medicare Supplement Working Group National Association of Insurance Commissioners Regarding Attained-Age Ratings in the Medicare Supplement Insurance Market, June 3, 1995.

Dallek G. Federal Oversight of Medicare HMOs: Assuring Beneficiary Protection, Testimony Before the Special Committee on Aging, U.S. Senate, August 3, 1995.

General Accounting Office. Medigap Insurance: Insurers Compliance with Federal Minimum Loss Ratio Standards, 1988-93, GAO/HEHS-95-151, August 1995.

General Accounting Office. Letter to The Honorable William S. Cohen, Chairman, Special Committee on Aging, United States Senate, AARP Medigap Premium Increases, GAO/HEHS-96-119R, April 19, 1996a.

General Accounting Office. Medigap Insurance: Alternatives for Medicare Beneficiaries to Avoid Medical Underwriting. GAO/HEHS-96-180, September 1996b.

Health Care Financing Administration. Profiles of Medicare: 30th Anniversary, 1996a.

Health Care Financing Administration. Medicare Managed Care Contract Report, January - September, 1996b.

Institute of Medicine. Improving the Medicare Market: Adding Choice and Protections, Washington D.C.: National Academy of Sciences, 1996.

Kaiser Family Foundation. Medicare Chart Book, October 1995.

Moon M. Medicaid Now and in the Future, The Urban Institute Press, Washington DC, 1996.

National Association of Insurance Commissioners. 1994 Medicare Supplement Insurance Experience Reports by Direct Premiums Earned, October 17, 1995.

Office of Inspector General, Health and Human Services. Beneficiary Perspectives of Medicare Risk HMOs, OFI-06-9100730, 1995.

Pear R. "Quirk in Medicare Law Yields Bigger Bills for Outpatient Care," The New York Times, A1, A10. July 1, 1996.

Physician Payment Review Commission. 1996 Annual Report to Congress, p. 214, April 1996.

Prospective Payment Assessment Commission. Medicare and the American Health Care System, June, 1996.

Price Waterhouse. Is there Biased Selection in Medicare HMOs? Washington D.C., March, 1996.

Riley G, Tudore, Chiang Y, and Ingber B. "Health Status of Medicare Enrollees in HMOs and Fee-for-Service in 1994," Health Care Financing Review, Summer 1996.

Shearer G. Written States before the Medicare Supplement Working Group National Association of Insurance Commissioners Regarding Attained-Age Ratings in the Medicare Supplement Insurance Market, June 3, 1995.

Stephenson v Shalala, In the United States Court of Appeals For the Ninth Circuit, On Appeal From the United States District Court for the Eastern District of California, NO. 95-15729, 1995.

Ware J, Bayliss M, Rogers W and others. "Differences in 4-Year Health Outcomes for Elderly and Poor, Chronically Ill Patients Treated in HMO and Fee-for-Service Systems: Results From the Medical Outcomes Study," Journal of the American Medical Association, 276:1039-1047, 1996.

APPENDIX 1

MEDIGAP METHODOLOGY

We wrote to the Department of Insurance in all 50 states asking for their 1995 and 1996 Medigap rate comparison guides. We followed this initial letter with phone calls to the Departments asking for the guides. A few states do not compile Medigap premium rate information in any form; they only offer a list of companies in the state that provide Medigap insurance, without premium informatio. We received both 1995 and 1996 guides for 26 states.

The data found in the guides are limited in two ways. First, we were unable to obtain 1995 and 1996 Department of Insurance Medigap Guides for a number of states. Second, some guides did not include premium information for all age groups or all plans for which the insurers wrote policies. For example, the New Jersey and Washington guides provided Medigap rate information for age 65 only. Floridas 1996 Medigap guide did not list Prudential premiums for plans B-J. Illinois 1995 guide did not list BC/BS or Prudential premiums for plan A.

As described in the text, we analyzed the premium changes for the largest Medigap insurers, BC/BS and Prudential, in 35 states. In instances where the state guides showed no change in premiums between 1995 and 1996, we called the companies to assess whether a change had been made in 1996 following the printing of the 1996 guide, or whether no change in premiums had occurred. We also collected BC/BS and Prudential 1995 and 1996 premium information directly from these insurers in additional states during September 1996 in order to increase the number of study states. Tables 2-7 reflect this updated information.

Out of the ten standardized Medicare Supplemental Plan options, we focused our research on the three most commonly sold Medigap plans (plans A, C, and F) as well as two of the three plans which offer prescription drug coverage (plans H and J). To assess the magnitude of the premium increases on different age groups, we analyzed premium information for Medicare beneficiaries at ages 65, 70 and 80.

When a company differed in its rates by geography, the lowest premium price was entered, except for Illinois, where Chicago rates were used; Nevada, where Las Vegas rates were entered; California, where San Diego rates were used; and Pennsylvania, where northeastern Pennsylvania rates were used. Individual plan rates were entered instead of group plan rates, and direct sales rates were used instead of agent sales rates when a company offered both options. Each of these measures was taken to ensure consistency in our analysis so that any change in rates would reflect true changes in premiums.

Premiums did not frequently differ based on sex, although, when they did, the female rate was always lower. If a company did sex-underwrite one year, but did not do so the next year, then within plan comparisons were made using the lower priced female plan in the first year. Analysis showed no significant differences in the year-to-year premium changes for men versus women.

We compaed the price of each standard Medigap plan sold by a particular company in 1995 and 1996 to a particular age group and calculated the percentage increases. We calculated premium rate changes between 1995 and 1996 for all plans in a state. An analysis of this data showed no discernable trends. Premium changes fluctuated for different plans offered by a particular Medigap insurer and for different age groups. Premium changes among insurers also varied significantly. We analyzed the mean within plan changes for all insurers for which premiums changed between 1995 and 1996. However, because we were unable to weight the mean changes for the number of policies sold by the different insurers, this average was not meaningful.

CREDITS

This report was primarily written by Geraldine Dallek, Director of Health Policy.

This report was produced with the assistance of the following Families USA Foundation staff:

Ron Pollack, Executive Director
Cheryl Fish-Parcham, Health Policy Analyst
Amy Klamberg, Research Assistant
Kristen Goliber, Research Assistant
Juliette Gale, Administrative Assistant

Families USA also wishes to thank Bonnie Burns, Consultant, Senior Health Issues for her assistance on this report.

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