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Statement of
Hon. Bobby P. Jindal,
Assistant Secretary for Planning and Evaluation,
Department of Health and Human Services
Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means
Hearing on
Medicare Supplemental Insurance (Medigap)
March 14, 2002

Chairman Johnson, Representative Stark, distinguished Subcommittee members, thank you for inviting me to discuss the issue of Medicare supplemental insurance, commonly referred to as Medigap, and to share with you the Administration’s views about – and proposals to strengthen – this critical complement to the Medicare fee-for-service program. Clearly, because of the major gaps in the benefit package in the fee-for-service program, Medigap is an essential part of Medicare coverage for millions of our nation’s elderly and disabled. The Administration shares your concern regarding the rapid increases in Medigap premiums in recent years: most seniors now pay much more for Medigap than they pay in Medicare premiums. We also agree that we can better design both Medicare and Medigap so that seniors and people with disabilities can get more affordable coverage, and get the most for the health care dollars they spend.

As you know, the President has put forward a framework for strengthening Medicare that would address the many threats to its ability to give seniors the health security they need. Medicare’s lack of prescription drug coverage is only one example of the ways in which the program has lagged behind. The Administration also believes that Medicare should provide better coverage for preventive care and serious illness. Medicare's statutory benefits have enormous gaps, and its cost-sharing requirements can add up quickly. Beneficiaries who require $25,000 or more in care are typically responsible for about $5,000 in deductibles and co-payments. Yet Medicare provides no stop-loss protection – something the Administration believes should change.

As past of legislation to improve Medicare’s existing coverage, it is also important to develop new Medigap options that better meet beneficiary needs and provide more affordable premiums. Clearly the existing set of options, which require beneficiaries to purchase "first-dollar" coverage for hospitalizations and even basic services like doctor’s visits before they can obtain any drug coverage, has become outdated. Yet giving seniors the option of a better benefit package, including prescription drugs, and more affordable Medigap plans to go along with it will take several years to implement. So we have also proposed that two new Medigap plans be added to improve beneficiaries’ options quickly. These options would include valuable prescription drug coverage, protection against high out-of-pocket costs, and coverage of most of Medicare’s cost-sharing – all at a significantly lower price than the current Medigap options that include prescription drugs. While we are obviously willing to work with Congress and other interested parties on the details of these initiatives, we believe that providing better short-term options for seniors to get more affordable drug coverage is a critical priority. In addition, these options would generate modest savings for Medicare as well as savings for beneficiaries.

BACKGROUND

Before I provide additional details about our proposals, I would like to briefly review the key features of – and problems with – Medigap coverage today. One of the main reasons why nearly all seniors in the fee-for-service (government) plan have supplemental insurance is that Medicare does not provide adequate protection against the costs of serious illness. As you know, the deductible for each hospital spell now exceeds $800 and will grow rapidly. Moreover, Medicare beneficiaries who require long hospital stays are exposed to daily co-payments that run into the hundreds of dollars – and Medicare coverage can eventually run out altogether. This stands in stark contrast to private plans like the Blue Cross/Blue Shield plan offered to Federal employees, which has a single annual deductible and modest coinsurance for outpatient care but provides much better coverage for hospitalizations. Not surprisingly, the Coalition to Preserve Choice for Seniors (which consists of several Medigap insurers) recently found that coverage of hospital expenses not paid by Medicare is the Medigap benefit that seniors value most.

Of course, not all beneficiaries get their supplemental insurance through Medigap. Those who are eligible often obtain this coverage through Medicaid or their former employer. Many have been able to lower their co-payments and deductibles by joining a Medicare+Choice plan. It is important to recognize that, despite the changes in Medicare+Choice benefits that have resulted from years of consistently inadequate payment updates, these plans still provide a better deal for seniors than fee-for-service Medicare plus an increasingly costly Medigap policy. That is why the Administration places a high priority on ensuring that these private plan options remain available for beneficiaries.

But the focus of our discussion today is on the roughly 10 million beneficiaries who have to purchase their own Medigap policy. The designs of these policies were standardized in 1990 and have scarcely been updated since. As a result, these seniors face important problems in getting the coverage they need:

  • Antiquated benefit design. The 1990 reforms created 10 standard Medigap plans, but three specific designs account for about three-fourths of the enrollment in these standardized plans. This concentration of enrollment suggests that the other available plans are not providing the range of options that beneficiaries need. What is more, Medigap drug coverage can be purchased only in combination with first-dollar coverage for other services. As a result, the added premiums for these policies can be so high that they greatly limit the value of the benefit – if these policies are available at all. Not surprisingly, less than 10 percent of those who purchase a standardized plan buy one that covers drugs. In effect, it is easier for seniors to get coverage for a foreign travel emergency than it is to get drug coverage from Medigap.
  • First-dollar coverage. All of the standard Medigap plans pay the up-front costs of care for beneficiaries, often including the first dollar spent. Research has demonstrated that first-dollar coverage results in increased utilization and higher costs without providing clear health benefits. The independent Office of the Actuary at CMS estimates that service use is 23 percent higher for beneficiaries with Medigap than for those without supplemental insurance.* Medicare pays most of these costs, but first-dollar coverage also leads to higher Medicare and Medigap premiums. Indeed, the added cost of a Medigap policy that covers the $100 Part B deductible often exceeds $100 – so seniors who purchase these policies are merely "dollar trading." According to GAO and others, even modest changes in first-dollar coverage would lead to significantly lower Medicare costs, and in turn, Medigap costs. Additionally, almost all private insurance plans avoid first-dollar coverage and instead use reasonable co-payments. Private plan enrollees have some limited out-of-pocket costs to help encourage appropriate use of services, and they benefit from much lower insurance premiums. As a result, Medicare spending for those with supplemental coverage through their employer is about 10% less than for those with individual Medigap policies.
  • Rising premiums. The result of these problems can be seen in high and rising premiums. In 1998, the average senior was actually spending more on supplemental insurance premiums than on prescription drugs. According to Weiss Ratings, the cost of Medigap policies that provide drug coverage has grown rapidly since then – by 17 to 34 percent in 2000 alone. Premiums for Medigap policies that do not cover drugs did not rise quite as fast in 2000 but over the past three years have increased 25 to 45 percent.

IMPROVING MEDICARE AND MEDIGAP FOR THE FUTURE

Clearly, addressing these problems requires a comprehensive approach. That is why the President worked with Members of Congress from both parties to develop a framework for strengthening and improving Medicare. It includes giving all seniors the option of subsidized prescription drug coverage. It includes giving seniors better options to reduce their costs in a private plan. And it includes giving seniors the option of keeping the coverage they have now or choosing an improved benefit package with better coverage for preventive care and serious illness as part of a modernized fee-for-service plan. In specific:

  • Medicare’s preventive benefits should have zero co-payments and should be excluded from the deductible.
  • Medicare’s traditional plan should have a single indexed deductible for Parts A and B to provide better protection from high expenses for all types of health care.
  • Medicare should provide better coverage for serious illnesses, through lower co-payments for hospitalizations, better coverage for very long acute hospital stays, simplified cost sharing for skilled nursing facility stays, and true stop-loss protection against very high expenses for Medicare-covered services.
  • These changes should not reduce the overall value of Medicare’s existing benefits.

These improvements in Medicare’s coverage will reduce the benefit gaps that Medigap must fill and will lower Medigap premiums. But the President’s framework also includes updated and more affordable Medigap options for beneficiaries who choose the improved Medicare benefit package. These new options should begin by giving beneficiaries even better protection against high-costs – supplementing the stop-loss limit that would be added to Medicare. More generous policies could then reduce Medicare’s deductibles and co-payments – but they should not be structured in such a way that seniors have to buy first dollar coverage for hospitalizations and doctor’s visits before they can obtain drug coverage or supplement the Medicare drug benefit.

At the same time, the President strongly believes that beneficiaries who wish to keep their current benefits with no changes must be able to do so. Let me be clear: under the President’s framework, seniors who are happy with their current Medigap policy would never have to change it.

Such restructuring will also take time. However, to provide more affordable Medigap options before the improved benefit package becomes available, and to improve the Medigap options available for seniors who prefer their current Medicare benefits, the Administration proposes the addition of two new Medigap plans to the existing ten standardized plans. We believe both of these new plans should cover all of the coinsurance for extended hospital says in the same way that the current Medigap plans do, but should not cover the Part B deductible. To give seniors a choice about how best to meet their needs:

  • One plan would cover 75 percent of current cost-sharing and have a lower stop-loss limit while providing modest drug coverage that most beneficiaries would value. The drug benefit would have a $250 deductible and cover half of the next $2,500 in drug spending (as in the current Medigap plans H and I).
  • The other would provide coverage for additional drug expenses – like the current plan J – but have a higher stop-loss limit and cover 50 percent of Medicare’s cost-sharing.

Both of these options would be considerably more affordable that the current Medigap policies that cover drugs. They would substantially reduce cost-sharing for beneficiaries and provide much better protection against high costs. They would also provide needed options for beneficiaries who want lower premiums but have not chosen to enroll in one of the two high-deductible Medigap policies – giving beneficiaries a choice between "all or nothing". And they would increase the number of seniors with drug coverage. If we provide a one-time opt-in for current beneficiaries, we estimate that up to 1.5 million beneficiaries would choose these new policies once they are available – and that nearly half of these enrollees would be beneficiaries who do not have drug coverage now. This could even be a conservative estimate; the Coalition to Preserve Choice for Seniors found that one-third of Medigap policy holders would favor a proposal that included a modest deductible and some payments for doctor visits and hospital stays – even without the offer of drug coverage. Moreover, we can achieve this significant increase in drug coverage among seniors right away, not several years down the road, while saving money for beneficiaries and the Medicare program.

Let me reiterate that we are quite open to working with this Committee, other Members, and key stakeholders going forward. For example, it could be that a nominal co-pay for doctor’s visits would work better than a fixed percentage or that the drug benefit designed could be improved. But, as with our other Medicare proposals, we want to act now. The idea of making updated Medigap plans available has long had bipartisan support. For example, President Clinton proposed to update Medigap with a new supplemental coverage option that included reasonable limits on cost sharing. The new plans we are proposing would also generate modest budgetary savings – at least $1.3 billion over 10 years – since they would not provide first-dollar coverage. But the primary reason we support them is that they provide another means for seniors to obtain more affordable drug coverage quickly. I look forward to answering your questions.


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Last revised: March 18, 2002